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Gold inched lower as US Treasury yields rose amid expectations of tighter monetary policy by the Fed. The metal has been struggling to find a floor after its price made a U-turn from its 9-month high at 1960. 1850 from a previous bullish breakout at the start of the year has failed to stop the bleeding. A bullish RSI divergence shows a slowdown in the downward momentum but there is no confirmation yet of a turnaround, which would be a rise above 1890. In the meantime, 1825 is likely to be the next stop.

The US dollar jumped after January’s inflation did not slow down as fast as expected. The pair came to rest at the start of the breakout rally in early January (1.0660). The top of a previously faded rebound (1.0790) showed a spike with an upper shadow indicating rejection of the upside. The former demand zone around 1.0830 is the hurdle ahead and only a close above 1.0940 would reignite hopes of a bullish continuation. Otherwise, a drop below 1.0660 would bring back the selling pressure and drive the euro towards 1.0500.

Equity markets are poised to open a little softer on Wednesday following similar moves in Asia overnight as investors weigh up the latest setback in US data.

The inflation report really needed to over-deliver after the red-hot labour market figures earlier in the month and it simply didn't do it. The trend remains positive but it may be stalling and that won't give the Fed any encouragement to stop raising interest rates.

The next 25 basis point hike was never really in doubt anyway but now markets are factoring in much more, including another in May and a good chance of one more in June. What's more, those rate cuts that were priced in for the end of the year only a couple of weeks ago are no more. Markets are pricing in the possibility of one but the anticipated year-end rate is now significantly higher, as is the terminal rate.

A long way to go

UK inflation may still be far too high but the January CPI report has offered some cause for optimism, slipping faster than expected on both a headline and core basis. The headline number remains above 10% so there's still a very long way to go but favourable base effects and lower energy prices should go a long way in driving this much lower over the course of the year. The BoE may be particularly encouraged by the core decline as this is where we're likely to see stubborness but we must remember that this is just one release and there will likely be many setbacks over the course of the year.

Large inventory build weighs

Oil prices are a little lower again today but remain broadly within the same range they've traded in over the last couple of months. China has been a very bullish development for crude oil but the global economy as a whole is much more uncertain. In addition, the US decision to release oil from the SPR has come as a surprise given previous commitments to refill the reserve.

What's more, a shockingly large inventory build reported by API on Tuesday is contributing to the decline ahead of today's widely followed EIA report. If that's backed up later today, we could continue to see oil drift away from its range highs.

Gold correction continues

The corrective move in gold is continuing today after the yellow metal did not get the lift from the US inflation report that some were hoping for. It's now broken back below $1,850 and could continue lower from here, with the next support potentially coming around $1,820-$1,830, although a bigger test may come around $1,780-$1,800.

Ultimately the recent data has not been particularly favourable and that's been evident in the shift in interest rate expectations this year. A higher terminal rate and potentially no rate cuts this year is not a good near-term development for the yellow metal.

Correction run its course?

Bitcoin enjoyed a decent rebound on Tuesday despite broader market sentiment being more challenging on the back of the US inflation report. We continue to see resilience in cryptos which is very encouraging despite regulatory headlines not being particularly good. Of course, it's now retraced back to a level that was a notable area of support in late January and early February before it corrected and we'll soon see whether that's become a bearish resistance zone or the corrective move has run its course.

Daily Pivots: (S1) 160.72; (P) 161.45; (R1) 162.78; More...

Immediate focus is now on 161.80 resistance. Decisive break there, and sustained trading above 55 day EMA (now at 160.99) will argue that whole decline from 172.11 has completed. Bias will be back on the upside for 169.26/172.11 resistance zone. On the downside, break of 155.33 low will resume the fall from 172.11 to 153.70 fibonacci level next.

In the bigger picture, as long as 163.02 support turned resistance holds, decline from 172.11 medium term top is expected to continue to 38.2% retracement of 123.94 to 172.11 at 153.70. Sustained break there will raise the change of trend reversal and target 61.8% retracement at 142.34. Nevertheless, break of 163.02 support turned resistance will argue that the decline has completed, and retain medium term bullishness.

Daily Pivots: (S1) 141.96; (P) 142.45; (R1) 143.39; More....

Immediate focus is now on 142.79 resistance in EUR/JPY. Firm break there will argue that the correction from 148.38 has completed at 137.37 already. Further rise would be seen to 146.71 resistance next. On the downside, break of 139.54 will resume the whole fall from 148.38 through 137.37, to 135.40 fibonacci level.

In the bigger picture, as long as 55 week EMA (now at 138.87) holds, larger up trend from 114.42 (2020 low) is still in progress for 149.76 long term resistance. However, firm break of 55 week EMA will bring deeper fall to 38.2% retracement of 114.42 to 148.38 at 135.40. Sustained break there will raise the chance of trend reversal, and target 61.8% retracement at 127.39.

Daily Pivots: (S1) 0.8798; (P) 0.8823; (R1) 0.8843; More...

Intraday bias in EUR/GBP stays neutral first. Break of 0.8873 minor resistance will indicate that pull back from 0.8977 has completed. Bias will be back on the upside for retesting 0.8977 first. Below 0.8802 will bring deeper fall. But overall outlook will stay bullish as long as 0.8720 support holds.

In the bigger picture, the notable support from 55 day EMA (now at 0.8780) retains near term bullishness. Break of 0.8896 should target 0.9267 (2022 high) and possibly above, to resume whole up trend from 0.8201 (2022 low). However, break of 0.8270 support and sustained trading below 55 day EMA will set the stage for 0.8545 and below.

Daily Pivots: (S1) 1.5325; (P) 1.5400; (R1) 1.5443; More...

No change in EUR/AUD's outlook and intraday bias stays neutral. On the upside, above 1.5650 will revive that case that correction from 1.5976 has completed at 1.5254. Intraday bias will be back on the upside for 1.5749 resistance first. On the downside, firm break of 1.5254/71 will carry larger bearish implication and resume the fall from 1.5976.

In the bigger picture, it's still early to confirm if rise from 1.4281 represents bullish trend reversal. But as long as 1.5271 support holds, such rally is in favor to continue. Break of 1.5976 will target 1.6434 key resistance next. On the other hand, firm break of 1.5271 will retain medium term bearishness instead.

Daily Pivots: (S1) 0.9864; (P) 0.9880; (R1) 0.9912; More....

Intraday bias in EUR/CHF is neutral for the moment. On the upside, firm break of 0.9905 minor resistance will confirm short term bottoming. More importantly, corrective pattern from 1.0095 should have then completed. Bias will be flipped back to the upside for 1.0067/95 resistance zone. In case of another fall, downside should be contained by 38.2% retracement of 0.9407 to 1.0095 at 0.9832.

In the bigger picture, the rejection by 55 week EMA (now at 1.0025) mixed up the outlook. On the upside, sustained trading above 55 week EMA will raise the chance of bullish trend reversal. Rise from 0.9407 should then target 1.0505 cluster resistance (2020 low at 1.0505, 61.8% retracement of 1.1149 to 0.9407 at 1.1484). However, firm break of 0.9832 support will revive medium term bearishness and bring retest of 0.9407 low instead.

Asian shares flashed red on Wednesday along with US futures as investors evaluated sticky American inflation data and remarks from Fed officials. European futures are pointing to a negative open this morning amid the cautious sentiment and this could find its way back to Wall Street later today.

In the currency arena, dollar bulls were injected with some renewed confidence as expectations intensified over interest rates remaining higher for longer than initially anticipated. Gold struggled to keep above $1850 during early trade and could extend losses as expectations shift towards a more hawkish Fed in the near term. Given how the latest red-hot US inflation figures are likely to create some uncertainty over the US economy, caution may remain the name of the game.

Sticky inflation data rekindles rate fears

Buying sentiment towards the dollar slightly improved after the latest US inflation figures printed higher than expected.

The headline consumer price index number climbed 6.4% in January from a year earlier, one-tenth lower than the 6.5% print in December. Although this was higher than the forecast of 6.2%, it was still the lowest reading since October 2021. The core reading, which excludes volatile items such as food and energy, cooled for the fourth consecutive month to 5.6%. This figure was above market expectations of 5.5% but still, the lowest witnessed since December 2021.

While inflation in the world’s largest economy continues to slow, it's not falling as quickly as investors anticipated – ultimately rekindling Fed rate hike bets. Given how these latest inflation figures add to January’s blowout jobs report, the dollar could edge higher in the short term. However, the bigger picture has not changed with the Fed closer to a peak in rates in the coming few months.

It will be wise to keep a close eye on the US retail sales and industrial production figures released later today. There has been a lot of hype and excitement around the US CPI but the retail sales data may provide fresh insight into consumer behaviour and health of the economy. A strong set of economic data will most likely stimulate expectations around US rates being higher for longer.

On the technical front, the DXY could be gearing up for a breakout above 104.00. Such a move could open the doors towards 105.00. Alternatively, sustained weakness below 104.00 may open a path back toward 102.00.

Commodity spotlight - Gold

After swinging between losses and gains in the previous session, gold kicked off Wednesday on a negative note.

The precious metal is trading below $1850 thanks to the sticky US inflation print and conflicting views from Fed officials. Given how the dollar is likely to draw strength from expectations around the Fed staying hawkish for longer, this could translate into more pain for zero-yielding gold down the road. Buying sentiment towards the precious metal could also take another hit this afternoon if the US retail sales and industrial production data exceed market forecasts.

Focusing on the technical picture, gold is under pressure on the daily charts. A solid daily close under $1850 may open the door toward $1815 and $1800, respectively.

Markets

In a first reaction, markets doubted how to react to US CPI release. US Headline consumer prices rose 0.5% M/M and 6.4% Y/Y (from 0.1%MM and 6.5% Y/Y). Core inflation printed at 0.4% M/M and 5.6% Y/Y (from 5.7%). Monthly moves were close to, but higher than, expectations. The report suggests that the disinflationary process might develop slower than the Fed and part of the market hoped for, reinforcing the ‘higher for longer case’. After some nervous swings immediately after the release, US yield ended the session higher with a further curve inversion. The 2-y yield gained 9.8 bps; the 30-y 0.2 bps. The 2-y-10-y spread reached a new cycle ‘peak’ of -87 bps. Markets now see a 50% chance of a third 25 bps additional Fed hike in early summer (after two other steps in March and May). Bets for a Fed rate cut in Q4 are scaled back. At least some Fed governors (Barkin, Williams, Logan) indicated that the Fed might raise rates further than initially anticipated if inflation stays too high. The US repositioning also spilled over to Europe with German yields gaining between 8.2 bps (5-y) and 5.6 bps (30-y). Worth mentioning, UK yields jumped an impressive 19 bps (2-y) to 7.6 bps (30-y) as market concluded that a strong job growth and higher than expected wage rises won’t allow the BoE to end its tightening cycle anytime soon. The impact from higher yields on equities remain modest. (EuroStoxx -0.06%, Dow -0.46%, Nasdaq +0.57%). The mild reaction of risk assets and yields also trending higher outside the US, limited USD gains. DXY closed the day little changed at 103.23. USD/JPY outperformed other USD cross rates as the yen corrected further after the nomination of Ueda as new BOJ governor (close 133.16). After some volatile intraday swings, EUR/USD closed marginally higher at 1.0738.

Asian markets are starting the session in risk-off modus with losses mostly between 0.5% and 1.75%. The dollar gains (EUR/USD 1.071; USD/JPY 133.25). (US) yields maintain yesterday’s post-CPI gains. The focus for global trading remains on the US with January retail sales (expected to rise 2% after -1.1% decline), the Empire manufacturing survey (expected -18.0 from -32.9), production data and the NAHB housing index. After yesterday’s CPI, data showing economic resilience might reinforce the view that the Fed will have to take further decisive action to slow demand. Also keep an eye at a $15bn 20-y US Treasury auction. The US 2-y yield (4.61%) nears the November cycle peak (4.799%). 2-year German and 2-y EMU swap yields are already setting new cycle peak levels. For now, the impact of higher yields on equites stayed modest. Even so, we still slightly favour the dollar over the euro. A break below EUR/USD 1.0656 would open the way to the 1.0484/61 area. This morning, UK January CPI data came out slightly softer than expected (headline -0.6% M/M and 10.1% Y/Y from 10.5%; core 5.8% Y/Y from 6.3%). Sterling in a first reaction returns most of yesterday’s gain with EUR/GBP jumping from the 0.882 area to the 0.8845 area.

News Headlines

UK PM Sunak and finance minister Hunt are considering to give workers at the National Health Service an additional lump sum pay by backdating next fiscal  year’s pay rise (taking effect from April) to January 2023. The fear is that the room for wage increases within the existing health and education department’s budget is too little. Some estimate it at only 3% compared to an average inflation expected by the UK fiscal watchdog of 5.5% in 2023-2024. Such another year of a pay cut in real terms could infuriate unions and intensify the current biggest wave of strike in decades. But at the same time, the finance minister is keen on keeping pay under control, saying that it risks stoking and embedding high inflation in the economy.

French finance minister Le Maire will meet the country’s retailers to discuss price caps for essential goods amid surging inflation that’s eroding households’ purchasing power. France is already coping with large street protests over the president Macron’s plan to raise the retirement age from 62 to 64. The government seeks to avoid adding to people’s discontent and trigger cost-of-living strikes similar to those in the UK. Le Maire said he gives himself until March 15 to come up with a solution.