Equities continued marching north, and the US dollar continued to weaken, after the US CPIs met their forecasts, suggesting that the Fed is unlikely to change to a more aggressive strategy than what was already priced in. Today, the focus will turn on Fed Governor Lael Brainard’s testimony on her nomination as Fed Vice Chair, and it will be interesting to hear what she has to say on monetary policy.
Dollar Keeps Sliding, Risky Assets Advance as Fed Rate Outlook Seen Unchanged
The US dollar continued trading lower against all the other major currencies on Wednesday and during the Asian session Thursday, losing the most ground versus CHF, AUD, and NZD.
The weakening of the US dollar combined with the strengthening of the risk-linked Aussie and Kiwi, suggests that the financial community continued trading in a risk-on environment. Indeed, turning our gaze to the equity world, we see that major EU and US indices continued to trade in the green. However, sentiment softened during the Asian session today.
EU and US shares may have continued to gain on the back of Fed Chair Jerome Powell’s remarks, suggesting that the Fed may not be in a rush to tighten monetary policy, at least not faster than what market participants are currently pricing in, but also due to the CPIs not accelerating by more than anticipated. The headline rate hit 7.0% yoy, the highest since 1982, but this was what the market has been anticipating. Remember, yesterday, we said that with equities rebounding on Tuesday, even with such a forecast being publicly known, it would need an upside surprise for investors to start pricing in a more aggressive strategy by the Fed. For now, according to the Fed Fund futures, they are fully pricing in a 25bps hike to be delivered in May, with a decent chance of this happening a month or two earlier.
As for today, market participants are likely to turn their gaze to Fed Board Governor Lael Brainard’s testimony before the Senate Banking Committee. She will be testifying on her nomination as Fed Vice Chair. It would be interesting to hear her view on monetary policy, but given that yesterday, she already made some remarks, saying that controlling inflation is the “most important task” facing the Fed right now, we don’t expect any major deviations. Although she was considered a dove ahead of her nomination, she thereafter showed willingness to combat high inflation, and thus, we do expect her to be in favor of rate increases this year. However, in order for her remarks to change the course of the market, she needs to sound more hawkish than Powell did on Tuesday, something we see as unlikely, given her dovish views in the past. We believe that anything confirming the current market pricing may allow equities to continue gaining, while the US dollar could stay under selling interest.
Dow Jones – Technical Outlook
The Dow Jones Industrial Average cash index traded higher yesterday, hit resistance at 36460, and then it pulled back. However, it remains above the upside support line drawn from the low of December 1st, and thus, we see decent chances for another round of buying soon.
A clear break above 36540, marked by he high of January 6th, could allow advances towards the high of the day before, which is also the record high of the index, at around 36950. If market participants are not willing to stop there, then a break into the uncharted territory may encourage extensions towards the 37500 zone.
On the downside, we would like to see a clear dip below 35630, which is the low of January 10th. This could confirm the break below the aforementioned upside line and may initially target the 35375 barrier, marked by the low of December 15th. If that barrier does not hold, its break may lead to the 35040 level, marked by the low of December 21st, where another break could carry extensions towards the low of December 20th, at 34670.
EUR/USD – Technical Outlook
EUR/USD traded sharply higher yesterday, breaking above the upper bound of the sideways range it had been trading within between November 26th and January 12th. Then, it overcame the medium-term downside resistance line drawn from the high of May 25th, and stopped near the 1.1465 zone, marked by the high of November 15th. With that in mind, we believe that the short-term picture may have turned to positive for now.
A clear break above 1.1465 could encourage extensions towards the 1.1524 territory, which provided support between October 6th and November 5th. If the bulls are not willing to stop there, we could see them pushing the action towards the inside swing low of November 9th, at 1.1575. Slightly higher lies the peak of that day, at around 1.1615.
In order to start examining the bearish case, we would like to see a clear dip below 1.1233, the lower bound of the aforementioned range. The pair will already be well below the downside line taken form the high of May 25th, which the dip below the lower end of the range will confirm a forthcoming lower low on the daily chart. The next stop may be at 1.1185, marked by the low of November 24th, the break of which could extend the fall towards the low of June 1st, 2020, at 1.1100.
As for the Rest of Today’s Events
The only releases worth mentioning are the US PPIs for December and the US initial jobless claims for last week. Usually, we monitor the PPIs as a gauge for the CPIs, as producer prices usually feed into consumer prices. However, bearing in mind that we already got the CPIs yesterday, we don’t expect the PPIs to prove a market mover. Just for the record, they are expected to accelerate further. Initial jobless claims are forecast to have declined slightly.
As for the speakers, besides Fed Board Governor Brainard, we will get to hear from ECB Vice President Luis de Guindos, ECB Executive Board member Frank Elderson, Philadelphia Fed President Patrick Harker, and Chicago Fed President Charles Evans.
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