Forex markets looking to US CPI for direction

Market Overview

Aside from a slightly positive move for the dollar, there is little real direction on forex markets as traders seem to be sitting on their hands ahead of the announcement of US consumer inflation (CPI) today. Broadly speaking, there has been a lack of decisive direction across recent sessions and perhaps US CPI can be the catalyst for a move. Ever since the January employment data saw a jump in Average Hourly Earnings, inflation has been a key theme for traders. Expectations are running higher (at least on the 5 year breakevens) but will the hard data catch up? Friday’s February hourly earnings suggest this may be a little too soon still to see consumer inflation picking up, but any surprise will certainly be pounced upon. Currently the market sees the Fed adding 25 basis points in March and June and then once more in the second half of the year. A surprise tick higher in the core inflation would increase expectations of a further fourth hike. Forex markets are muted ahead of the announcement. However there is one currency under pressure, the Japanese yen. Hit in the latter part of last week on the improved risk appetite, there is a scandal that is beginning to engulf Japanese Prime Minister Shinzo Abe over cronyism which could affect his chances of re-election later this year.

Inflation

Wall Street closed mixed, with the Dow off -0.6%, the NASDAQ higher by +0.3% and the S&P 500 -0.1% at 2783. Asian markets were also mixed over night with the Nikkei +0.6%, but European markets are looking cautious again. In forex majors, there is a slightly positive tone to the dollar moves today, with the yen underperforming, whilst sterling is also mildly lower ahead of the Spring Statement. The New Zealand dollar is the main outperformer. In commodities, with the dollar pulling slight gains, there is another slip at the open for gold, whilst oil is ticking slightly lower too.

There are two factors to watch out for today, both coming out at 1230GMT. The first is the major economic announcement of the week, the US CPI inflation. Consumer inflation for February is expected to show headline CPI ticking slightly higher to +2.2% (+2.1% last month) whilst core CPI is expected to remains at +1.8%. After the January jump in average hourly earnings was unwound according to Friday’s payrolls data, it will be interesting to see if there is an impact on CPI. A positive surprise would certainly give the dollar a boost and could worry risk traders. The UK Spring Statement is at 1230GMT also but is not anticipated to be too much of an event. The speech is expected to only be perhaps a quarter of an hour long and is expected to be fairly policy neutral. Aside from announcing a reduction in borrowing forecasts (due to surprise improvements in the UK’s budget deficit) this could be one of the more dull fiscal events for the UK. Despite this, UK Gilts and sterling could be more volatile.

Chart of the Day – AUD/USD 

The Aussie bulls have made some good ground in recent days. Trading against the dollar, a downtrend has now been broken and there are some real technical improvements being seen that could now drive a serious recovery. In rallying from the long term pivot around $0.7700 a couple of weeks ago, the market is now leaving a series of higher lows and broke a five week downtrend on Friday. This comes with a bullish crossover buy signal on the MACD lines and the Stochastics are now accelerating above 50 to new five week highs and strong near term configuration. The bulls will be eying the resistance of a lower high at $0.7895 which has been a pivot previously. Moving above this resistance would open the next barrier at $0.7990. The hourly chart shows there is an uptrend channel formation and support initially in the band $0.7840/$0.7850 with intraday corrections being bought into. Support at $0.7770 is key near term.

EUR/USD

The selling pressure that was seen on the euro in the wake of the ECB meeting seems to have been largely contained now. The outlook on EUR/USD is now looking increasingly neutral within what is now an eight week consolidation range of 400 pips between $1.2155/$1.2555. Finding a low of $1.2270 on payrolls Friday a small positive candle formed yesterday. This has helped to neutralise the momentum indicators which means the Stochastics, MACD and RSI lines are all broadly flat close to their neutral points. The hourly chart shows the market very much in a tight  range in the past few sessions with the market trading within 90 pips below the near term pivot at $1.2360. A decisive break above the pivot opens $1.2445 but it looks like a catalyst could be needed. That could come from US CPI inflation today, but in front of that this could be another quiet session.

GBP/USD

The outlook has been somewhat mixed in recent days. There is a six week trend of lower highs which is a negative pull for the market as rallies have been failing at lower levels. However there is also a trend that can be traced back to November that is underpinning the market for higher lows too, which supported the big negative candle from Thursday. This candle has also now been negated by a couple of subsequent positive candles. However there is a lack of intent in the momentum indicators which is suggesting that the market is in need of a near term catalyst to start to drive decisive direction as these trend lines continue to converge. The near term resistance at $1.3930 is a barrier today whilst the downtrend comes in at $1.3960 today. The hourly chart shows ranging near term momentum configuration with the hourly RSI oscillating between 30 and 70 as the latest move higher rolls over again this morning. Initial support is $1.3840 from yesterday’s low and then $1.3870. US CPI and the UK Spring Statement could help to drive direction today.

USD/JPY

Since breaking the eight week downtrend on Friday, the market has taken on an increasingly choppy configuration. Yesterday’s negative candle saw the market drop back by 35 pips only for this to be regained again early this morning. It is interesting to see that the forces that have been compelling the market to sell Dollar/Yen into strength seem to be far less certain now about the market tracking lower. The daily momentum indicators are also now beginning to gain traction, with the MACD and Stochastics lines both moving decisively higher now. Friday’s high of 107.05 is initial resistance and if this can be breached then the bulls will begin to think more seriously about 107.65/107.90 which are the key near term resistance levels needed to be broken in order to take on a more positive outlook. The hourly chart shows that although the pivot at 106.35 was breached slightly overnight there is still regard given to it as a basis of support and 106.25 would become a higher low if the market remains supported today. There seems to be a subtle shift in sentiment away from the yen, watch for US CPI today as this could provide more clues on near term direction.

Gold

The range phase that gold has formed above the long term pivot at $1300 continues. It is interesting to see that in recent sessions, every time the market drops below $1320 there is a reaction to prevent a decisive bear candle forming. Once more yesterday, the weakness was supported and the market closed again around $1322, within a $3 range for the fourth consecutive session. However the bulls are being tested and there is a mild negative bias that is forming that is weighing on the price. Again the market is lower in early moves today, whilst the MACD lines and RSI are beginning to drift lower. It seems that gravity is pulling the market lower and this is reflected on the hourly chart where the RSI is failing consistently around 60 and testing 30, with the MACD and Stochastics lines also turning negative again early today. Recent lows at $1313/$1315 are initially supportive but could see further pressure, with $1302.60 still key support. The last two rallies have fallen over $1325/$1326 with the key near term resistance at $1341.

WTI Oil

The market continues to throw off a raft of mixed signals amidst erratic trading. Friday’s strong bull candle was almost entirely undone by a retracement move yesterday, although a rebound into the close has limited the negative near term influence of this candle. However, this recent choppy trading comes as the market continues to trade within converging trendlines. There is a downtrend of the past five weeks which is lending resistance now around $62.60, whilst the support of an uptrend that dates back to August is supportive at $60.20 today. Momentum indicators are fluctuating but with a mildly negative bias which continues to suggest the market could still pressure the support at $59.95. The hourly chart reflects a very choppy near term outlook whilst leaving resistance at $62.35 as a lower high below $63.30 and key resistance at $64.25.

Dow Jones Industrial Average

The market is trending higher over the past seven sessions as he bulls shape up for a test of the February high at 25,800 (which incidentally the S&P 500 briefly breached its equivalent resistance yesterday). The bulls are still fighting through the Fibonacci retracements of the big sell-off.  Although the 50% Fib at 24,988 has become the basis of a pivot and is supportive, it was interesting to see the 61.8% Fib at 25,372 becoming the basis of resistance during yesterday’s session. The momentum indicators are ticking higher with the Stochastics now making good ground above 50, and the MACD lines rising. With the mini uptrend in place the bulls will be looking to use the little corrective candle from yesterday as another chance to buy the recovery. The seven day uptrend support comes bang on the 50% Fib. A retest of 25,800 remains the favoured move in due course.