What we are looking for

  • USD edging higher: The USD is performing well on major forex pairs.
  • Indices fall away again: Equities fell back on Friday after the US PPI data. This has continued early today with US futures showing mild losses and European indices around -0.5% lower early in the session.
  • Commodities also tick lower: A stronger USD is a drag on precious metals, although oil is holding up well.
  • Data traders: There is no data to drive major markets for the rest of today. A final day of relative calm before the storm…

Overview

There was another USD positive reaction on Friday as more data has led the market to become more cautious about the view of a less hawkish Fed. Data in early December have tended to come on the hot side, with Nonfarm Payrolls and the ISM Services previously better than expected. Now, on Friday the US PPI (factory-gate inflation) has come in ahead of forecasts. This now sets up for Tuesday’s US CPI. With US Treasury yields moving higher, there is a growing risk that the Fed may come in with a hawkish surprise. A 50bps hike is still expected but it could be a hawkish lean in the dot plots or inflation projections.

Treasury yields moved higher on Friday and are again higher today. The USD is also positive and this is weighing on broader sentiment, with equity markets and precious metals trading lower.

It is a quiet day on the economic calendar. However, this will likely be the final day of calm before volatility takes off for the rest of the week.

Today’s news

Market sentiment has soured slightly: There is an edge of risk negative sentiment with the USD gaining.

Treasury yields hold on to Friday’s rebound: There is little decisive move on yields yet, but coming after Friday’s rebound, this is sustaining the slight shift we have seen in positioning.

UK monthly GDP surprises to the upside: GDP rebounded by +0.5% in October (+0.4% expected). UK Industrial Production also rebounded more than expected to -2.4% YoY (from -3.1%) with a smaller improvement to the -2.8% forecast. This is helping GBP to find support.

China trying to lift tough COVID restrictions: Restrictions have been lifted on transport workers. However, this comes in the face of “severe” infection levels.

Cryptocurrencies slide: The usual response on crypto to a slide in risk appetite. A decline in crypto early today (although not excessive), with Bitcoin -1% (to $16935 and Ethereum -0.8% to $1249.

Economic Data:

  • No major economic data due. 

Major markets outlook

Broad outlook: A risk negative bias, with USD gains, although the move is easing as the European session develops. 

Forex: USD has been outperforming but some has leaked away as EUR and GBP have picked up.

  • EUR/USD has held above the initial support band at 1.0430/1.0495 but is consolidated under the recovery high of 1.0595. Momentum remains strongly configured with the RSI around the mid to high 60s. We remain cautious ahead of huge risk events this week although we favour using supported weakness as a chance to buy. The market has left a low at 1.0442 and this is encouraging, but there could be some huge volatility in the coming days. A closing breakout above 1.0595 tests the 1.0615 June high, with 1.0785 as the next key resistance.
  • GBP/USD has held on to the one-month uptrend and continues to creep higher. The move is not decisively positive but there is a positive configuration on the daily RSI. For now, the outlook remains positive and near-term supported weakness looks to be a chance to buy. However, we are mindful of the huge risk events that lie ahead in the next week and the move higher is tentative. A breakout above resistance at 1.2343 would open the upside for a test of 1.2405. Initial support is 1.2105 with a breakdown below 1.1900 turning the market corrective again. 
  • AUD/USD has moved higher from support at 0.6668 but is just backing away from a test of the 0.6850 reaction high. The concern is that although the daily RSI is positive above 50, it still shows signs of stuttering and needs to be watched. A move below 50 would be a big warning now. The run of higher lows means that 0.6642 is an important support now, with initial support at 0.6668. As long as 0.6642 holds, the outlook can still be positive.

Commodities: Precious metals remain positively configured and are trending higher. Oil has continued to struggle to form a recovery.

  • Gold has moved higher from the support at $1764/$1765 but since Friday has just eased back from the $1810 key resistance again. The market is running along an uptrend for the past four weeks and the rising 21-day moving average. There is a positive configuration on momentum with the daily RSI we still look to use weakness as a chance to buy. With the expected elevated volatility this week, we would still be watching the initial support around $1764 to be a gauge of correction. Furthermore, if the RSI also falls below 50 this would be a decisive reversal signal corrective signal.
  • Silver has continued to find buyers into weakness. A strong rebound from $22.02 has broken through the recent $23.52 reaction high but just needs to now confirm the move on a closing basis. We still look to buy supported weakness with the breakout band now around $22.00/$22.50 a good gauge of initial support. A close below $22.00 would suggest a deeper unwind towards $21.67 initially.

  • Brent Crude oil has continued to post bearish candles and is struggling to form any kind of recovery despite the stretched position on the daily (below 30). However, we remain on the lookout for signs of a reversal as the risk of a technical rally is elevated. Trading at levels not seen since early January, the next support of note is not until $69.50. A move above the initial resistance at $79.50 is worth watching. Having broken the old support band of $81.40/$83.55 this now becomes an area of overhead supply to limit any near-term rebounds.

Indices: Equities have fluctuated in recent days but are still amidst a consolidation ahead of risk events.

  • S&P 500 futures fell on Friday but continue to hold on to the support of the important near to medium-term pivot band support at 3912/3935. If there is a close below 3912 it would be a key corrective signal as the recovery would have topped out. Friday’s bull failure has left initial resistance at 3990 and added to the initial resistance around 3987/4015. This seems to be a growing consolidation ahead of the key risk events this week.
  • German DAX has settled into a consolidation in recent days broadly between 14190/14390. This comes after having backed away from the crucial resistance band between 14700/14800. However, also, the move settled above important support around 14125. Leaving this support is preventing a topping pattern formation and restricts a deeper correction. The market is essentially ranging between 14125/14605 in a near-term wait-and-see mode.
  • FTSE 100 has broken below the support at 7515/7520 and is using this as a basis of resistance now for a drift lower. This move has opened the next important support at 7426/7437 and it also means that initial resistance is now between 7520/7555 for any recovery. The daily RSI has turned lower and is around five-week lows (but is at least holding above 50. The run of negative candles suggests that intraday rallies are seen as a chance to sell now to play for a correction. Gauging the reaction to the next reaction low at 7437 will be key. 


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