Today’s report: Critical Inflection Point?
The market is focused on the outlook for US inflation and the impact on Fed policy normalization and global equities. The Dollar has been gaining momentum in recent days and traders are trying to figure out if we’ve finally reached a critical inflection point post the 2008 financial markets crisis.
Wake-up call
Chart talk: Major markets technical overview video
- Eurozone CPI
- PM U-turningÂ
- FX warnings
- unwelcome demand
- yield differentials
- CPI print
- retail sales
- Profit taking
- Metal demand
- BITCOINÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Why the Yield Curve is Flattening, R. Birkett, Financial Times (February 21, 2018)
- The Big Danger that is Inflation, B. Carlson, Bloomberg  (February 22, 2018)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The major pair has stalled out after trading up to a +3 year high above 1.2500. Daily studies have been in the process of rolling over from stretched readings and a break back below 1.2200 will open the door for a deeper correction towards the 1.2100 area 2017 high, which guards against the 2018 low around 1.1915. Ultimately however, the overall pressure remains on the topside, with dips expected to be well supported ahead of the next extension towards monumental resistance in the form of a falling trend-line off the 2008 record high, currently around 1.2650.
EURUSD – fundamental overview
ECB Smets was on the wires expressing concern about Euro appreciation, though the market isn’t paying too much attention. German growth and Eurozone CPI data ahead, followed up by Fed speak later in the day. The market will continue to try and figure out if it should be taking prospects for a more aggressive Fed normalisation more seriously, which would weigh on the Euro, or if there hasn’t been enough data to shake things up just yet, with soft Dollar policy still running the show. Dealers report stops below 1.2200.
GBPUSD – technical overview
The market has entered a corrective phase since pushing to a 2018 high at around 1.4350 and rallies should be well capped ahead of the 2018 high for additional corrective activity. There is still scope for additional declines into the 1.3400-1.3600 area, though setbacks should then be very well supported in favour of that next meaningful higher low and bullish continuation.
GBPUSD – fundamental overview
The latest Brexit related news comes from the soft Brexit side, following a Times report that EU citizens entering the UK during the post-Brexit transition period will be allowed to stay permanently. This hasn’t done much to influence price action thus far, with Brexit stories running back and forth, while the focus is also on bigger picture macro themes related to the Fed policy outlook and global equities. Absence of first tier data out of the UK and US will leave the market watching these themes, while also taking in some more Fed speak.
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. This could now open the door for an accelerated decline in the days ahead, down towards the 102-103s, an area that coincides with a measured move extension target and the 78.6% fib retrace off the 2016 low to high move.
USDJPY – fundamental overview
Overall, the Yen has been well bid in early 2018, with the Dollar taking a big hit from US administration soft Dollar policy and risk for a capitulation in global equities driving additional Yen demand. Though we have seen a healthy rebound in risk appetite off the 2018 lows, there has also been a clear downturn in 2018, which could invite additional Yen demand if the market rolls over again. Stops were taken out below the 107.30 area 2017 low last week, with the market dropping to a fresh multi-month low into the 105s thus far. Looking ahead, absence of first tier data will leave the focus on US equities and Fed speak.
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 0.8000 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
Earlier this week, the RBA Minutes came out and produced a mostly mixed message, in line with what was to be expected from the central bank. The RBA was upbeat on growth but balanced this out with concerns about inflation and wages. Overall, the Australian Dollar has managed to hold up on dips in recent months, with the supportive price action more a function of broad based US Dollar weakness than anything else. But this is changing right now. Risk sentiment is showing signs of deteriorating in 2018, while softer Aussie data has left room for the RBA to take a more cautious approach as reflected in its February decision. Soft US Dollar policy has been a drag but signs of rising inflation in the US could soon more than offset, especially if global risk sentiment deteriorates. Looking ahead, absence of first tier data will leave the focus on risk sentiment and Fed speak.
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 1.2450.
USDCAD – fundamental overview
Overall, Canada’s recovery is already somewhat fragile, and this coupled with an unstable macro picture 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. The Loonie has also come under added pressure after a discouraging Canada retail sales print and will now take in an important Canada CPI reading later today. This will be the primary focus given the absence of first tier data in the US.
NZDUSD – technical overview
The market looks to be in the process of rolling over, with the daily chart showing a possible double top formation. Right now, it will take a clear break above 0.7400 to take the pressure off the downside and negate the bearish outlook. Until then, there is risk for continued weakness back towards 0.7000.
NZDUSD – fundamental overview
The New Zealand Dollar has been bid up in recent weeks, on the back of broad based US Dollar declines. However, earlier this month, the RBNZ took on a more dovish outlook and this coupled with signs of rising inflation in the US and the possibility for equity market capitulation, could easily offset any of the recent demand, ushering in a wave of Kiwi underperformance. We’re already seeing signs of this with Kiwi unable to do anything with a solid retail sales print earlier today. Looking ahead, absence of first tier data will leave the focus on risk sentiment and some Fed speak.
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 Fed’s more hawkish tone and subsequent jumps in hourly earnings and CPI, are the types of things that could weigh more heavily on sentiment in the sessions ahead.
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 $13,000 at a minimum, to take the pressure off the downside.
Feature – fundamental overview
The crypto asset has come under pressure in 2018, with ramped up regulatory oversight and potential government crackdowns forcing many holders to exit positions. The market is also coming back to earth after a euphoric 2017 run that had bubble written all over. 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 has been a welcome development and will ramp up transaction speed, which has been behind some of the recovery off the 2018 low, though it seems the combination of a massive bubble, more regulatory oversight, a market that is still trying to convince of its proof of concept, and the threat of a reduction in global risk appetite, could all suggest even deeper setbacks ahead.