Next 24 hours: About the Initial Reaction to US CPI
Today’s report: How Today’s US CPI Could Disrupt the Market
The prospect of rising inflation is a big theme in 2018, given the impact on the global economy. In short, any signs of inflation picking up at a faster pace than the market expects, could translate into accelerated monetary policy normalizations – something that will materially weigh on investor sentiment.
Wake-up call
Chart talk: Major markets technical overview video
- growth data
- UK inflation
- isk sentiment
- unwelcome demand
- Cautious RBA
- NAFTA uncertainty
- Inflation expectations
- US CPI
- Metal demand
- BITCOINÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Role of Bond Yields and Inflation, J. Authers, Financial Times (February 10, 2018)
- Powell Not About to End the Greenspan Put, T. Duy, Bloomberg  (February 13, 2018)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The Euro has entered a period of correction off the recent 2018 high, though overall, the uptrend remains firmly intact and there is still room to run. The break of the 2017 high set up a bullish continuation and the next major measured move upside extension into the 1.2650 area, which coincides with monumental resistance in the form of a falling trend-line off the record high from 2008. In the interim, any setbacks should be very well supported ahead of 1.1900, ideally into the 1.2100 area 2017 high.
EURUSD – fundamental overview
The big focus on Wednesday will be US CPI data, though we also get important data out in Europe, which includes German GDP, Eurozone industrial production and Eurozone GDP. It’s also worth noting that US retail sales are also scheduled for release, but will be taking a back seat to the US inflation data. Solid demand continues to emerge for the Euro on dips, though the single currency has mostly been consolidating over the past several days.
GBPUSD – technical overview
Daily studies are in the process of unwinding from overbought levels. There is scope for an initial drop back towards the 2017 high in the 1.3660 area, after the market triggered a double top formation. But any setbacks are viewed as corrective, with the overall structure showing signs of a longer term bottom.
GBPUSD – fundamental overview
Absence of first tier data out of the UK on Wednesday, will leave the focus on any Brexit related headlines and important US readings later in the day, with US CPI and retail sales on tap. Of the two, the inflation data will be the more important one to watch, given the impact this could have on the Fed normalization trajectory and global sentiment. On Tuesday, the Pound was bid up on a hotter UK CPI reading, which should add pressure on the BOE to need to be moving forward with those rate hikes. Of course, Brexit bumps to hang over the Pound’s head, limiting the upside.
USDJPY – technical overview
The major pair has just taken out the 2017 low, with the break a significant one, as it also compromises a range that has been in play for many months. If the market establishes a weekly close below 107.30, it could open the door for an accelerated decline in the days ahead, that takes the price down into the 103s, an area that coincides with the 78.6% fib retrace off the 2016 low to high move. On the other hand, inability to establish below 107.30, will suggest the range is still intact.
USDJPY – fundamental overview
Overall, the Yen has been well bid in early 2018, mostly on the back of a soft US Dollar campaign and some hawkish leaning tweaks to BOJ policy. This latest downturn in global risk sentiment could invite additional Yen demand on the traditional correlation, with the Yen in position to outperform the Dollar, at least for a while. Stops have now been taken out below 107.30, with the market dropping to a fresh multi-month low, below the 2017 low, and this break is adding to tension in markets. Looking ahead, US CPI and retail sales are the key standouts on Wednesday.
EURCHF – technical overview
Despite this latest round of setbacks, overall, the market continues to trend higher, recently extending gains to a fresh multi-month high. The bullish price action has the market thinking about a retest of that major barrier at 1.2000 further up. In the interim, look for the current round setbacks to be very well supported, while only back below 1.1260 would delay the overall constructive tone.
EURCHF – fundamental overview
The SNB will need to be careful right now, as its strategy to weaken the Franc could face headwinds from the US equity market in 2018. The record run in the US stock market has been a big boost to the SNB’s strategy with elevated sentiment encouraging Franc weakness. Of course, the SNB is no stranger to this risk, given a balance sheet with massive exposure to US equities. But any signs of capitulation on that front into this new year, will likely invite a very large wave of demand for the Franc, which will put the SNB in a more challenging position to weaken the Franc.  And so, we speculate the SNB continues to be active buying EURCHF in an attempt to build some cushion ahead of what could be a period of intense Franc demand ahead. Recent outperformance in the Swiss Franc despite flows which should have otherwise been supportive of a higher EURCHF, could already be offering up a red flag.
AUDUSD – technical overview
The market has been in the process of rolling over after failing to sustain a break above the 2017 high. The recent daily close back below 0.7957 strengthens this outlook and opens the door for a renewed wave of declines back towards 0.7500. At this point, only a daily close back above 0.8000 would delay.
AUDUSD – fundamental overview
Overall, the Australian Dollar could be at risk for deeper setbacks ahead. Risk sentiment is showing signs of deteriorating, while the Aussie data has left room for the RBA to take a more cautious approach as reflected in the February decision. Looking ahead, the focus will be on US CPI data, US retail sales and performance in global equities.
USDCAD – technical overview
Despite a recent round of setbacks, there are signs of basing in this pair. This sets the stage for additional upside, with the next focus on a retest of the psychological barrier at 1.3000. In the interim, any setbacks should now be well supported above 1.2250.
USDCAD – fundamental overview
Last Friday’s Canada employment report wasn’t all that bad, though it did require looking beyond the headline print. Full time employment grew at an impressive clip and wage growth picked up. Overall however, Canada’s recovery is already somewhat fragile, and this coupled with an unstable macro picture, a retreat in OIL prices and plenty of uncertainty around the fate of NAFTA, should be keeping the Canadian Dollar pressured, especially after the Bank of Canada opted to go ahead with another rate hike last month, which will only add to the strain if the global sentiment picture deteriorates even further. Looking ahead, absence of first tier Canada data (we get Canada HPI readings), will leave the focus on US CPI and retail sales.
NZDUSD – technical overview
An impressive run has finally stalled out into formidable internal resistance. Overall, the risk is tilted to the downside and it will take a clear establishment back above 0.7400 to delay the bearish outlook and risk for another reversal. A daily close below 0.7200 will strengthen the bearish outlook and open deeper setbacks towards 0.7000.
NZDUSD – fundamental overview
Although the RBNZ left policy on hold as was widely expected last week, the central bank caught the market off guard, with a more dovish leaning outlook. The central bank pushed back inflation target projections by two years, to Q3 2020. This comes at a time when global sentiment is at risk of deteriorating, the US Dollar is recovering in the aftermath of a more hawkish Fed read and US hourly earnings have jumped up, all warning of additional downside pressure on the Kiwi rate. Last week’s impressive GDT auction result and stronger New Zealand jobs report have been followed up with today’s improved inflation expectations and this along with renewed USD selling, have helped to slow the pace of declines. Looking ahead, the focus will be on US CPI data, US retail sales and performance in global equities.
US SPX 500 – technical overview
A severely overbought market has finally at long last relented, allowing for stretched readings to unwind. There’s plenty of room for these setbacks to extend following the break back below the 2675 area January low, with the market at risk for a further intensification of declines. Any rallies should now be very well capped ahead of 2800.
US SPX 500 – fundamental overview
Investor immunity to downside risk is not looking as strong these days and there’s a clear tension out there as the VIX starts to rise from unnervingly depressed levels. The fact that Fed policy is normalising, however slow, could start to resonate a little more, with stimulus efforts exhausted, balance sheet reduction coming into play and the Fed finally following through with forward guidance. Certainly, the more hawkish tone from this latest otherwise uneventful Fed meeting and subsequent jump in hourly earnings, are the types of things that could weigh more heavily on sentiment in the sessions ahead. Today’s US CPI is a big one as well and could confirm the need for a more accelerated Fed normalization.
GOLD (SPOT) – technical overview
Setbacks have been well supported over the past several months, with the market continuing to put in higher lows and higher highs. Look for the current run to break through and establish above massive resistance in the form of the 2016 high at 1375, with the push to suggest a major bottom has formed, opening the door for a much larger recovery in the months ahead. Any setbacks should now be well supported ahead of 1300.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players persists, with these players more concerned about exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity well supported, with many market participants also fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Certainly the US Dollar under pressure has added to the metal’s bid tone as well, but there is a growing sense that even in a scenario where the US Dollar is bid for an extended period, GOLD will hold up on risk off macro implications. The 2016 high at 1375 is a massive level that if broken and closed above, could be something that triggers a widespread panic and rush to accumulate more of the hard asset.
Feature – technical overview
Bitcoin has come under intense pressure since topping out at a record high just shy of 20,000 in December. The market has now exceeded a measured move downside objective that had targeted a drop to $7,000, with deeper setbacks now on the cards for a move to retest the September 2017 peak around $5,000. At this point, it will take a daily close back above $10,000 at a minimum, to take the pressure off the downside.
Feature – fundamental overview
The crypto asset has come under intense pressure in early 2018, with ramped up regulatory oversight and potential government crackdowns forcing many holders to exit positions. The market has also been on a euphoric ride, with the run gaining too much momentum as latecomers look to get in on the action, often a sign of a bubbling asset. Bitcoin has struggled on the transaction side as well, with transactions per second a major drawback, along with a mining community that has been less willing to process transactions due to the lower fees. The Lightning network is expected to ramp up transaction speed as it is integrated, which could be a big help to Bitcoin, though it seems the combination of a massive bubble, more regulatory oversight and a market that is still trying to convince of its proof of concept, could be at risk for even deeper setbacks. Throw in a capitulation in global equities and downturn in sentiment, and the picture looks even gloomier.