What we are looking for
- USD strengthening once more: The big upside surprise in US CPI above 9% and 40-year highs for inflation is driving USD strength as markets increasingly pivot from expecting a 75bps hike in July, to expecting a 100bps hike.
- Indices have fallen again: Equities fell on the US CPI surprise and are lower again today. Important higher low supports on Wall Street are back within range.
- Data trading: The US PPI (producer prices index) inflation data will be key today. Any upside surprise will add to the concerns over inflation, strengthening the USD once more. Any upside surprise to the weekly jobless claims will be risk negative as it plays into recessionary fears.
Overview
Market sentiment has taken another jolt as yet again US CPI inflation has surprised with a hot print to the upside. Moving above 9% on the headline CPI is a 40-year high and is moving markets. Fed funds futures markets had been solidly pricing in for a 75 basis points hike in February. The way markets are moving, this is now looking increasingly likely that 100 basis points will become priced in. How the Fed reacts now will be key. Fed speakers have been non-committal on the prospect of 100bps, but this could change over the coming days. Christopher Waller is speaking today and will certainly be watched.
Markets were choppy in response to the US CPI. Initial USD strengthen then reversed, but now there is a USD positive bias once more this morning. Parity on EUR/USD has been tested for the past two days and is close again today. It is difficult to see the support holding if talk of 100 basis points from the Fed grows. Equity markets have been sliding in recent days and US futures are again lower today. Similarly, we see commodities which continue to move lower, as the Brent Crude oil price drops back to $100.
US inflation is again the focus on the economic calendar today. This time it is for US factory gate prices or the US PPI. After the big upside surprise in the CPI yesterday, will there also be an upside surprise in the PPI? Weekly Jobless Claims will also be eyed, as claims have been trending higher in recent weeks. Upside surprises in jobless claims will be a concern for the Fed as inflation continues to rise. Also, watch out for a speech by the Fed’s Waller. Any hints of a push for a 100 basis points hike in July will make the headlines.
Today’s news
Market sentiment is mixed to negative today: Markets were choppy in the wake of the US CPI but there is a USD positive/risk negative bias once more taking hold.
Treasury yields mixed since US CPI: The US 10yr yield closed lower last night despite the huge CPI surprise. Shorter-dated yields have increased, with the 2yr rising sharply. This has widened the negative spread (inversion) of the 2s/10s to c. -0.25%. This is seen as a signal of an upcoming recession.
Australian unemployment falls much more than expected: June unemployment fell to 3.5% (3.8% expected, from 3.9% in May. AUD is outperforming today.
Italian political risk: A vote of no confidence in the government today could bring PM Draghi’s reign to an end. This would increase negative pressure on EUR.
Cryptocurrencies holding up well: Despite the hints of renewed negative risk appetite, crypto is holding up well for a second day. Bitcoin was +1% higher yesterday and is over +1% higher again this morning, rallying towards $20,000 again.
FOMC’s Waller to speak at 1600BST: Waller (permanent voter, very hawkish) will be in focus in the wake of inflation rising above 9%. Markets will be looking for any push for a 100bps hike for July.
Economic Data:
- US PPI (at 1330BST). Headline PPI is expected to reduce slightly year on year to 10.7% in June (from 10.8% in May). The Core PPI is expected to drop to 8.1% (from 8.3%)
- US Weekly Jobless Claims (at 1330BST). Claims are expected to stay the same at 235,000 (versus 235,000 in the previous week).
Major markets outlook
Broad outlook: There is a mild USD positive and risk negative bias this morning.
Forex: The USD is slightly outperforming, with EUR and JPY under pressure. NZD is slightly weaker too.
- EUR/USD was choppy on US CPI yesterday but has not yet decisively broken parity (the low has been 0.9997). The market has come close to parity for a third time this morning but it has once more been defended. However, with the USD remaining strong it is difficult to see how this can continue. There is resistance A close below 1.0000 could open the floodgates towards 0.98/0.99 with the market already at almost 20-year lows. The initial resistance of note is now 1.0122 and then 1.0190/1.0220.
- GBP/USD was also choppy post-US CPI but with a bias of USD strength taking hold again today. We have seen another dip towards the recent low at 1.1807 but this has been initially defended. However, the two-week downtrend is a basis of resistance now around 1.1930, with the initial resistance of note the 1.1965 spike high. Below 1.1807, there is almost no support until 1.1410.
- AUD/USD remains in a downtrend of lower highs over the past five weeks which is currently around 0.6800. However, the market has held up well in recent sessions and is again higher (outperforming USD strength) today. Despite this though, with continued negative configuration on the daily RSI, we continue to favour selling into strength. Resistance is mounting at 0.6875/0.6895.
Commodities: Precious metals remain under selling pressure whilst Brent Crude oil is testing the medium-term range support of around $100
- Gold is falling once more this morning after a choppy reaction to the US inflation data. Yesterday’s intraday rebound has fallen over $1945 and the pressure is once more back to the downside. Another breach of support at $1721 is underway and we continue to see near-term rallies as a chance to sell. A closing break of $1722 opens downside potential towards the key support at $1676. Initial support is yesterday’s spike low of $1707. A close above $1752 is needed to induce a potentially sustainable rally.
- Silver has fallen over this morning after having closed higher yesterday. However, the bull failure from yesterday’s rebound may simply be adding to overhead resistance, now between $19.40/$19.48. There is still a consistent feel of selling intraday rallies. Initial support is at $18.74 with a breach being further 2-year lows and opening at $17.35/$18.35 as the next support area. The caveat is that there is still the threat of a near-term technical rally remains. Initial resistance around $19.48 needs to be broken to open the way towards the more considerable resistance between $20.20/$20.45.
- Brent Crude oil continued to test the support of the medium-term range lows which comes in at around $98/$102. Yesterday’s rebound has fallen over again and the downside pressure is mounting. A close below $98 would be a near five-month low and begin to look at a key downside break, opening initially at $95 and then $90. Initial resistance is at $102.80 with resistance strengthening around $108/$110. Momentum is taking on an increasingly corrective configuration for selling into strength.
Indices: Negative trends are re-establishing once more.
- S&P 500 futures have turned lower in recent sessions and has now broken the near-term recovery uptrend. The bull failure which has firmed the resistance of a 75 tick band 3875/3950 has now induced a move that is retreating towards a test of the key higher low at 3741. Below this re-opens the lows at 3638/3693. These moves suggest that the bulls are not ready to mass for a solid recovery. Initial resistance is at 3834.
- German DAX has continued to slide lower and is firming the four-week downtrend. With a succession of lower daily highs, the resistance at 12,860 and 12,935 protects the key resistance at 13,012 which is a level seen as an important marker for a potential sustainable near-term recovery. Eith corrective momentum configuration rallies are still a chance to sell. Below 12,610 support re-opens the 12,375/12,440 key lows.
- FTSE 100 continues to post long-legged/small-bodied candles but there is a growing negative bias now. The market is again falling early this morning and the move is eyeing a test of the initial support 7098/7105Below this would re-open the one-month range between support at 6970/7013. With the daily RSI consistently below 50, this still favours selling near-term rallies within the month-long range. Initial resistance is growing between 7192/7229.
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.
