Chinese consumer CPI dips and USD looks to weaken

The market was quiet overnight but the broad trend lower in USD seems to be back. We are expecting to see the continued buying of growth currencies and selling funders EUR, JPY, CHF but also selling USD.

The Fed’s Kaplan added to the view that the FOMC is likely to look through short term inflation spikes.  He said "The temporary jump in inflation or rise won't surprise me — the question for me will be how persistent is it". 

US CPI this afternoon is followed by comment from Powell.  The US CPI tonight would need to come in close to 2% or above to cause concerns of tapering, it is expected t come in at 1.5% YoY. 

China's consumer prices CPI dropped 0.3% in January 2021 after a brief improvement in December 2020 as the Chinese economy was hit by the impact of fresh coronavirus outbreaks and decreased travel

Australia Westpac Consumer Confidence bounced back 1.9% after a 4.5% drop in Jan on the back of concern around lockdowns. Australia has since controlled those outbreaks swiftly allowing sentiment to recover.

USD lower is currently the main trade, but we will be looking for the reflation trade to generally lead to crossJPY demand as long as risk sentiment stays supported so a dip to that support level should be bought.  Japan holiday tomorrow then Chinese New Year from Friday.

New Zealand 2-yr inflation expectations came in strong yesterday at 1.89%.  The market didn’t seem too concerned although it does keep RBNZ among the front runners of CB’s likely to exit loose monetary policy measures in the future.  Although it does seem like RBNZ could be the front runner when exiting loose policy does start among G10 central banks. NZDUSD traded up to 0.7254 yesterday after the stronger inflation expectations although has since lost steam.

The key numbers today are EURUSD back in the trend higher. 1.1950 support, and USDJPY broke 105.00, next support at 104.13 top of ichimoku cloud.

Our overview and outlook of the key trading pairs and indices is as follows

EURUSD – The euro bulls keep holding on to gains as the pair breaks back above 1.21 amid the upbeat mood surrounding the US fiscal stimulus. The global risk sentiment remained well supported by the progress in coronavirus vaccinations and US fiscal stimulus, fueling hopes for a strong global economic recovery. Today, the attention shifts to the US inflation data and Fed’s speech. If inflation remains low and Powell remains supportive, then the single currency might push higher towards 1.2170 and possibly 1.2215.

GBPUSD – The cable continues to trend higher after breaking above the 2-year high, 1.3750, as USD inflation fears keep weighing on the US dollar. The GBP continued benefiting from the coronavirus vaccination distribution and diminishing odds for negative BoE interest rates in 2021. Today, if US CPI doesn’t show any inflation on the Dollar, then the Sterling will probably rally higher towards 1.3850 and 1.39.

USDJPY – Progress on fiscal stimulus negotiations coupled with the Federal Reserve’s relatively dovish stance, may trigger further losses for the US Dollar against the Japanese Yen after a breach of our short-term support level at ¥104.65. Moreover, if upcoming US inflation data fails to surprise to the upside, the USD/JPY could drop even further to the next key support level around ¥104. US CPI is due at 1330 GMT.

FTSE 100 – As mentioned yesterday, the 200-period moving average has now turned support after another failed attempt to break below it during yesterday’s trading session. Today, futures are higher again rising across indices in Europe after Asian indices closed mostly higher ahead of the Lunar New Year holidays starting tomorrow. Real money is finally starting to pour into the underinvested FTSE100 as expectations are that the UK will come out of lockdown earlier due to the rapid vaccine roll-out in the country. However, in the short-term a slight pullback is likely according to technical indicators as the index is still trading in the same tight range between 6520/50 and 6580/6600.

DOW JONES – A very quiet session on Wall Street yesterday ahead of US CPI (consumer inflation) scheduled to be released later this evening, anticipated to increase from 1.4% in December 2020 to 1.5% in January 2021. US CPI would need to come in close to 2% or above to cause concerns of tapering which may trigger a slight sell-off in equities with technical indicators showing support for the Dow index at the 50-period moving average at 31400 and the 200-period moving average at 31340. Otherwise, we suspect buyers will keep scooping stocks on dips with our next resistance level at 31600.

DAX 30 – The DAX30 hit our support level at 14000 yesterday briefly dropping to 13960 before buyers scooped up the lower priced shares pushing the German benchmark back to our resistance level at 14100. Today, stocks in Frankfurt are seen extending yesterday’s gains as recovery hopes remain intact and after CPI figure rose by 0.8%, in-line with estimates. However, reports earlier suggest German chancellor Angela Merkel will be pushing to extend lockdown restrictions to stop the spread of coronavirus until at least the month of March which may put some pressure on the DAX with 14000 as our next support level.

GOLD – The yellow metal held above the 1835 support level which coincided with the 200 period SMA as ongoing weakness in the greenback kept Gold supported. All eyes on US CPI data today with previous month standing at 0.4% and current expectations for a slightly lower print at 0.3%. We continue to trade in a range between 1840/1850 support/resistance with technical indicators favouring higher prints on an hourly close above 1850 resistance level.

USOIL – 8th consecutive daily close in the green for WTI Crude, closing at $58.49pbl with Brent topping $61pbl, despite a pullback lower, hitting our support targets at $58 and $57.50 before retracing higher with $58 now back as support level. API inventory data came in at -3.5Mb with previous standing at -4.261Mb, capping higher prints on WTI, as investors await official EIA data today (consensus: 0.985Mb, Previous: -0.994Mb). An hourly close above $58.50 will open the door to higher prints with $59 as next resistance level.