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U.S. CPI Inflation To Drive Volatility On Treasuries And Forex

Published 14/07/2017, 10:38
Updated 09/03/2019, 13:30

It would seem that inflation is key to the pace of Fed tightening. After Fed chair Yellen’s somewhat cautious statement for her testimony suggested that the FOMC could ease back in its tightening if inflation persists, this has added anticipation of today’s US CPI numbers.

Sentiment looks reasonably positive ahead of US inflation, but the data is sure to drive volatility on Treasuries, Forex and commodities this afternoon. Sentiment has been better in recent days as a dovish surprise from the Fed helps to ease fears of tightening too quickly (in light of sluggish inflation). Subsequently, equity markets have been stronger, whilst the dollar has been under pressure. However Treasury yields bounced back yesterday and that has helped to stabilise a wobbling dollar. The recent rebounds on precious metals have also just tailed off with this move. Markets will though be reactive to the US inflation data this afternoon, whilst it will also be interesting to see if US Retail Sales can bounce back after disappointment last month. It is also the start of US earnings season with three big banks, JP Morgan, Citi and Wells Fargo (NYSE:WFC) set to report before the US open.

Wall Street closed marginally higher with the S&P 500 +0.2% at 2448, whilst Asian markets were also slightly higher (Nikkei +0.2%) and European markets are cautiously higher today.

In Forex, the tone looks to be mildly risk positive with the euro and sterling positive, whilst the Aussie continues its remarkable run of strength this week as it breakout to a 2017 high. In commodities, gold is consolidating, whilst oil is also trading mixed to slightly higher.

Testimony from Janet Yellen showing an cautious tone on inflation puts added importance on the key tier one economic data for the US today. Subsequently, traders will be focusing in on the US CPI reading at 13:30 BST. Expectation is for the headline CPI to drop to +1.7% (from 1.9%) and continue its decline back from +2.7% earlier in the year. The core CPI has been falling steadily for the past four months but is expected to stabilise around +1.7%. At the same time though there is also the announcement of US Retail Sales, which is expected to show ex-autos month-on-month rising by +0.2%. This reading will also be key as the last three months have shown sharp misses of the consensus.

At 14:15 BST US Industrial Production is expected to grow by +0.3% for the month with Capacity Utilization ticking higher to 76.7 (from 76.6 last month). Finally, at 15:00 BST the preliminary reading of University of Michigan Sentiment which is expected to remain at 95.1 (from the upwardly revised final reading of 95.1 last month).

Chart of the Day – Silver

I remain wary of how long these rallies on the precious metals will last and with silver just finding resistance at the old key May low, the prospect of this rally being sold into is increasing. Silver has not been as strong as gold on a longer term basis, with the May rally falling well short of the equivalent highs earlier in the year and the subsequent trend lower is now providing a barrier at $16.34. The momentum indicators have been tracking lower and (with the exception of the sensitive Stochastics) have failed to ignite with the recent rebound. Old support becomes new resistance and with the resistance of $16.01 capping the gains of the past two sessions, forming a bear candle yesterday the bears are being tempted once more to sell. The old key December 2016 low at $15.59 will now be seen as an important indicator. There has not been a decisive closing breach yet (last week’s close of $15.58 was hardly decisive) and a breach would re-open the spike lows of recent sessions, with $15.16 and $14.86 as support. Above $16.01 the resistance is $16.22 before $16.34/$16.43. Rallies look to be a chance to sell.

XAG Daily Chart

EUR/USD

The market has continued with its mild corrective move that has set in for the past couple of sessions. Despite the dollar coming under pressure of late, EUR/USD has tracked slightly lower. However, there is nothing that suggests that this is anything more than a dip that will be bought into. The uptrend of the past three months still comfortably pulls higher and is today around the $1.1300 key breakout support. There is a slight deterioration in the momentum indicators as the bulls have just eased off in the past couple of sessions. This is resulting in the RSI dropping below 60, the MACD and Stochastics lines threatening to roll over. However I continue to expect corrections to be bought into. There is a near term basis of support around $1.1380 which has held (aside from a brief intraday breach of a few pips yesterday) throughout this week. The hourly chart suggests this a consolidation that will be contained. The key near term support is $1.1310. A move back above yesterday’s high at $1.1455 will re-engage the bulls once more.

EUR Daily Chart

GBP/USD

With two strong bull candles in a row and early gains today the recent corrective drift seems to be breaking higher again. The trend of lower highs and lower lows is arguably still intact whilst below $1.2982 but the momentum is changing now. The RSI has picked up from around 50, whilst the MACD and Stochastics lines have also ticked higher. The low in place now at $1.2808 is now key and it is interesting to see the hourly chart far more positively configured now. The hourly moving averages are bottoming to turn higher whilst the hourly RSI and Stochastics have a far more bullish outlook. Building support above what is becoming a near term pivot band $1.2890/$1.2915 will be key to the continuation of the rally. A move above $1.2982 would confirm the bulls being back in control and open a test of the highs above $1.3000 once more. The initial resistance would be $1.3030 whilst the key high remains $1.3047.

GBP/USD Daily Chart

USD/JPY

The recent dollar weakness meant a loss of momentum and the decline has broken the four week uptrend. However, the difference between this being a bearish reversal and a simple trend line break which turns into consolidation, is the band of support between 112.70/112.90. These is the first area of support to be tested within the previous uptrend and for now it is holding. The market has tested the support in the past two sessions but, as yet, it remains intact. A mildly positive candle yesterday has been followed by additional gains today as the dollar bulls fight back. For now, momentum indicators are hinting at a correction, rather than screaming one. The RSI is holding above 60 and MACD lines are plateauing, only the Stochastics have hinted at a corrective move. This could all though be playing out a move for a lower high below the uptrend, which is currently 114.10. The hourly chart shows resistance at 113.70 is key near term now, with a consolidation outlook forming. A breach and close below 112.70 would be near to medium term bearish now.

USD/JPY Daily Chart

Gold

Gold remains in its five week downtrend and the negative candlestick from yesterday looks to be re-affirming that position. Having previously posted some more positive candles, yesterday’s move would have certainly dented the confidence of the bulls. I continue to expect the market to be pulled lower by the downtrend which today comes in at $1224, with rallies being sold into. The resistance is building now overhead from Wednesdays high at $1225.60 which is underneath the $1229.10 reaction high from late last week. Momentum indicators remain corrective with the RSI still camped below 40 and the recent uptick on the Stochastics doing little to inspire confidence. The hourly chart shows the rally having lost its way with previously positive momentum dropping away. A move below $1214 initial support would put the bears back in control once more for a retest of the $1204.50 low.

Gold XAU Daily Chart

WTI Oil

The market continues to build a recovery, even though the move has a slightly messy look to it. The 38.2% Fibonacci retracement at $45.85 has been a basis of resistance, often intraday (on Tuesday) but also on a closing basis too. With yesterday’s bull candle pushing back above this, the bulls will be looking more positive again, but this needs to continue. The daily momentum indicators are now beginning to track higher once more with the Stochastics crossing higher, the RSI rising above 50 and the MACD lines continuing to hold their improvement. This points towards using intraday corrections as a chance to buy for a test of Wednesday’s high at $46.50. A breakout would re-open the old key resistance band around $47.00. There is a basis of support around $45.00 now.

WTI Oil Daily Chart

Dow Jones Industrial Average

The bulls still have the handbrake on for this breakout as once move the market just stalls as the next upside move threatens. Momentum indicators have ticked higher with the Stochastics tracking at a two week high and RSI back into the 60s. However there will be nagging doubts in the minds of the bulls unless the market can really break clear of all these intraday peaks of the past few weeks between 21,530/21,580. The hourly chart shows positive momentum configuration but the support band of the past week between 21,450/21,500 needs to hold to maintain the belief that this is the time for a breakout. A closing breakout above 21,581 would really be a bull signal now and confirm the range bull break and imply around 380 tick higher.

DJi Daily Chart

DISCLAIMER: This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such.

All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.

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