Espresso Morning Call: USD falters again with a dovish BoC

What we are looking for

• USD is consolidating but still tracking lower: After the Bank of Canada move, the USD has been once more dragged back. There is a degree of consolidation on major forex this morning, but USD is still trending lower.
• Indices tick higher: European indices have opened positively after a strong rebound into the close on Wall Street. US futures have also been supported overnight after positive earnings from Telsa.
• Commodities look mixed: Silver is once more pulling back lower, with gold also a shade weaker today. Oil is looking to build support after the recent pullback.
• Data traders: US Advance GDP will be key for USD positions. A little later, also watch for the US New Home Sales. 

Overview

With the Bank of Canada hiking by 25 basis points but then suggesting it is now on pause, there is a potential read-through to the Federal Reserve. The US Federal Reserve has consistently tracked the BoC in tightening rates, so this is giving markets more reason to believe that the Fed is also in the final throws of its tightening. Whilst the CAD weakened on the BoC move, this has also weighed on the USD, whilst also helping to support risk assets.

There is a sense of consolidation in major markets today. Traders may be looking towards the important US economic growth data later today. However, there is very little move on major forex aside from the continued outperformance of the AUD, whilst NZD is also popping higher. Equity markets have been boosted amid a Wall Street rebound into the close and positive earnings from Tesla after-hours.

The first reading of Q4 US GDP is the big data release on the economic calendar today. US Advance GDP is expected to be +2.6% (annualised), down from +3.6% in Q3. The Atlanta Fed’s GDPNow forecast suggests that GDP could be 3.5%, however, analysts are thinking it will be lower. Elsewhere there are also Durable Goods Orders which are expected to show core goods unwinding the November growth of +0.2% with a December decline of -0.2%. Weekly Jobless Claims are expected to increase (this is the standard expectation) from last week. Also, US New Home Sales are expected to decline by -3.5% in December. 

Today’s news

Market sentiment is mildly positive: The AUD outperformance continues, although USD is consolidating yesterday’s losses. Equities are positive. Commodities are mixed with silver lower, but oil supported.  

US Treasury yields are consolidating yesterday’s decline: There is little move on yields this morning ahead of the US GDP announcement. 

Wall Street rebounding as Tesla gains: Tesla announced positive results after the bell last night. The electric car giant beat on both revenue and earnings. The shares are set to open +5% higher, helping US futures to overnight gains.

Cryptocurrencies give back some gains: Crypto bounced strongly into the close last night amid the risk rally across major markets. However, some of these gains are being given back today. Bitcoin is -2.5% at $23000, with Ethereum -0.7% at $1607.

Federal Reserve is in its “blackout period”: There will be no Fed speakers until after the meeting on Wednesday 1st February.

Major Economic Data:

• US GDP – Q4 Advance (at 13:30 GMT) Advance GDP is forecast to be +2.6% (after +3.6% in Q3). 
• US Durable Goods Orders (at 13:30 GMT) Core durables (ex-transport) are expected to decline by -0.2% in December (after +0.2% growth in November).
• US Weekly Jobless Claims (at 13:30 GMT) Weekly claims are expected to increase to 205,000 after falling to 190,000 last week.
• US New Home Sales (at 13:30 GMT) Sales are expected to fall to 617,000 in December (from 640,000 in November).

Major markets outlook

Forex: USD continues to trend lower, whilst AUD continues to outperform.

• EUR/USD is gradually but consistently now moving to nine-month highs as it moves clear of the previous resistance at 1.0887. The momentum is strong but with the RSI hitting 70 there is a caveat. Each of the past five times since November the RSI has hit 69/70, it has induced a period of consolidation, with minor profit taking. Whilst we are bullish still, we are mindful of this overstretched position and prefer to buy into weakness in the uptrend channel. Initial support is 1.0835/1.0887 with 1.0765 a key higher low. Above resistance at 1.0935 is the psychological 1.1000 level. 

• GBP/USD has picked up again from 1.2263 to again eye a test of the resistance at 1.2445. The pick-up in the RSI from 60 is encouraging and has upside potential for the test of resistance. We continue to see near-term weakness as a chance to buy. A close above 1.2445 opens 1.2600/1.2660. Below 1.2170 would be disappointing now.

• USD/JPY has posted two negative candles in the past two sessions as the market has again found resistance and backed away from the three-month downtrend and the falling 21-day moving average (c. 130.51). The daily RSI remains negatively configured and has failed consistently around 40/45 in recent months. This still suggests selling into strength for a test of the low at 127.22. A move decisively below the initial support at 129.05 would open that move. Resistance is building between 131.10/131.55. 

Commodities: Gold consolidating the breakout. However, Silver is stuck rangebound whilst oil is tailing off in its recovery 

• Gold continues to move higher and is now trading at its highest level since April. The next resistance is $1957 and beyond that the key resistance at $1998. It is interesting to see three candles in a row of long lower tails only to close decisively towards the high of the session. This suggests a continued appetite to buy into weakness. With the RSI above 70, this suggests a minor pullback is still a risk. There is good support between $1904/$1929, also with the support of the 12-week uptrend. We continue to favour buying into near-term weakness.

• Silver has picked up in the past couple of sessions but is still struggling in the consolidation rectangle between $23.11/$24.55. The bottom of the rectangle has been supportive in recent sessions, but upside traction is not there for a sustainable rebound. Having seen the RSI now bumping along around 50 there is very much a neutral outlook forming. This will continue until a close above $24.54 or below $23.11. 

• Brent Crude oil has been retracing the breakout of the resistance at $86.75 from earlier in the week. With negative closes in the past couple of sessions and the market threatening lower today, this retracement continues. However, for now, this is just a pullback and whilst the support at $83.65 remains intact and the RSI remains above 50, there is still a positive bias to the medium-term outlook. Resistance is at $89.00 with a move above $90.00 being a decisive positive move now. 

Indices: Wall Street has again reacted well to near-term weakness, however, European indices are still struggling for decisive upside traction. 

• S&P 500 futures looked to be losing the upside momentum however, early weakness yesterday was bought into, reclaiming earlier losses. The market has ticked higher again this morning and is eyeing the resistance at 4056. However, this resistance needs to be decisively broken as there is still a risk that the RSI is around 60, a position where upside traction has consistently failed in recent months. This all comes under the November/December highs of 4105/4140 which mark the top of a medium-term trading band. Initial support is 3963/4005.

• German DAX has been fluctuating in recent sessions. Holding above last week’s low at 14910 is encouraging, but the candlesticks lack conviction. Early gains today have pulled back from a test of the 15275 resistance and this plays into what is a continuing two-week consolidation phase. The RSI momentum is just tailing off slightly with this. Despite all this, we continue to see weakness as a chance to buy. Holding on to the support of the breakouts between 14604/14810 is important to this. A close above 15275 would drive the next bull run higher.

• FTSE 100 looks more susceptible to a negative drift than the DAX right now. Having fallen over at 7818 as a lower high under 7884, the market is also forming near-term lower lows in what looks to be a drift back towards the old highs between 7635/7695. This comes as the RSI is unwinding and the move looks to be another retracement within the two-and-a-half-month uptrend. We look to use supported weakness as a chance to buy.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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