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• German inflation falls to 3.2%, eurozone inflation next
• US second-estimate GDP improves to 5.2%

The euro is showing limited movement on Wednesday. In the North American session, EUR/USD is trading at 1.0984, down 0.11%.

German inflation falls to 3.2%

Gerrmany’s inflation rate dropped more than expected, coming in at 3.2% y/y in November. This was down considerably from 3.8% in October and below the market consensus of 3.5%. This was the lowest inflation rate since June 2021 and was driven by lower food and energy inflation. Services inflation eased to 3.4%, down from 3.9%. Core inflation dropped to 3.8%, down from 4.3% in October.

There’s a lot to like in this inflation print and ECB policy makers will no doubt be pleased as German inflation continues to fall. The next text is on Thursday, with the release of eurozone inflation for November. Headline inflation is expected to fall to 2.7%, down from 2.9%, and the core is expected to ease to 3.9%, down from 4.2%.

The ECB has signalled a ‘higher for longer policy’, as have the Federal Reserve and other major central banks. Even though inflation has been dropping, it remains higher than the ECB’s 2% target, and the central bank hasn’t given any indications of a rate cut. The markets are more dovish and have priced in a rate cut as early as May. If eurozone CPI follows the German release and declines more than expected, we could see the odds of a rate cut brought forward ahead of May.

The US economy provided another reminder today that the economy is in strong shape. US GDP (second estimate) climbed an impressive 5.2% y/y in the third quarter, the strongest quarter since Q4 2021. The release beat the market consensus of 5.0% and was higher than the preliminary estimate of 4.9%. The economy showed marked improvement compared to the second quarter, which had growth of just 2.1%.

EUR/USD Technical

• EUR/USD is testing support at 1.0986. Below, there is support at 1.0920
• 1.1033 and 1.1099 are providing support

• Australian CPI falls more than expected
• AUD/USD down after four-day winning streak

The Australian dollar is in negative territory on Wednesday, after four straight winning sessions. In the North American session, AUD/USD is trading at 0.6623, down 0.39%.

Australia’s inflation rate surprises on the downside

Australia’s inflation rate rose 4.9% y/y in October, down from September’s 5.6%, which was a five-month high. This beat the consensus estimate of 5.2% and marked the first decline in inflation since July. Trimmed mean inflation, a key core inflation gauge, ticked lower to 5.4%, down from 5.3% in September.

The drop in inflation is an encouraging sign for the Reserve Bank of Australia, which has tightened rates in order to curb inflation and bring it back down to the target range of 2%-3%. The RBA has said that inflation has peaked, but that doesn’t necessarily mean that interest rates have peaked as well. Future rate policy will largely depend on the data, and inflation will be a key factor. If inflation continues to fall at a relatively fast pace in the coming months, it’s likely that the tightening cycle is over. If that is not the case, then one final quarter-point hike remains a possibility, perhaps as early as February.

Today’s inflation print led to a repricing of the rate odds for the December meeting. The probability of a quarter-point hike has fallen from 10% on Tuesday to 2% today, according to the ASX RBA rate tracker. It’s a virtual lock that the RBA won’t raise rates next month and the inflation print has raised expectations of rate cuts in 2024.

Australia’s retail sales surprised on the downside with a 0.2% decline in October. This was another sign that elevated rates are filtering through the economy and dampening economic growth.

Fed members presented a mixed picture on Tuesday. Fed Governor Christopher Waller said that he was “increasingly confident” that rates had peaked and that the Fed could trim rates in the coming months if inflation continued on its downswing. Fed Governor Michelle Bowman expressed the opposite position, saying that further hikes will likely be needed in order to bring inflation back down to the 2% target.

AUD/USD Technical

• AUD/USD tested support at 0.6618 earlier. Below, there is support at 0.6559
• 0.6650 and 0.6709 are the next resistance line

The Bureau of Economic Analysis' second estimate of Q3-2023 real GDP was revised 0.3 percentage points (pp) higher to 5.2% quarter-over-quarter (q/q, annualized).

Consumer spending advanced by 3.6% – a modest downward revision from the 4.0% gain reported in the advance estimate. Healthy gains in spending were seen across both goods (+4.7%) and services (+3.0%).

Business fixed investment expanded by 1.3% – an upgrade from the near flat reading previously reported – with the revision largely concentrated in non-residential structures (+6.9% from 1.6%). Meanwhile, equipment spending fell by 3.5%, while intellectual property products expanded by 2.8%.

Residential investment rose by 6.2%, snapping what had been nine consecutive quarters of declines.

Government spending expanded by a robust 5.5% (up from the previously reported 4.6% gain) and added nearly a full percentage point to third quarter growth. Gains were seen across both federal (+7.0%) and state & local (+4.6%) spending.

Inventory investment added a meaningful 1.4 pp to GDP, while net trade had no overall impact as a strong gain in exports (+6.0%) was completely offset by a slightly smaller rise in imports (+5.2%).

Real Gross Domestic Income rose by 1.5% in the third quarter, an acceleration from the downwardly revised gain of 0.5% (previously 0.7%) in Q2. Corporate profits were meaningfully higher, rising by 14.0% (annualized) or $105.6 billion after accounting for inventory valuation and capital consumption adjustments. Personal income rose by a healthy 3.9%, largely unchanged from Q2's gain.

• Measured as a share of nominal GDP, corporate profits inched higher by 0.2 pp to 11.9% and remain slightly above the 2018-2019 average of 11.5%.

Key Implications

At the beginning of 2023, most forecasters expected the U.S. economy to be contracting or at least slowing through the second half of this year. Instead, Q3 growth expanded at a pace that was more than double the previous quarters' rate of growth, and well above what most believe to be the economy's underlying potential growth rate of 1.8%.

While we expect growth to downshift in the fourth quarter, our current tracking still has the U.S. economy expanding by 1.8% to round out the year. The Atlanta Fed's GDPNow tracking is even stronger at 2.1%. These numbers are inconsistent with returning price stability and could require a further tightening in the policy rate unless we see a more decisive slowing in economic activity through early-2024.

Dollar is stabilizing after earlier selloff but remains the weakest performer for the week. Its modest recovery can be partly attributed to a bounce back against Euro, which is currently under pressure due to Germany's lower-than-expected CPI readings. Meanwhile, Australian Dollar is experiencing a delayed reaction to Australia's lower-than-expected monthly CPI readings too. As a result, both Aussie and Euro are the worst performers for the day.

On the other hand, the New Zealand Dollar continues to soar, bolstered by RBNZ's (RBNZ) hawkish holds. Swiss Franc is also showing strength, particularly in its recovery against Euro. Sterling and Canadian Dollar, meanwhile, display mixed performances amidst these currency movements.

From a technical analysis perspective, AUD/USD is now at a critical juncture, pressing medium term falling channel resistance. Decisive break there will solidify the case that whole fall from 0.7156 has completed with waves down to 0.6269. Further rally should then be seen to 0.6894 resistance.

On the other hand, rejection by the channel resistance at this stage will bring consolidations first. However, break of 0.6521 support will revive medium term bearishness for deeper fall. The upcoming China PMI data, expected tomorrow, could be a significant catalyst for the next move in this currency pair.

In Europe, at the time of writing, FTSE is up 0.02%. DAX is up 1.14%. CAC is up 0.55%. Germany 10-year yield is down -0.040 at 2.456. Earlier in Asia, Nikkei fell -0.26%. Hong Kong HSI fell -2.08%. China Shanghai SSE fell -0.56%. Singapore Strait Times rose 0.61%. Japan 10-year JGB yield fell -0.074 to 0.681.

US goods trade deficit widens to USD -89.8B in Oct

US goods exports fell -1.7% mom to USD 170.8B in October. Goods imports was flat 0.0% mom at 260.7B. Goods trade deficit widened from USD -86.8B to USD -89.8B, larger than expectation of USD -86.7B.

Wholesale inventories fell -0.2% mom to USD 899.4B. Retail inventories was virtually unchanged at USD 796.6B.

Eurozone economic sentiment rose to 93.8, EU rose to 93.7

Eurozone Economic Sentiment Indicator ticked up from 93.5 to 93.8 in November. Employment Expectations Indication fell from 102.8 to 102.1 Economic Uncertainty Indicator fell from 22.7 to 22.4.

Eurozone industry confidence fell from -9.2 to -9.5. Services confidence rose from 4.6 to 4.9. Consumer confidence rose from -17.8 to -16.9. Retail trade confidence rose from -7.4 to -7.0. Construction confidence rose from -5.5 to -4.8.

EU Economic Sentiment Indicator rose from 93.2 to 93.7. Employment Expectations Indicator fell from 102.3 to 101.8. Economic Uncertainty Indicator fell from 22.2 to 21.8.

Amongst the largest EU economies, the ESI improved in the Netherlands (+2.9), France (+2.0) and Poland (+1.7), while it eased in Spain (-1.5) and, to a lesser extent, in Germany (-0.5) and Italy (-0.3).

BoE's Bailey dismisses rate cut speculations again

BoE Governor Andrew Bailey, in an interview, emphasized, "Two percent is our (inflation) target and we will do what it takes to get there."

Bailey also addressed the speculation around interest rate cuts, categorically stating, "We are not in a place now where we can discuss cutting interest rates – that is not happening."

He noted, "We need to see how the final part of the journey down to 2% inflation plays out; we have not seen enough of that journey yet to be confident."

He acknowledged the ongoing economic challenges, including some weakening in economic activity. However, he described this observation as a "realist view" rather than an "ultra-pessimist" outlook, as some critics have suggested.

RBNZ raises rate track, signaling additional rate hike

RBNZ decided to keep the Official Cash Rate steady at 5.50%, aligning with market expectations. However, a significant aspect of their announcement is the upward revision of their "rate track."

According to the bank's forecasts in the Monetary Policy Statement, OCR is expected to peak at 5.70% in Q2 of 2024 and maintain this level throughout the year. Looking ahead, RBNZ anticipates a rate cut in Q2 of 2025, bringing it down to 5.4%.

In the accompanying statement, RBNZ noted, "ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation."

RBNZ also emphasized its readiness to hike again. "If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further."

Moreover, RBNZ underlined the necessity of maintaining interest rates at a restrictive level for a sustained period, aiming at ensuring consumer price inflation returns to target level and to support maximum sustainable employment.

Australia's monthly CPI slowed to 4.9% in Oct, below exp 5.2%

Australia monthly CPI slowed from 5.6% you to 4.9% yoy in October, below expectation of 5.20%. Excluding volatile items and holiday travel, CPI slowed from 5.5% yoy to 5.1% yoy. Annual trimmed mean CPI also slowed from 5.4% yoy to 5.3% yoy.

The most significant contributors to the October annual increase were Housing (+6.1%), Food and non-alcoholic beverages (+5.3 per cent) and Transport (+5.9%).

BoJ's Adachi: Not at a stage to discuss exit from ultra-loose policy

BoJ board member Seiji Adachi acknowledged that while there are early indications of a positive wage-inflation cycle emerging, these are not yet sufficient to consider exiting ultra-loose monetary policy.

He emphasized the importance of continuing with monetary easing approach, stating today, "For now, it's appropriate to patiently continue with our monetary easing."

Adachi specifically pointed out the challenges posed by China's slowing growth and the potential impacts of aggressive US interest rate hikes, noting that these factors make it difficult to predict whether Japanese firms will substantially increase wages next year.

He also addressed the disparity in wage increase capabilities between large and small companies. While some big companies seem prepared to continue raising wages, many smaller firms, particularly in regional areas, are struggling to do so due to challenging business conditions.

He emphasized, "We're not at a stage yet where we can discuss an exit" from ultra-loose policy.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0950; (P) 1.0980; (R1) 1.1024; More...

Intraday bias in EUR/USD stays on the upside with 1.0933 minor support intact. Current rise from 1.0447 should target 1.1274 resistance next. But strong resistance should be seen there to limit upside. On the downside, below 1.0933 minor support will turn intraday bias neutral and bring consolidations. But further rally will remain in favor as long as 1.0851 support holds.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is tentatively seen as the second leg. Hence while further rally could be seen, upside should be limited by 1.1274 to bring the third leg of the pattern.

Economic Indicators Update

US goods exports fell -1.7% mom to USD 170.8B in October. Goods imports was flat 0.0% mom at 260.7B. Goods trade deficit widened from USD -86.8B to USD -89.8B, larger than expectation of USD -86.7B.

Wholesale inventories fell -0.2% mom to USD 899.4B. Retail inventories was virtually unchanged at USD 796.6B.

Full US goods trade balance release here.

Daily Pivots: (S1) 1.0950; (P) 1.0980; (R1) 1.1024; More...

Intraday bias in EUR/USD stays on the upside with 1.0933 minor support intact. Current rise from 1.0447 should target 1.1274 resistance next. But strong resistance should be seen there to limit upside. On the downside, below 1.0933 minor support will turn intraday bias neutral and bring consolidations. But further rally will remain in favor as long as 1.0851 support holds.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is tentatively seen as the second leg. Hence while further rally could be seen, upside should be limited by 1.1274 to bring the third leg of the pattern.

Daily Pivots: (S1) 1.2631; (P) 1.2673; (R1) 1.2739; More...

Intraday bias in GBP/USD remains on the upside at this point. Sustained trading above 61.8% retracement of 1.3141 to 1.2036 at 1.2716 will pave the way to retest 1.3141 high. On the downside, below 1.2606 minor support will turn bias neutral and bring consolidations first. But further rally will remain in favor as long as 1.2426 resistance turned support holds.

In the bigger picture, price actions from 1.3141 are seen as a corrective pattern to rise from 1.0351 (2022 low). Strong rebound from 38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075 suggests that current rise from 1.2036 is already the second leg. However, while further rally could be seen, upside should be limited by 1.3141 to bring the third leg of the pattern.

Daily Pivots: (S1) 0.8756; (P) 0.8787; (R1) 0.8813; More....

Intraday bias in USD/CHF stays on the downside and outlook is unchanged. Firm break of 100% projection of 0.9243 to 0.8886 from 0.9111 at 0.8754 will target 161.8% projection at 0.8533, which is close to 0.8551 low. On the upside, above 0.8817 minor resistance will turn intraday bias neutral first. But risk will stay on the downside as long as 0.8886 support turned resistance holds.

In the bigger picture, price actions from 0.8551 are currently seen as part of a corrective pattern to the decline from 1.0146 (2022 high). Fall from 0.9243 is seen as the second leg for now. Deeper decline could be seen to 0.8551 low but strong support should be seen there to bring rebound. For now, this will remain the favored case as long as 0.8886 resistance holds.

Daily Pivots: (S1) 146.92; (P) 147.87; (R1) 148.43; More...

Intraday bias in USD/JPY is turned neutral with breach of 147.70 minor resistance. Some consolidations could be seen, but risk will stay on the downside as long as 149.66 resistance holds. Below 146.65 will resume the fall from 151.89 to 100% projection of 151.89 to 147.14 from 149.66 at 144.91, which is close to 145.06 key resistance turned support.

In the bigger picture, rise from 127.20 (2023 low) is seen as the second leg of the pattern from 151.93 (2022 high). Decisive break of 145.06 resistance turned support will confirm that this second leg has completed, after rejection by 151.93. Deeper fall would be seen through 38.2% retracement of 127.20 to 151.89 at 142.45 to 61.8% retracement at 136.63. Nevertheless strong bounce from 145.06 will retain medium term bullishness for another test on 151.93 at a later stage.

• Shaped four consecutive weeks of positive higher closes since 27 Oct 2023 low of 32,310.
• Potential start of a major uptrend phase with next major resistance at 39,515.
• Watch 35,175 key short-term support to maintain minor uptrend phase from 10 November 2023 low.

The price actions of the US Wall St 30 Index (proxy of the Dow Jones Industrial Average futures) have shaped four consecutive weeks of positive higher closes since its recent October 2023 low of 32,310.

The current price level of 35,446 at this time of the writing is just a whisker of 4.3% away from its all-time high level of 36,971 printed on 5 January 2022.

Start of a potential major uptrend phase

Fig 1:  US Wall St 30 long-term secular and major trends as of 29 Nov 2023 (Source: TradingView, click to enlarge chart)

The long-term weekly chart of the US Wall St 30 Index has exhibited several positive elements; oscillating within a newly formed major ascending channel from the 3 October 2022 low of 28,574, cleared above the 200-day moving average, and weekly RSI momentum indicator inched back up above 50 level.

These observations suggest that the Index has printed two major higher swing low areas on 3 October 2022 and 27 Oct 2023 (around a year apart) that advocate the start of a new major uptrend phase within its long-term secular uptrend in progress since the Great Financial Criss low of March 2009.

The major resistance after its current all-time high of 36,971 stands at 39,515 (upper boundary of the major ascending channel & 1.00 Fibonacci extension from 3 October 2022 low).

Watch the 35,175 key short-term support

Fig 2:  US Wall St 30 minor short-term trend as of 29 Nov 2023 (Source: TradingView, click to enlarge chart)

Since its bullish breakout from the former medium-term descending channel resistance in place since the August 2023 high, the price actions of the Index have continued to evolve within a minor ascending channel from the 10 November 2023 low of 33,842.

In addition, the hourly RSI momentum indicator has continued to hover above a parallel support at the 45 level which suggests that short-term bullish momentum is likely to be intact.

If the 35,175 key short-term pivotal support holds, the Index may continue its ongoing impulsive up move sequence within its minor uptrend phase with the next intermediate resistance coming in at 35,830 (also the 9/10 February 2022 swing high) in the first step.

However, a break below 35,175 negates the bullish tone for a minor corrective decline to expose the next intermediate support zone of 34,830/750 (also the upward-sloping 20-day moving average).