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US inflation slows down, Fed to keep raising the interest rate

January 16, 2023

U.S. equities continued to climb on the last trading day of the week. All 3 major indices closed the week out in positive territory amid easing concerns over inflation. The Dow Jones Industrial Average rose 0.33% to close at 34302.61. The S&P 500 gained 0.4% to close at 3999.09. The tech-heavy Nasdaq Composite climbed 0.71% to close at 11079.16.

The December U.S. CPI report, which was released on the 12th, showed the rate of consumer price increases rising at a slowing rate over the year; furthermore, consumer prices have dropped by 0.1% over the month. Easing price pressure sparked last week’s rally across equity markets; however, market participants should not completely disregard the Fed’s hawkish stance as, over the past month, Fed officials have continued to echo their intentions to increase terminal interest rate targets and keep interest rates higher for longer periods.

The benchmark U.S. 10-year treasury yield was last seen trading at 3.498%, while the short-term 2-year treasury yield dropped below 4.3% and is trading at 4.224%, as of writing.

On this week’s economic docket, the U.S. will release its retail sales and PPI figures on the 18th and weekly jobless claims figures on the 19th.

On the earnings calendar, Goldman Sachs and Morgan Stanley will report earnings on the 17th.  Proctor and Gamble and Netflix will release earnings on the 19th.

Main Pairs Movement

The Dollar index, which tracks the U.S. Greenback against a basket of major foreign currencies, lost 0.06% throughout last Friday’s trading. The Dollar index closed 1.67% lower over last week. Easing price pressure, signified by the soft CPI report released on the 12th, has acted as a headwind for the Dollar.

EURUSD lost 0.19% throughout last Friday’s trading. The Euro could not advance against the Dollar as confidence in the European economy remains depressed.

GBPUSD gained 0.17% throughout last Friday’s trading. Cable posted a weekly gain of 1.17% as the Dollar continues to weaken. U.K. GDP came in at a positive 0.1% growth, month over month.

XAUUSD gained 1.24% throughout last Friday’s trading. The Dollar denominated Gold continues to find upside momentum as the Dollar falters.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair declined lower on Friday, failing to extend the previous upside momentum and dropped to a daily low below the 1.079 mark amid the speculations that the US Federal Reserve would slow the rate hikes pace. The pair is now trading at 1.0809, posting a 0.39% loss daily. EUR/USD stays in the negative territory amid the recovery witnessed in the US Dollar, as the greenback manages to regain some composure and advance to the 102.60 region on the back of the profit-talking sentiment in the risk complex. The financial markets are cheering for Thursday’s US inflation report, which showed December’s Consumer Price Index (CPI) dropping beneath 7% and core CPI below 6%. Moreover, according to the CME FedWatch Tool, odds for a 25 bps rate hike by the Federal Reserve lie at a 94.2% chance after the release of the US inflation report. In the Eurozone, the hawkish outlook remains as ECB policymaker Martins Kazaks said that there was no rationale for markets to bet on a rate cut and added that rates should rise well into the restrictive territory.

For the technical aspect, RSI indicator 61 figures as of writing, suggesting that the upside is more favoured as the RSI is now rising higher. As for the Bollinger Bands, the price regained upside traction and rebounded from the moving average, therefore some upside movements can be expected. In conclusion, we think the market will be bullish as the pair is heading to test the 1.0854 resistance level. The RSI also suggests that there is more room on the upside for the pair.

Resistance:  1.0854, 1.0921

Support: 1.0750, 1.0710, 1.0624

GBPUSD (4-Hour Chart)

GBP/USD had no clear traction on Friday as market participants has no consensus on direction. At the time of writing, the pair is still trading in a narrow range of around 1.22. In the UK, GDP for November outperformed, rising 0.1%, greater than the forecast of -0.2% but weaker than the previous of 0.5%. The overall situation is not that good, with GDP falling by -0.3% in the three months to November. The UK economy is sluggish and the Bank of England is facing difficulties as it must continue raising rates, despite the weak economy, to curb high inflation.

For the technical aspect, RSI indicator 56 figures as of writing, slightly above the mid-line, suggesting that the pair is in an uptrend but with no strong bullish momentum. As for the Bolling Bands, the price hovers around the average. The moving average holds almost horizontal, showing no clear trend in the near term. In conclusion, we think the price is waiting for a decisive breakthrough as technical analysis shows a neutral trend and the price hold in a narrow range. For the uptrend scenario, the pair is now testing the resistance at 1.2233. The price needs a decisive breakthrough to trigger the follow-through buy interest. For the downtrend scenario, if the price drop below the support at 1.2110, it may change the current trend and head to test the pivotal support at 1.1927.

Resistance: 1.2233, 1.2450

Support: 1.2110, 1.1927

XAUUSD (4-Hour Chart)

Gold price advanced above the $1,900 mark, hitting a new 9-month high at $1,921.95 on Friday as market participants speculated that the US Federal Reserve could shift to a less aggressive stance following the release of inflation data. According to the CME FedWatch Tool, there is a 94.2% chance that the FED will raise rates by 25 basis points after the release of US inflation data. At the time of writing, the gold price is trading at $1,915.64, continuing to extend gains on weekly basis.

For the technical aspect, RSI indicator 72 figures as of writing, holding above the overbought region, suggesting that the pair is in strong bullish momentum but facing the risk of a downward correction. As for the Bolling  Bands, the price goes up along with the upper bound, which is a sign of strong bullish momentum. The pair could make a downward correction in the short term before extending the rally. In conclusion, we think the gold price is in a bullish mode based on the technical analysis. That said, traders should aware of the risk of correction as the RSI indicator and Bolling Bands both signal overbought signs. For the downtrend scenario, the key support level is at $1,870. If the price drop below this level on the 4H chart, it may change the current trend and head to test the next pivotal support at $1,830.

Resistance: 1919, 1930

Support: 1870, 1830, 1775

Economic Data

CurrencyDataTime (GMT + 8)Forecast
EURGerman ZEW Economic Sentiment (Jan)18:00-15.5

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