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Fed expected to raise 50 bps after US inflation slower

December 14, 2022

US Dollar falls due to the lower-than-expected CPI which is 7.1%, and the Consumer Price Index in November of 0.1% below the 0.3% of market consensus, which is another moderation in monthly core CPI helps to reaffirm that the USD peak is here ($105.00).

The Fed is widely expected to hike the funds’ rate by 50 basis points (bps) on Wednesday, after four consecutive 75 bps hikes. If the data comes in hotter than expected, this will be problematic for the Fed eager to slow the pace of tightening and potentially weigh on risk assets and thus lead to a stronger US Dollar and the meeting is likely to be an increase in the projected peak for the funds’ rate in 2023.

The Dow Jones Industrial Average has raised 0.3% to close at 34108.64. The S&P 500 raised 0.73% to close at 4019.65. The tech-heavy Nasdaq Composite raised 1.01% to close at 11256.81. The surge of the stock market was the reaction of the CPI when the CPI was just released,  NAS 100 once reached 12223, then it falls back to 11776 after 3 hours,  Wall Street closed positive but the S&P 500 Futures struggle for clear directions. Further, the US Treasury bond yields go up and down. U.S. 10-year treasury yield sits at around 3.505%. The policy-sensitive 2-year treasury yield sits at 4.228%.

The decline of US inflation challenges the FOMC for the next announcement of the bps. Even with the pre-Fed caution, the DXY may witness further sidelined performance as the latest US CPI challenges the policy hawks. Also, the already-given 50 bps rate hike and lesser odds of witnessing any surprises from the FOMC added strength to the market’s inaction. However, a surprise from the Fed, either in the form of rate hike directions or economic projections, won’t be taken lightly.

Main Pairs Movement

The US Dollar dropped sharply on Tuesday, as all investors eyed the subdued US consumer price index reading.  The November Consumer Price Index was up by 7.1% YoY, below the 7.3% expected and shrinking from the previous 7.7%. The core reading in the same period was up by 6%, down from 6.3% in the previous month. The DXY index tumbled with nearly 1% losses and fell to a level below 103.7 when the weaker CPI was released.

The GBPUSD surged with 0.79% daily gains for the day as a weaker US CPI report deeply hurt the safe-haven greenback. The British Pound climbed above the 1.2440 level following the release of US consumer data. Meanwhile, the EURUSD rallied 0.9% after the announcement of critical data. The pair earned 0.91% on Tuesday.

The XAUUSD surged with a 1.65% gain daily, as the market anxiety ahead of today’s FOMC and a bit pale headlines from China. Gold rallied by almost 2% following the weaker-than-expected US CPI report.

 Technical Analysis

EURUSD (4-Hour Chart)

EURUSD soared more than 1% at the release of the U.S. CPI figure, which came in below market estimates at rising 0.2% over the month and 6% on an annual basis. The lower-than-expected CPI sent the U.S. Greenback lower as interest rate expectations fall just ahead of the FOMC’s key interest rate decision on the 14th. Markets are now pricing in a 50 basis point interest rate increase at tomorrow’s conference, but the streets are now suggesting a possible surprise of a 25 basis point rate hike. U.S. equities soared on the release of lowered price pressures but quickly retreated as uncertainty still looms across markets. On the economic docket, the Fed will release its interest rate decision during the late American trading session on the 14th, while the ECB will release its interest rate decision during the late European trading session on the 15th.

On the technical side, our previously estimated resistance level of 1.0595 has been thoroughly broken through. Near-term resistance for the Euro-Dollar pair now hovers around the 1.0785 price region. The Conservative support level for the pair remains around the 1.046 price region. RSI for the pair sits at 64.84, as of writing. On the four-hour chart, EURUSD is currently trading above its 50, 100, and 200-day SMA.

Resistance: 1.0785

Support: 1.046,1.031

GBPUSD (4-Hour Chart)

GBPUSD soared 1.23% in 15mins chart and rallied to a new six-month high at around $1.2440 after the release of the US CPI figure, which is 0.2% lower than forecast, 0.6% lower over the month. Lower CPI made the dollar plunge 0.89% at the release time. On Wednesday, the UK will also release inflation figures and the BoE will release its policy statement alongside the interest rate decision on Thursday. Hence, investors could move back to the sidelines following a strong initial reaction to the US CPI data. As we get closer to the release time, five major banks regarding the upcoming UK inflation print. They expected the headline at 10.9% YoY versus 11.1% in October. As for core figures are expected to remain steady at 6.5% YoY.

On the technical side, the previous estimated resistance level of $1.2400 has been broken through and the estimated new resistance level may be up to $1.2666, the high point of this May. RSI for the pair sits at 64.036, as of writing. On the four-hour chart, GBPUSD currently trades above its 10, 50, and 200-day SMA.

Resistance: 1.2666, 1.3000

Support:1.2290, 1.2100, 1.1900,

XAUUSD (4-Hour Chart)

U.S. CPI data again weaker than expected, dollar plunges to spur gold prices above $1,800.

On Tuesday, the inflation data released by the US showed that the annual CPI rate in November was 7.1%, less than the expected 7.3%, which is also the lowest level so far this year; meanwhile, the annual core CPI rate was 6%, less than the expected 6.1%, the lowest in the past four months. The data again showed that the U.S. inflation rate has fallen more than expected, and expectations that the Federal Reserve will further slow down or even stop raising interest rates have risen.

The weaker-than-expected CPI data led to a similar market as on November 10th, when the US CPI data for October was also weaker than expected. The dollar index quickly plunged more than 1% after the release, while the 10-year U.S. bond yields fell nearly 5%, the corresponding gold prices were greatly boosted, gold prices quickly pulled up above the $1,800 mark, and continued to expand. The next market-focused incident is the statement of FOMC will release on December 14th.

On the technical side, the daily chart shows that the gold price has broken through the key resistance of 1800, the level is not only a round number, it also served as key support or resistance in May, June and August this year, so it is a very respectable price level for the market. RSI for the pair sits at 67.03, as of writing. On the four-hour chart, XAUUSD currently trades above its 5, 10, and 20-day SMA.

Resistance: 1810, 1830

Support: 1800, 1795, 1775

Economic Data

CurrencyDataTime (GMT + 8)Forecast
JPYTankan Large Manufacturers Index (Q4)07:506
JPYTankan Large Non-Manufacturers Index (Q4)07:5017
GBPGerman CPI (YoY) (Nov)15:0010.9%
USDCrude Oil Inventories23:30-3.913