Daily Technical Analysis

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In general, inflation has been slowing over the last few months. Tomorrow, markets will get a look at December’s CPI print. Expectations are that the headline print will continue to move lower to 6.5% YoY vs a November reading of 7.1% YoY. Last month’s reading was the fifth straight monthly decline after reaching a high of 9.1% YoY in June 2022. The print was also the lowest reading since December 2021.

Markets have also now seen that wage growth is slowing. Average Hourly Earnings for December slowed to 4.6% YoY and expectation of 5% YoY and a lower November revised print of 4.8% YoY from 5.1% YoY. The Fed has been worried about wage growth, and this data was the first sign that wages may be rising at a slower pace.

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The British Pound is drifting for a third day straight. In the European session, GBP/USD is trading at 1.2161, down 0.09%. We could see stronger volatility from the pound before the weekend, with the release of the US inflation report and UK GDP on Friday, both of which are market movers.

There an secure expectation ahead of the US inflation report. Inflation is projected to drop in December, which would be music to the market’s ears. The forecast for headline inflation stands at 6.5%, following the November gain of 7.1%. The core rate, which is more important, is also expected o ease, with the forecast of 5.7% in December, compared to 6.0% in November. The inflation release should result in volatility from the US Dollar. If inflation, particularly the core rate, falls as expected or more, the US dollar will likely lose ground, as speculation will increase that the Fed may have to pivot from its hawkish stance and ease up on the pace of rates. Conversely, if inflation does not fall as much as expected, it would vindicate the Fed’s hawkish position, which the markets may have to grudgingly accept.

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The Australia dollar has started 2023 strongly, rising above 70 cents to highs since August. A softer USD and improved China sentiment have been key. This week’s highlights include Australia’s jobs data, the Bank of Japan decision and US retail sales.

The SUD has risen about 1.6 cents or 2.3% so far in January, to just under 0.7000. Price action was quite mixed in the first few days of the year, the Aussie rally only igniting on 6 January when the USD slumped in response to soft data. While the US December payrolls gain of 223k was quite solid and unemployment rate edged down to 3.5%, there was a declaration in wages growth. Moreover, on the same day the US services ISM survey showed a shocking slide in the headline index, to 49.6 in December from 56.5 in November.

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As in the US, retail sales in the UK also went down. They fell -1.0% in December, which is significantly lower than the forecast +0.5%. Analysts note that real spending in the country was significantly ahead of GDP in 2020-2022, but the rise in inflation led to a sharp halt in this process. And it is predicted that 2023 will be a period of retribution for this waste.

According to economists at HSBC, one of the world’s largest financial conglomerates, things are not so bad. “With UK inflation likely to have peaked and could potentially slow more than the consensus forecast,” a less aggressive tone of tightening from the BoE now could mean a less dramatic reversal later in the year. And this may eventually become a minor positive factor for the British pound in the coming months. The shift towards better-than-expected domestic data should also be positive for the British pound.

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The Bank of Canada are expected to hike interest rates by 25bp tomorrow according to market pricing and economists. The hike would see their benchmark rate rise to 4.5% – its highest level since October 2007 – and on par with the Fed yet above the RBNZ’s 4.25% rate. A 25bp hike would be the slowest pace since their first hike of this cycle in March 2022, after which they moved up 50bp increments, a 100bp hike and a 75bp hike along the way. The central bank will also provide minutes from the meeting on February the 8th, which is the first time in their history.

Money markets suggest an 80% chance of a 25bphike, whilst 25 of 26 economists polled by Reuters also anticipate the move. With a 25bp hike all but a given, it could take a surprise hold to start volatility for traders. But then looking through the latest business and consumer sentiment surveys suggest we could be fast approaching the BOC’s terminal rate.

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Headline CPI 1.9%qtr/7.8%yr; Trimmed Mean 1.7%qtr6.9%yr; Weighted Median 1.6%qtr5.8%yr. Hospitality services most important factor in the upside surprise in the December quarter but with the Trimmed Mean coming in broadly as expected this suggests the pace of core inflation is generally unfolding as we expected.
The CPI lifted 1.9% in the December quarter with the most significant contributions coming from domestic holiday travel & accommodation, electricity, and international holiday travel & accommodation.

The ABS noted that ‘strong demand, particularly over the Christmas holiday period, contributed to price rises for domestic holiday travel and international airfares”. The rises seen for domestic & international travel were notably higher than the historical norm for the December quarter.

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After silver’s big plunge on Monday, both precious metals have managed to steady the ship, suggesting the move at the start of the week was probably a bear trap.

The US Dollar has come back against the Canadian dollar thanks to a 25- basis point rate hike from the Bank of Canada, with its governor saying that interest rates will be kept at its current level while the bank assesses the impact of the cumulative interest rate increases.

But elsewhere, the likes of the Pound, Euro and Yen all remain supported against the US dollar. This is helping to keep buck-denominated metals supported.

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Last year was tough for Japanese yen. USD/JPY gained more than 30% over 2022, striking above 150 in October. While anticipation of slower Fed rate hikes pulled the pair below the 130 level at the start of 2023, the speculations over the destiny of BOJ’s yield control policy grabbed the attention of the Japanese assets in the middle of January.
The BOJ is famous for its slow and steady monetary policy, which aims to boost economic activity and fire inflation. There are two main tools that the BOJ uses: the negative interest rate at -0.1% and the yield-curve control, which allows the 10-year government bond to fluctuate within a pre-determined range to reach the 0% yield target.
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The pair started on a positive note thanks for Spain’s Harmonized CPI, which came in at +5.8 YoY vs 4.7% YoY expected and +5.5% YoY last. Today, Markets will get a look at CPI from France and Germany, ahead of the Eurozone January Preliminary CPI tomorrow. Expectations are for a print of the headline CPI to drop to 9% YoY from 9.2% YoY in December. The Core rate is expected to drop to 5.1% YoY from 5.2% YoY in December. Expectations are for 50bps rate hike, which would bring the key rate to 3.00%. Many members of the committee, including ECB President Christine Lagarde, have already indicated that a 50bps hike is a done deal. Anything different will disappoint the markets. But traders will be watching for signals that another 50 bps rate hike is in the cards for March.

Last week, the US released one of the Fed’s favorite measures of inflation, the Core PCE Price Index. The print was 4.4% YoY, as expected, vs a prior reading of 4.7% YoY. Today, the US will release another important gauge of inflation which the Fed relies heavily on: The Q4 Employment Cost Index. Expectations are for an increase of 1.1% vs a Q3 reading of 1.2%. How will these prints affect the FOMC when it meets tomorrow ? The markets are already pricing in a 99% chance of a 25bps hike, which would bring the Fed Funds rate to 4.75%.

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The Bank of England has a decision to make tomorrow. It is not “to hike or not to hie”. It is to hike by 25 or 50bps, that’s the question. As well as the rate decision itself, the BoE’s comments on the economic outlook and future tightening, as well as the vote split, will have a big impact on the pound. Barring a big sell-off in risk assets due to the Fed’s policy decision taking first, on Wednesday, the GBP/USD could be heading to 1.25 if the BoE does not deliver a dovish surprise.

An already-split Monetary Policy Committee is unlikely to be unanimous as they consider whether to step down a notch or keep going at the 50-basis-point pace. The markets are about 65% confident of a 50-bps hike to 4.0%, owing above all to high underlying inflation, stronger-than-expected wage growth and surprising resilience of the domestic and European economies.

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