More strong US data, higher yields and USD strength
- Sticky inflation and a solid labour market: With the US PPI inflation coming in significantly higher than expected and another low weekly jobless claims number markets continue to position for higher Federal Reserve interest rates
- US Treasury yields continue to climb: Yields on the 2-year and 10-year are higher again
- USD is solidly outperforming: The USD is decisively positive on all major forex pairs.
- A risk-negative bias on major markets: With Wall Street closing decisively lower last night and US futures c. -0.5% this morning, European indices have opened lower. Commodities such as gold, silver and oil are all decisively lower too.
US data continues to point to higher Fed rates
There has been a stream of higher-than-expected US economic data in recent weeks.
Positive labour market data has been coupled with upside surprises in both the US CPI inflation (on Tuesday) and now the US PPI (factory-gate inflation, out on Thursday).
The trends are lower on US inflation, but the data is proving to be sticky.
Yesterday’s core US PPI was expected to fall to 4.9% YoY (from 5.5%) but came in at a sticky 5.4%. Just like the US CPI data from earlier in the week, this is down from last month, but inflation is proving to be sticky.
This gives more fuel for the hawks on the FOMC to continue raising interest rates. Markets are responding.
Higher Fed rates are likely with no rate cuts this year
Markets are already fully pricing a 25 basis points (bps) rate hike in March. But another 25bps is increasingly being priced in for May too. This would take the likely terminal rate to 5.25% (but could be even higher too).
However, this is also coming as potential rate cuts have been priced out in 2023. The first rate cut after the Fed stops (at the moment probably 5.25%) is not expected until February 2024.
This is more hawkish positioning is showing in US Treasuries (yields moving higher) and also translating to strength for the US dollar.
In Treasuries, the US 10-year yield has moved above 3.90% for the highest level since November. The US 2-year yield is decisively above the previous barrier of 4.57% and is pushing firmly towards 4.88%.
Higher US bond yields also mean a stronger USD. The Dollar Index (the USD against a basket of major currencies) has broken higher.
A move above 104.65 is likely and the next key resistance is at 105.63.
This is a significant turnaround in the near to medium-term outlook for the USD. The move has upside potential too.
USD strength is testing crucial levels on major pairs
The USD strength is having a significant impact on major forex pairs. Key levels are under pressure or being broken on every pair:
- EUR/USD a close below 1.0655 opens 1.0482
- GBP/USD key support at 1.1840 is being eyed
- USD/JPY a close above 134.75 would be bullish
- AUD/USD a close below 0.6855 would be bearish
- NZD/USD support at 0.6190 is being eyed
- USD/CAD a close above 1.3520 would be bullish
- USD/CHF a close above 0.9291 would be bullish
AUD/USD
A classic head & shoulders top pattern is completing. The pattern needs a close below 0.6855 to be confirmed. If so, it would imply c. -300 pips of additional downside.
Trading under the 55-day moving average is corrective.
The daily RSI is confirming the breakdown, under 50 and at a three-and-a-half-month low.
If there is a close below the neckline support at 0.6855 we would be near to medium-term bearish.
We would look to use near-term rallies as a chance to sell, with initial resistance of overhead supply between 0.6855/0.6935.
The next important support comes in around 0.6720.
EUR/USD
Although the EUR has been one of the better performing major currencies, we are still seeing EUR/USD dragged lower.
- A close below 1.0655 support would be a corrective signal.
- The daily RSI is now failing under 50 and is at a three-and-a-half-month low.
If there is a close below 1.0655 today, we would see 1.0655/1.0720 as overhead supply and an area where near-term rallies are likely to fade.
A retreat to 1.0482 is growing increasingly likely now.
The key resistance is now at 1.0804. This is the first lower high of the growing correction.
Support and resistance levels for major markets
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