Tickmill UK Daily Market Notes

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Currency Shifts, Oil Decline, and Speculative Assets: Analyzing Market Trends and Powell's Impact in the Week Ahead


European currencies experienced a continued decline on Monday, with EURUSD finding support around 1.0850, and GBPUSD sliding from its recent peak of 1.27 to 1.2650. Both currency pairs have been consolidating near their local highs since the beginning of last week as the wave of selling the dollar started to taper off. This shift was prompted by changing expectations regarding the actions of the European Central Bank, following the recent EU inflation figures that indicated a significant decrease in price pressures across the bloc. Markets reacted by anticipating similar developments in the UK, putting a halt to the rise of the Pound. Additionally, relatively dovish comments from ECB officials on Friday suggested that, barring inflation shocks, the ECB's tightening cycle may be over, and the central bank could consider policy easing in 2024. The slowdown in EU inflation prevented interest rate differentials from narrowing, which would have favored the European currency. Over the past week, this spread increased by 10 basis points, rising from 1.8% to 1.9%. Interestingly, this spread has largely stayed within a corridor since September, despite the rise in the Euro, raising questions about the sustainability of the European currency rally.

The change in market expectations for short-term real yields in a country, all else being equal, impacts demand for its currency. When it declines, demand drops, and vice versa. However, it's crucial to assess the relative change in yield compared to the real interest rate in a country with similar investment opportunities. This is why the differential between EU and US expected real yields is crucial in evaluating the performance of EURUSD.

On another note, oil prices extended their decline on Monday, partly due to a disappointing OPEC agreement to extend production quotas released last week, indicating potential disagreements among OPEC members on production levels. Additionally, markets may be pricing in a European economic slowdown following unexpectedly dovish inflation figures, which could affect the energy market. From a technical perspective, prices are nearing the mid-November low, and the next support level will be the yearly minimums, particularly for WTI in the range of $68-70 per barrel.

Expectations that interest rates will soon fall have fueled bets on speculative assets like Bitcoin and safe-heaven Gold, which has an inverse relationship with rate expectations. Bitcoin surpassed the $40K resistance without significant resistance from sellers, while gold prices spiked and broke through the $2100 level, reaching an all-time high. Although gold prices later erased intraday gains, they continue to trade near all-time highs around the 2070 level. Remarks from Powell on Friday further supported gold, as he signaled the Fed's increasing confidence that no more rate hikes are needed to combat inflation, but they won't hesitate to act if inflation pressures rise again.

There's a growing consensus in the market that an inflation comeback is unlikely, and global central banks' monetary policies and credit conditions are expected to become softer in 2024. This environment is fertile ground for the rise of assets benefiting from declining investment opportunities and lower bond yields.

Looking ahead, this week is packed with fundamental data from the US. The market will be closely watching the ADP jobs report, services PMI from ISM, and the official unemployment report from BLS on Friday. The consensus estimate is 180K jobs, and a print near this forecast is expected to have a mildly negative impact on the dollar. A weaker-than-expected report could prompt a resumption of the upside trend in European currencies, with last week's decline seen as a pullback within the overall trend.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

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NFP preview: US employment resilience persists amid mixed labor market signals


In the latter half of the week, bearish pressure on European currencies has somewhat eased, with EURUSD consolidating in the range of 1.0750-1.08 and GBPUSD at 1.25-1.26. This hints that the upcoming direction may be influenced, to some extent, by the Non-Farm Payrolls, and the upcoming Federal Reserve meeting next week. Recent economic activity indicators in the EU have convinced the European Central Bank to signal that the tightening cycle is nearing its end.

Several officials from the Governing Council made unequivocal comments this week, stating that "further rate hikes are unlikely." However, market expectations for the ECB to shift towards rate cuts in March are deemed somewhat fantastical by one official. The market anticipates a 125 basis point reduction in the ECB interest rate by the end of next year, suggesting a relatively aggressive pace of rate cuts. From this perspective, the potential for further weakening of the European currency is limited, as incorporating anything more aggressive seems challenging.

The third GDP estimate for the Eurozone in the third quarter was revised downward again to 0%, contrary to the forecast of 0.1%. Weak growth was corroborated by EU retail sales for October, showing a year-on-year decrease of 1.2%, below the projected -1.1%. A surprising figure was Germany's factory orders, contracting by 3.7% on a monthly basis against the expected 0.2% increase. German economic exports also decreased by -0.2% in October, while a growth of 1.1% was anticipated for the month.

Shifting focus to the U.S. economy, all eyes are currently on the labor market as employment indicators are the only ones preventing markets to forget completely about the threat of inflation comeback. Alongside signs of weakening, some indicators are surprising on the upward side. One such indicator is initial claims for unemployment benefits, which, despite a gradual increase since mid-October, showed improvement in the latest report:

The extended claims for unemployment benefits, indicating the average duration of unemployment, sharply declined after a significant increase in the preceding week, from 1925 to 1861K against a forecast of 1910K. Earlier this week, market reactions were notable due to JOLTS job openings and ISM's services PMI data. While JOLTS indicated labor market weakness with a sharp decline in job openings (well below expectations), the services PMI surprised on the upside, with respondents noting an increase in hiring compared to the previous month.

Wednesday's ADP report showed modest job growth of only 103K, below the slightly higher forecast of 130K. Wage growth slowed, and weak job growth was observed in both manufacturing and services. Although the connection between ADP surprises and deviations from the unemployment forecast is weak, considering other indicators, risks for today's report lean towards a negative surprise.

What will happen to the dollar and risk assets if NFP job growth disappoints? A moderately lower-than-expected outcome will reduce divergence in the short-term policy stance between the ECB and the Fed, lessening the expected gap in the pace of monetary policy easing, providing clear support to European currencies. On the other hand, very weak or strong job figures may lead to dollar strengthening – the former due to risk aversion, where the dollar's role as a safe haven increases, and the latter due to an expected divergence in the pace of monetary policy easing between the ECB and the Fed.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

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Fed dovish pivot expectations shift to 1Q 2024 as November US CPI shows resilience

The foreign exchange market is churning today, with several key currencies experiencing volatility as investors digest the latest economic data and anticipate upcoming central bank decisions. Gold, the safe-haven asset, is feeling the heat after the release of US inflation figures, which reinforced expectations that the Federal Reserve won’t rush with much anticipated dovish pivot, preferring instead to leave this risk for 1Q 2024 meetings. This has boosted the US Dollar against a basket of currencies, while the UK Pound is under pressure following disappointing economic data. Meanwhile, the Japanese Yen is finding limited support despite improved business confidence, as risk-on sentiment prevails.

Gold Price Stumbles After US Inflation Data

Gold prices are struggling this Wednesday, losing its recent gains after the release of US inflation figures. While the 0.1% MoM increase was in line with market expectations, the annual figure of 3.1% suggests that inflation pressures in the US economy remain stubborn. This has somewhat provided floor for the USD, making gold a little bit less attractive as a hedge against inflation.

Fed Policy In Focus, USD Holds Firm

The US Dollar Index is hovering around 103.80, buoyed by the Fed's anticipated policy stance. While the central bank is widely expected to keep rates unchanged this week, market players are pricing in an 80% chance of a rate cut by May. This has pushed the US Treasury yields lower, but the USD remains supported in anticipation of the Federal Open Market Committee (FOMC) meeting and Chair Jerome Powell's comments.

UK Economic Data Dampens Pound Sentiment

The British Pound has taken a tumble after data revealed a sharper-than-expected contraction in UK GDP in October. This, coupled with a slowdown in wage growth (7.2% actual vs. 7.7% exp.), has fueled concerns about the country's economic outlook. Investors are now looking towards the Bank of England's monetary policy meeting on Thursday, hoping for clues about a potential shift towards a dovish stance.

JPY Struggles Despite Improved Business Confidence

The Japanese Yen is facing headwinds despite the release of positive Tankan survey data, which showed improved business confidence among large manufacturers. The prevailing risk-on environment is undermining the JPY's safe-haven appeal, while traders are also awaiting the Bank of Japan's monetary policy decision next week.

All Eyes on Fed and BoJ Meetings

The global forex market will remain fixated on central banks this week, with the Fed's policy decision and Chair Powell's press conference taking center stage today. The focus will be on the updated economic projections and any hints about the future path of interest rates. Investors will then turn their attention to the BoJ's meeting next week, seeking clarity on the future of the central bank's negative interest rate policy.
Overall, the forex market is navigating crosscurrents as investors weigh the latest economic data and central bank policies. While the US Dollar is finding support from the Fed's hawkish stance, the Pound and Yen are facing headwinds from their respective economic challenges. The upcoming central bank meetings will be crucial for determining the future direction of these currencies and the broader forex market.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

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Central Bank Meetings Overview: Igniting the Chase for Yield


This week saw a series of central bank meetings that delivered a plethora of surprises. In particular, the communication from both the Federal Reserve and the European Central Bank diverged from market consensus expectations. Strong data on the U.S. economy, including service activity indices (PMI), employment and wage growth in November, and changes in unemployment benefit claims in recent weeks, shaped expectations that the Fed would maintain a pause at its Wednesday meeting and initiate a discussion on monetary policy easing only in the first quarter of 2024. Additionally, there were hypotheses that the sharp decline in bond yields (risk-free rates, benchmarks for all other rates in the economy) in October-November would have a "heating" effect on the economy, delaying the onset of central bank rate cuts. However, the Fed didn't hold back; Powell, during the press conference, clearly stated that FOMC members had already begun contemplating and discussing how the rate would decrease in 2024. This became the first major surprise for the market. The updated central bank economic forecasts also worked against the dollar: Core PCE for 2023 and 2024 were revised downward compared to September, while real output increased for 2024. This provided an additional stimulus for market participants to increase demand for risk assets.

The second surprise was the signal of resistance from the ECB to market expectations of aggressive easing of credit conditions in 2024. Although the European Central Bank left the main policy parameters unchanged yesterday, Lagarde's statement at the press conference that the members of the Governing Council had not discussed rate cuts at all was a surprise. The element of surprise here was that incoming data on the European economy for October-November seemed to indicate a much more significant slowing impulse than in the U.S. For example, core inflation sharply slowed from 4.2% in October to 3.6% in November (forecast 3.9%), and GDP contracted by 0.1% in the third quarter. Considering that the ECB's sole mandate is to maintain price stability (inflation targeting), the fact that the sharp decline in inflation in November did not prompt a change in rhetoric became an additional argument in favor of the strengthening of the Euro yesterday.

One tangible result of the sharp shift in market expectations after the meetings of the two leading central banks was the decline in the spread in short-term bond yields between the U.S. and the EU, by more than 20 basis points over the last two days:

The pound sterling strengthened on Wednesday and Thursday by more than two percent after the Fed signaled a softer stance on rates ahead, while the Bank of England, at Thursday's meeting, emphasized that inflation risks persisted, so ruling out further rate hikes was not possible. Three officials out of nine advocated for a rate hike on Thursday, which was also a rather hawkish signal for the market (especially against the backdrop of the Fed decision). Both the bond market and interest rate derivatives revised their expectations for central bank policy easing in 2024 by approximately 7-10 basis points. This was enough to attract investors to British fixed-income assets, triggering an upward movement in GBP:

A highly successful combination for risk assets, particularly the U.S. stock market, was the combination of the Fed’s dovish signal and strong U.S. reports on Thursday. Retail sales in October grew by 0.3% for the month, beating the forecast of -0.1%, and initial jobless claims sharply fell again – to 202K against a forecast of 220K. The data unequivocally increase risk appetite in the market, and the prospect that this will be compounded by a chase for yield (i.e., speculative momentum) shifts short-term risks for the U.S. market towards further growth, at least until the end of the year.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

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Weak US GDP data points to dovish surprise in Core PCE report


The US dollar found itself on the back foot Thursday after a mixed bag of economic releases, including a downward revision to the third-quarter GDP growth estimate from 5.2% to 4.9%. The GDP Price Index also saw a downward adjustment, from 3.5% to 3.3%, indicating a smaller inflationary impact on growth than initially anticipated. While Initial Jobless Claims came in slightly below expectations at 205,000, the overall data failed to impress, contributing to a broad-based USD selloff in the afternoon.

EURUSD seized the opportunity to extend its recent rally, soaring above 1.1000 for the first time since early November. The softer dollar, coupled with growing expectations for a dovish surprise in the upcoming PCE data, fuelled the euro's ascent. Markets anticipate a smaller-than-forecast rise in the core PCE Price Index, potentially paving the way for a slower pace of Fed tightening and further euro gains. Should the data confirm these expectations, parity could be within reach for the EUR/USD pair.

GBPUSD fluctuated around 1.2700 after UK retail sales defied expectations with a 1.3% jump in November. This seemingly positive development was offset by a downward revision to Q3 GDP growth, which tempered sterling's enthusiasm. The pair's near-term direction likely hinges on the PCE data and broader risk sentiment. A dovish surprise from the data could lift the pound alongside global equities, while a hawkish tilt could trigger a pullback for GBPUSD.

The Japanese yen weakened after minutes from the Bank of Japan's October meeting reiterated its commitment to ultra-loose monetary policy. This stance, coupled with a modest dollar uptick, pushed USDJPY higher despite speculation about a potential policy shift in early 2024. The divergence in Fed and BoJ policy paths could cap further gains for the USDJPY pair, with yen bulls awaiting any hawkish signals from the BoJ in the coming months.

Gold prices climbed to a near three-week high above $2,055 before retreating slightly on a firmer dollar. However, the precious metal's appeal remains underpinned by the prospect of a global rate-cutting cycle in 2024, with the Fed potentially softening its hawkish stance after the PCE data release. Any dovish surprise could trigger a further rally for gold, while a hawkish tilt could lead to a temporary dip, presenting a buying opportunity for investors.

The Personal Consumption Expenditures Price Index takes center stage later today, with investors dissecting every detail for clues about the Fed's future rate trajectory. A dovish surprise could send the dollar tumbling and propel risk assets higher, while a hawkish tilt could trigger a reversal of recent trends. With central bank policies and economic data taking center stage across major economies, buckle up for a potentially volatile ride in global markets.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

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Mixed Signals in the Markets: US Employment and PMI Reports Shake Things Up


The job report and Services PMI in the US gave the market a bit of a rollercoaster ride last Friday. The dollar flexed its muscles after the employment stats revealed the US added 216K jobs in December, beating the expected 170K. However, the November job figure got a downgrade to 173K. Unemployment held steady at 3.7%, defying expectations of a slight increase to 3.8%. The real surprise came with wage growth, shooting up by 0.4% for the month, outpacing the expected 0.3%. As we know, wage growth is a leading indicator for inflation, making the future outlook and the possibility of a Fed rate cut in March less clear-cut. Over the year, average wages in the US grew by 4.1%, beating the expected 3.9%.

But the dollar rally on the report was short-lived. EURUSD briefly dipped to 1.0880, but within an hour not only recovered but also trended upward. The US Services PMI report played a part in this turnaround. Service sector activity is a key leading indicator for economic expansion, responsible for about 70% of the US GDP and employing around 70% of the workforce. The overall Services PMI dropped from 52.7 to 50.6 points, but the hiring sub-index plummeted from 50.7 to 43.3. In other words, a significant number of respondents reported sharp hiring cuts in December compared to the previous month.

The component of new orders in the report also declined in December compared to November but remained in the expansion zone, i.e., above 50 points.

Analyzing the overall market reaction to Friday's stats, it seems the market put more weight on the PMI report. This isn't surprising, considering labor market indicators are lagging indicators – they reflect peaks and troughs later than business cycle indicators. On the contrary, survey indicators like PMI can preemptively signal a shift in a business cycle.

The mixed US stats were offset by Eurozone data. European inflation in December accelerated but less than expected – 2.9% against a forecast of 3.0%. Signs of slowing inflation increased the likelihood of the ECB adopting a softer policy earlier than anticipated, weakening the upward momentum of the euro. As a result, EURUSD continues to stabilize in the 1.09-1.10 range it occupied before the release of fundamental data.

An important event this week will be the release of the US inflation report on Thursday. The consensus forecast anticipates a slowdown in core inflation from 4 to 3.8% and an acceleration in overall inflation from 3.1% to 3.2%. Also, on this day, we'll get a batch of labor market data – initial claims for unemployment benefits. In recent weeks, their behavior has become ambiguous again – the weekly increase has started to decline and is nearing the minimum of the current business cycle:

As seen, US statistics remain quite contradictory, possibly because the disparity is evident when comparing leading indicators (survey data) and lagging indicators (such as labor market data). Therefore, markets are not rushing to reassess the chances of a Fed policy easing, which remains the main driver for all asset classes.

The dynamics of the dollar this week will likely hinge on the inflation report. Until Thursday, we can expect stabilization in current ranges. The EURUSD retest of the 1.10 level and the subsequent pullback vividly show that the market is not ready to determine the trend for the main currency pair just yet.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

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AUDUSD: Potential U-Turn at the Start of the New Year Fueled by Continued CPI Slowdown


The EURUSD's mid-term uptrend has hit the pause button, chilling in a tight range of 1.09-1.10 for the sixth day straight, hugging the lower edge of the trend channel:

Last Friday's dollar-buying signal, triggered by a robust NFP report that outperformed expectations in job growth, unemployment, and wage increase, got dampened by a pretty weak US Services PMI, especially the hiring component. It plummeted below 50 to 43.7 points, raising concerns that official labor market stats in the early months of the new year might take a hit (as PMI indicators are forward-looking). This, in turn, cranks up the pressure on the Fed to ease policy in March. So, last Friday, EURUSD reacted with a 'sawtooth' pattern, dropping to 1.0880 and later bouncing back to 1.10. This week's consolidation likely stems from uncertainty ahead of Thursday's US inflation report (CPI), which could set the forex trend for several days or even a week.

Technically speaking, the current EURUSD pattern – consolidation near the lower edge of a fairly lengthy uptrend (over two months) – often precedes a breakthrough below the lower boundary.

A slightly wider range is still forming for GBPUSD – the price has been waltzing between 1.26 and 1.28 for almost a month. The preceding trend to this range, like with EURUSD, popped up in mid-November when the market started to factor in a change in the Fed's QE stance in Q1 2024:

Today, the head of the Bank of England, Bailey, will speak, and the market will be watching to see if he leans towards taming inflation or preventing further economic slowdown. Recent economic output data showed that the UK teetered on the edge of a recession in Q3 2023 – GDP shrank by 0.1%. The BoE's latest communication expressed uncertainty about growth prospects in Q4, indicating rising pressure to shift the tone towards a more market-friendly monetary policy that boosts credit growth. However, compared to the EU and the US, inflation in the UK is higher, making the dilemma sharper for the BoE than for counterparts in other leading countries. Friday's data on monthly GDP changes, construction volumes, and trade balances in the UK should shed light on which alternative the BoE will ultimately lean towards.

A more intriguing situation is unfolding on the AUDUSD chart – since the new year kicked in, the price has switched to a downtrend, bouncing off a long-term resistance line:

Today, Australia's monthly CPI indicator was released – inflation continued to slow down in November, beating expectations at 4.3% on an annual basis against the forecasted 4.4%. In the recent RBA meeting, rate hikes were put on hold, citing the need to assess the effectiveness of the previous series of increases. The new price data increases the likelihood that the tightening pause will be extended, which should negatively impact the attractiveness of the AUD. Considering the technical aspect of the AUDUSD chart, the risks of further decline are growing.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

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US CPI: analysis of preliminary data points to potential upside surprise


The currency market and the US bond market are in a bit of a pickle, prices moving in tight ranges or resembling fading oscillations. It seems like all the hot info that came out recently is already baked into the prices:

Hopes for figuring out the next trend are pinned on today's US inflation report. Overall inflation is expected to pick up slightly, going from 3.1% in November to 3.2% in December. At the same time, core inflation (excluding food, fuel, and other volatile components), according to the consensus forecast, will continue to slow down, hitting 3.8% versus 4% last month. Markets are more sensitive to surprises in core inflation, as its changes have a stronger impact on the Fed's policy - central bank folks, including Powell, have pointed this out multiple times. The deal is, if you base monetary policy on highly volatile data, it's clear that the volatility of interest rates and other Fed policy parameters will increase. Clearly, this volatility will spill over into the economy and financial markets, which is definitely not in the interest of the central bank, whose task is to smooth out fluctuations. Check out the graph below showing overall and core inflation: the first one resembles swings around the trend, which is represented by core inflation.

To understand what to expect from today's report, consider the following points:

- The NFP report showed that wage growth exceeded expectations in December, coming in at 0.4% MoM compared to the forecast of 0.3%. Wage growth correlates with changes in consumer inflation.
- The New York Fed, which weekly forecasts the quarterly GDP growth of the US based on incoming stats, raised the forecast for the fourth quarter from 2.26% in early December 2023 to 2.54% at the beginning of January 2024.

Overall improvements in December data may indirectly suggest that inflationary pressure in the economy may have increased in December.

- Initial claims for unemployment benefits in December (an employment indicator) again fell in December.
- Consumer credit sharply increased in November - $23.75 billion (forecast $5.13 billion). This can be seen as a leading indicator of increased consumer spending in December.
- The University of Michigan Consumer Confidence Index jumped to 69.7 points in December - the second-highest reading for 2023.

Among the reports that could indicate a negative surprise in December inflation, only the US Services PMI stands out. The overall index dropped to 50.6 points, but a significant contribution to the decline came from the employment component, which plummeted to 43.7 points.

In general, preliminary data and the seasonal surge in consumer spending at the end of November and in December tilt the risks for the CPI report towards a positive surprise. However, in my view, this won't significantly and for long change the market expectations for the March easing of the Fed's policy: the market will prefer to wait for data for January and February. If the report disappoints, an asymmetric reaction is likely: the market will be much more willing to factor in a Fed rate cut in March. In this case, the dollar could start to decline intensively along with bond yields, and the search for yield will sharply intensify, allowing the US stock market to refresh recent highs: the S&P could head towards 5000 points.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

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Global Markets React to Economic Data and Central Bank Actions: EUR/USD, GBP, AUD in Focus


The EUR/USD pair faced slight downward pressure during the European session, however later recovered to the equilibrium rate of 1.0950 which has been sustained by the market from the last week amid of lack of conclusive signals from the Fed or the ECB:

Dollar index (DXY) rose amidst a thin-volume trading session marked by elevated volatility due to the extended weekend in the United States for Martin Luther King Birthday. US equity futures trade slightly in the red, signaling a risk-averse market sentiment. Investors remain wary about the risk that recent improvement in the US data (CPI, labor market indicators) will translate into inflation persistence in other economies, hence steering clear from aggressive dollar bids.

The focus now shifts to the eagerly anticipated US monthly Retail Sales data for December, scheduled for Thursday. Analysts expect a 0.4% growth, surpassing the 0.3% increase recorded in November. The trajectory of the USD Index remains closely tied to market perceptions of March rate cut by the Federal Reserve. According to the CME Fedwatch tool, traders are currently assigning a 70% probability of a rate cut by the Fed in March.

On the Eurozone front, Germany's preliminary GDP for the fourth quarter of 2023 contracted by 0.3%, in line with expectations. This comes after a notable 1.8% growth in the previous period. While market participants foresee the European Central Bank contemplating interest rate cuts, ECB Chief Economist Philip Lane downplayed the possibility, citing recent inflation data.

Turning to the Pound Sterling, it faces a sell-off ahead of the United Kingdom labor market data for the three months ending November due on Tuesday. Soft wage growth data could potentially contribute to a decline in households' spending power, aiding in the gradual return of inflation towards the 2% target. The demand for labor remains vulnerable, with job postings in the UK declining by 32% in December compared to a year ago, according to the Recruitment and Employment Confederation (REC).

Down under in Australia, higher TD Securities Inflation data indicates mounting price pressures in the coming months. Additionally, job advertisements increased in December after three consecutive declines. However, these positive figures failed to offer significant support to the Australian Dollar. The People's Bank of China's decision to leave its benchmark rate unchanged disappointed investors who were expecting a rate cut to bolster the country's economic recovery. Consequently, the China-proxy Australian Dollar is under increasing bearish pressure, with key supports at 0.6620 (50-day SMA) and 0.6580 (100-day SMA). The pair witnessed reversal of the bullish trend at the start of new year which adds to the view that pair might have entered medium-term downward trend.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

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First batch of US labor market data trims chances for Fed rate cut in March


The EURUSD is attempting to develop the ascending impulse that emerged in the second half of the American session yesterday. However, resistance appeared above the 1.09 level, causing the price to drop below, and it is consolidating near the round level. Higher timeframes indicate a breakout of the ascending corridor, which strengthened after the release of the US retail sales report on Thursday. The data exceeded expectations, with both the overall and core sales indicators growing significantly stronger than forecasts. As a result, the market was forced to reassess the chances of a Fed rate cut: futures are now pricing in a 60% chance, down from 70% the previous week:

Since the beginning of the year, data on the US economy has consistently improved. The trend was set by the December NFP (Non-Farm Payrolls) report – job growth, wage payments, and the unemployment rate exceeded expectations positively, indicating that the labor market in December was stronger than anticipated. This was followed by the December CPI (Consumer Price Index), which showed that a significant component, such as prices for housing-related services, accelerated growth in December. Yesterday's retail sales and comments from Fed officials convinced the market that it had jumped ahead of 'dovish' rate expectations. The first batch of labor market data in January – initial unemployment claims for the week ending January 13 – showed an increase of only 187K, compared to expectations of 207K. This is close to the minimum of the current business cycle and should be interpreted as a strong argument in favor of the Fed extending the pause in March.

However, the market's reaction in the form of a strengthening dollar and rising bond yields still appears disproportionate to the improvement in December data. It is likely that the market is trying to attribute the strong indicators to a seasonal effect, based on increased consumer spending in December. Therefore, the market is likely to wait for January figures to make a final conclusion about the outcome of the March Fed meeting.

The ECB, in turn, is also trying to convey to the market that expectations for monetary policy easing in the EU are somewhat exaggerated. Several heads of European banks, predominantly known for their hawkish positions, have slightly adjusted their stance on the easing cycle this year, indicating that the market's expectations for a cumulative rate cut of 150 basis points this year appear overstated. However, in an interview with Bloomberg on Wednesday, Lagarde did not actively resist dovish expectations. As a result, the risk balance for EURUSD, considering the positions of central banks and taking into account data on unemployment benefit claims, looks biased towards a slightly greater decline, probably towards the 1.0750 area (December's low):

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