Espresso Morning Call: USD slipping as markets lie in wait

What we are looking for

• USD starting to fall back: USD is slipping once more on major forex as US Treasury yields drift lower. Markets appear to be settling back into trend ahead of some crucial data next week. 
• Indices build support: After a near-term corrective phase in recent days, Wall Street has started to find support again. US futures are ticking higher early today and this is lending support to European indices.
• Commodities supported again: After selling pressure briefly hit precious metals earlier in the week, recent sessions have seen support forming for the renewed recovery. Oil has continued to struggle but is trying to form initial support this morning.
• Data traders: US PPI comes before the CPI this month and could give an indication of the inflation trend for next week’s CPI. The PPI is expected to drop decisively. USD traders will be on alert. The Michigan Sentiment will also be watched for any surprises.

Overview

There is a more settled feel to major markets as we come towards the end of the week. With Treasury yields starting to drift lower again, a brief USD rebound has faltered. However, looming on the horizon is a massive week ahead for major financial markets. A deluge of central banks and tier-one data is coming, with the Fed and more immediately, US CPI inflation. This data flood could have a significant impact across major markets (especially if US CPI comes in hot). Subsequently, traders appear happy to sit in the trends formed in recent weeks. Today’s data announcements should certainly be watched and they may cause some initial market fluctuations, but essentially, markets look to have settled into a wait-and-see mode.

US data needs to be watched for on the economic calendar. US PPI is forecast to fall decisively YoY on both core and headline. Despite MoM growth of +0.2% for both, a big jump from December 2021 drops out of the YoY data. Michigan Sentiment is forecast to remain broadly as it was in November. Markets will also be watching the inflation expectations component, which is expected to drop slightly.

Today’s news

Market sentiment is supportive: USD is edging back lower, with risk appetite marginally positive as US futures tick higher.

Treasury yields drift lower: US yields have gradually begun to turn back lower again as the week has progressed. This is weighing on the USD slightly and allowing support for risk appetite.

Chinese inflation falls as expected: Chinese YoY CPI dropped to 1.6% in November (from 2.1% in October). This was in line with the consensus. The PPI remained at -1.3%.

Cryptocurrencies settle after yesterday’s rebound: Crypto bounced yesterday as risk appetite began to improve. After rallying by +2% yesterday, Bitcoin is a shade higher by +0.1% at $17200. Ethereum is +0.1% at $1280.

Economic Data:

• US PPI (at 13:30 GMT). Factory gate inflation is forecast to fall sharply in November. The headline PPI is expected to rise by +0.2% MoM but bring YoY inflation down to 7.2% (from 8.0% in October). Core PPI is also expected to increase by +0.2% MoM but again fall to 5.9% from 6.7%.
• Michigan Sentiment - prelim (at 13:30 GMT). Prelim sentiment for December is expected to remain fairly steady at 56.9 (56.8 in November). 

Major markets outlook

Broad outlook: Markets are settled with a mild USD negative and risk-positive bias. 

Forex: USD is marginally weakening again. However, CAD and AUD are mild underperformers.

• EUR/USD has rebounded from the initial support band at 1.0430/1.0495 and is now eyeing the recovery high of 1.0595. Momentum remains strongly configured with the RSI moving towards the high 60s. We are cautious ahead of huge risk events this week and 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 next week. 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 is creeping higher once more. The move is not decisively positive but the positive configuration on the daily RSI is encouraging. 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. A breakdown below 1.1900 would turn the market corrective again. 
• AUD/USD has slightly struggled for upside traction after forming support at 0.6668. The move higher is just easing back this morning as the market shies away from a test of the 0.6850 reaction high. The concern is that the daily RSI is still showing 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. Oil has some respite early today from the recent selling pressure.

• Gold has moved higher once more as the support at $1764/$1765 has been firmed. The market is running along an uptrend for the past four weeks and the rising 21-day moving average, with the bulls looking towards a test of the $1810 resistance once more. There is a positive configuration on momentum with the daily RSI holding up well now into the 60s. With the expected elevated volatility next 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 rebound from $22.02 has encouragingly moved back above the old $22.51 breakout and is eyeing a retest of the recent $23.52 reaction high. We still look to buy support 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 fall in recent sessions, with a series of bearish candles. Trading at levels not seen since early January, the next support of note is not until $69.50. Interestingly, the RSI continues to fall below 30 and shows little sign of inducing a technical rally from an oversold position. Despite this, it remains a risk and we are looking for near-term reversal signals. A move above initial resistance at $79.5 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: US futures have found a basis of support, and this also looks to be helping European indices.

• S&P 500 futures have held 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. Yesterday’s positive session is being followed up with initial gains this morning. A move above Initial resistance 3987/4015 would begin to improve the outlook, however, for now, this could just be part of a consolidation in front of key risk events next week.
• German DAX has drifted lower away from the crucial resistance band between 14700/14800. However, the move has begun to settle down with the important support around 14125 still intact. 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 starting to move decisively lower. Below 7515 has opened the next important support at 7426/7437 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 (even if it is above 50 still). 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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