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Daily Pivots: (S1) 1.0730; (P) 1.0753; (R1) 1.0780; More...

EUR/USD's rally continues today and intraday bias stays on the upside. Rise form 0.9534 should target 61.8% projection of 0.9630 to 1.0733 from 1.0482 at 1.1164 next. On the downside, below 1.0711 minor support will turn intraday bias neutral again first. But near term outlook will stay bullish as long as 1.0482 support holds, in case of retreat.

In the bigger picture, current development suggests that the rally from 0.9534 low is a medium term up trend rather than a correction. Further rally is in favor to 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 next. This will remain the favored case as long as 1.0482 support holds.

The Consumer Price Index fell 0.1% month-on-month (m/m) in December, slightly below expectations calling for a flat reading. On a year-on-year (y/y) basis, headline inflation fell to 6.5% (down from 7.1% the month prior).

Energy prices declined by 4.5% m/m, entirely due to a sharp drop in gasoline (-9.4%% m/m) prices. Energy services (+1.5% m/m) were higher on the month.

• Food prices (+0.3% m/m) continued to decelerate – having slowed in each of the last five months – but are still up 10.4% over the last twelve months.

Core inflation (excludes food & energy) rose 0.3% m/m – a modest acceleration from the month prior. Relative to last December, core is up 5.7% (down from 6.0% the month prior).

Price growth across services (+0.5% m/m) accelerated in December. This was led by an acceleration in shelter costs (+0.8% m/m), with both rent and owner's equivalent rent up 0.8% m/m. Lodging away from home (+1.5% m/m) was also higher.

• Other service categories including recreational (+0.3% m/m), education & communication (+0.3% m/m) and transportation (0.2% m/m) services also rose on the month.

Core goods prices (-0.3% m/m) declined for the third consecutive month. Declines were again concentrated in used vehicle prices (-2.5% m/m), but new vehicle prices (-0.1% m/m) also turned lower.

Key Implications

Another encouraging reading on CPI to round out 2022. Despite the core measure showing a modest acceleration last month, the three-month annualized change eased to 3.1% – marking the sixth consecutive month of deceleration.

Goods prices have turned quickly in recent months and have been a key factor in why core inflation has recently cooled. However, at just over 25% of the core CPI basket, weaker goods prices alone can only get inflation down to somewhere in the 3%-4% range. The rest of the heavy lifting will need to come from weaker price growth for services, and this is unlikely to happen so long as wage growth continues to run at a near 5% pace.

This is the last inflation report Fed officials will see before the next interest rate announcement in early-February. We suspect today's reading on inflation supports a smaller 25bps hike, as the FOMC now tries to gauge the cumulative impact of all the tightening done to date.

Daily Pivots: (S1) 0.6877; (P) 0.6902; (R1) 0.6930; More...

AUD/USD's rally resumed after brief consolidation and intraday bias back on the upside. Current rally from 0.6169 is in progress to 61.8% projection of 0.6169 to 0.6892 from 0.6721 at 0.7444. On the downside, break of 0.6875 minor support will turn intraday bias neutral and bring consolidations again. But overall outlook will stay bullish as long as 0.6721 support holds, in case of retreat.

In the bigger picture, corrective decline from 0.8006 (2021 high) should have completed with three waves down to 0.6169 (2022 low). Further rally should be seen to 61.8% retracement of 0.8006 to 0.6169 at 0.7304. Sustained break there will pave the way to retest 0.8006. This will now remain the favored case as long as 0.6721 support holds.

Dollar declines sharply after US data showed consumer inflation slowed notably in December as expected. The development reinforces expectation for Fed to further slowdown tightening in February with a 25bps hike. Yen is so far the strongest one for the day, as lifted by decline in US and European benchmark yields. Australian Dollar is leading commodity currencies higher on risk-on sentiment. European majors, while up against the greenback, is lagging behind.

Technically, Gold also jumps on Dollar selloff and it's now having sight on 1900 handle. Sustained break there will pave the way to 161.8% projection of 1616.51 to 1786.63 from 1728.48 at 2004.05. However, break of 1866.94 support will be the first sign of topping, which could be a signal for Dollar bottoming too.

In Europe, at the time of writing, FTSE is up 0.81%. DAX is up 0.68%. CAC is up 0.89%. Germany 10-year yield is down -0.079 at 2.095. Earlier in Asia, Nikkei rose 0.01%. Hong Kong HSI rose 0.36%. China Shanghai SSE rose 0.05%. Singapore Strait Times dropped -0.11%. Japan 10-year JGB yield dropped -0.0005 to 0.505.

US CPI slowed to 6.5% yoy in Dec, core CPI down to 5.7% yoy

US CPI declined -0.1% mom in December, below expectation of 0.0% mom. CPI core (ex food and energy) rose 0.3% mom, matched expectations. Food index rose 0.3% mom. Energy index dropped -4.5% mom.

Over the last 12 months, CPI slowed from 7.1% yoy to 6.5% yoy, matched expectations. That's also the lowest level since October 2021. CPI core slowed from 6.0% yoy to 5.7% yoy, matched expectations. Energy interest was at 7.3% yoy while food was at 10.4% yoy.

US initial jobless claims dropped to 205k

US initial jobless claims dropped -1k to 205k in the week ending January 7, below expectation of 210k. Four-week moving average of initial claims dropped -2k to 213k.

Continuing claims dropped -63k to 1634k in the week ending December 31. Four-week moving average of initial claims dropped -9k to 1680k.

ECB Survey: Consumer inflation expectations reversed in Nov

In ECB's November Consumer Expectations Survey, mean inflation expectations for the 12 months ahead dropped back to 7.3%, comparing to October's 8.1% and September's 7.3%.

Median inflation expectations for the 12 months ahead dropped to 5.0%, comparing to October's 5.4% and September's 5.1%.

Mean inflation expectations for the 3 years ahead dropped to 4.6%, comparing to October's 4.9%, and September's 4.8%.

Median inflation expectations for the 3 years ahead dropped to 2.9%, comparing to October's 3.0%, and September's 3.0%.

ECB Bulletin: Headline inflation to stay above target until mid-2025

In the monthly Economic Bulletin, ECB said, "evidence from surveys and markets shows that forecasters continue to expect inflation to peak soon, with longer-term expectations remaining at around the ECB 2.0% target." Still, "close monitoring is warranted given the further above-target revisions of some indicators".

In the December Eurosystem staff macroeconomic projections, headline inflation in Eurozone ill fall from average 8.4% in 2022 to 6.3% in 2023, 3.4% in 2024, and then 2.3% in 2025. Headline inflation is expected to remain above the ECB's target of 2.0% until mid-2025.

AUD/USD Mid-Day Report

Daily Pivots: (S1) 0.6877; (P) 0.6902; (R1) 0.6930; More...

AUD/USD's rally resumed after brief consolidation and intraday bias back on the upside. Current rally from 0.6169 is in progress to 61.8% projection of 0.6169 to 0.6892 from 0.6721 at 0.7444. On the downside, break of 0.6875 minor support will turn intraday bias neutral and bring consolidations again. But overall outlook will stay bullish as long as 0.6721 support holds, in case of retreat.

In the bigger picture, corrective decline from 0.8006 (2021 high) should have completed with three waves down to 0.6169 (2022 low). Further rally should be seen to 61.8% retracement of 0.8006 to 0.6169 at 0.7304. Sustained break there will pave the way to retest 0.8006. This will now remain the favored case as long as 0.6721 support holds.

Economic Indicators Update

US initial jobless claims dropped -1k to 205k in the week ending January 7, below expectation of 210k. Four-week moving average of initial claims dropped -2k to 213k.

Continuing claims dropped -63k to 1634k in the week ending December 31. Four-week moving average of initial claims dropped -9k to 1680k.

Full release here.

US CPI declined -0.1% mom in December, below expectation of 0.0% mom. CPI core (ex food and energy) rose 0.3% mom, matched expectations. Food index rose 0.3% mom. Energy index dropped -4.5% mom.

Over the last 12 months, CPI slowed from 7.1% yoy to 6.5% yoy, matched expectations. That's also the lowest level since October 2021. CPI core slowed from 6.0% yoy to 5.7% yoy, matched expectations. Energy interest was at 7.3% yoy while food was at 10.4% yoy.

Full release here.

The British pound is drifting for a third straight day. 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.

Will US inflation continue to drop?

There is guarded optimism 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 to ease, with a 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.

There remains a dissonance between the Fed and the markets, despite warnings by the Fed that the markets are underestimating Fed rate policy. The Fed has insisted that further rate hikes are coming, while there have been market players who are expecting a “one and done” hike in February which will wrap up the current rate cycle. The markets have priced in a peak terminal rate below 5% as well as rate cuts late in the year, while the Fed has been signalling a peak rate of 5-5.25% or even higher.

In the UK, there are no major releases on Thursday, but Friday will be busy, highlighted by monthly GDP and Manufacturing Production. The markets are braced for soft numbers, which could send the pound lower. GDP for November is expected to contract by 0.2% m/m, following a gain of 0.5% in October. Manufacturing Production for November is forecast to come in at -4.8% y/y, after a -4.6% reading in October.

GBP/USD Technical

• GBP/USD is putting pressure on 1.1832 and could test this line today. The next support level is 1.1726
• There is resistance at 1.1913 and 1.2026

China picked up the torch this morning with the publication of national inflation data. In December, the consumer price index rose from 1.6% to 1.8% y/y. Producer prices, an important leading indicator for national and global inflation, are losing 0.7% y/y, the third consecutive month of y/y decline. While consumer prices matched expectations, producer prices came in well below analysts’ average forecast of -0.1%.

In contrast to much of the world, China faces low rather than high inflationary pressures – the tail-end effect of austerity policies due to quarantines that have stifled economic activity. Some are suggesting a contraction of the economy in the first quarter, and the trend of a sharp slowdown coupled with widespread unrest was a fundamental reason for the December withdrawal of the 0-covid policy.

Overall, the opening of the economy promises to be a crucial pro-inflationary factor capable of pushing up global commodity prices. But China also buys more from Russia and Iran at a discount and is almost a monopoly buyer. At the same time, China is re-establishing coal purchases from Australia, which can also keep domestic prices down.

In the same direction, the appreciating renminbi has risen by 2.3% against the dollar since the start of the year and by 8% from its peak in November to 6.75 USDCNH, where the pair had consolidated before from May to August. On the weekly charts, the USDCNH struggles for long-term trends as the pair trades between the 50- and 200-week averages. Overcoming these levels in the last three years has triggered powerful moves. And now, similarly, it could be the starting point for a strong movement.

WTI price rises further in European session on Thursday, in extension of 4% rally on Wednesday (the biggest one-day gain since Nov).

Improved sentiment on growing optimism about global demand following China’s economy reopening after the end of Covid restrictions, combined by expectations for a softer landing for the US economy, boosts oil prices.

All eyes are on today’s release of US Dec inflation report, with optimistic expectations for further ease in consumer prices that would likely result in Fed lowering the pace of rate hikes and offer additional support to oil prices.

However, traders remain cautious, fearing scenario of fresh rise in consumer prices which would signal that inflation is entrenched and probably more policy tightening will be needed to bring inflation under control that would sour the mood and put oil under pressure.

Daily chart shows bullishly aligned studies as DMA’s (10/20/30) turned to bullish setup, but fading positive momentum and stochastic about to enter overbought territory, warn that bulls may lose traction.

Recovery rally from $72.44 (Jan low) broke above Fibo 61.8% of $81.46/$72.44), with fresh bullish signal looking for confirmation on firm break here that would open way for extension towards targets at $79.23 (Fibo 76.4%) and $80.00 (psychological).

Daily Tenkan-sen offers solid support at $76.95 which should hold and keep bulls intact, while dip and close below daily Kijun-sen ($75.78) will be bearish.

Res: 78.37; 79.33; 80.00; 80.96.
Sup: 78.01; 76.95; 75.78; 74.57.

The Japanese yen has awoken from this week’s slumber and is sharply higher on Thursday. In the European session, USD/JPY is trading at 130.96, down 1.16%.

BOJ may be planning review of policy

The BOJ has been in the headlines since the December meeting when it widened the band around its 10-year bond yield target. The move caught the markets flat-footed and the yen gained a staggering 3.8% the same day. The central bank meets on January 17th and 18th and investors will be keeping a close eye on the meeting.

There have been reports that the BOJ will raise its inflation forecast at the meeting, and the Yomiuri newspaper reported today that the BOJ will review the side effects of its ultra-loose policy and could take measures to address distortions in the yield curve. The yen has soared in response to this latest report, as any steps towards normalization are bullish for the yen. Will the upcoming meeting be as dramatic as what we experienced in December? That would be a high bar to reach, but the meeting should be treated as a market-mover.

There is a feeling of optimism ahead of today’s US inflation report. The forecast is for inflation to continue to fall, which is exactly what investors want to hear. The consensus for headline inflation stands at 6.5%, following the November gain of 7.1%. The core rate is also expected to ease, with a forecast of 5.7% in December, compared to 6.0% in November. If inflation, particularly the core rate, falls as expected, the US dollar will likely lose ground, as the Fed would have good reason to slow the pace of tightening and could afford to be less hawkish in its stance.

USD/JPY Technical

• 132.13 has strengthened in resistance following the yen’s strong gains. 133.28 is the next resistance line.
• 131.68 and 129.49 are the next support lines