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Gold stays high amid the US dollar’s softness across the board. On the daily chart, the precious metal has found solid demand along the 20-day moving average and is on its way to last June’s peak at 1880. A bullish breakout would lay the foundation for an extension to the support-turned-resistance of 1940 from last April’s sell-off. On the hourly time frame, an overbought RSI may cause a limited pullback, but the bullish drive would remain intact as long as the price is above 1840. 1815 on the MA would be another support.

The US dollar struggles as the Fed minutes confirms a slower pace in its interest rate increases. Last April’s low of 0.9200 has offered some support and the surge above 0.9340 prompted sellers to trim their exposure. Follow-up bids above the fresh resistance 0.9400 will be needed to keep the momentum going and cement a reversal. The current pullback may attract bargain hunters, but a failure to contain it above 0.9200 would signal weakness, opening the door to a bearish drift in the weeks to come.

Daily Pivots: (S1) 1.0552; (P) 1.0593; (R1) 1.0646; More...

Range trading continues in EUR/USD and intraday bias remains neutral. On the downside, break of 1.0481 will confirm short term topping, on bearish divergence condition in 4 hour MACD. Deeper fall would be seen back to 1.0289 support and below. On the upside, however, firm break of 61.8% projection of 0.9729 to 1.0481 from 1.0289 at 1.0754 will pave the way to 100% projection at 1.1041.

In the bigger picture, focus stays on 38.2% retracement of 1.2348 (2021 high) to 0.9534 at 1.0609. Rejection by 1.0609 will suggest that price actions from 0.9534 medium term bottom are developing into a corrective pattern. Thus, medium bearishness is retained for another fall through 0.9534 at a later stage. However, sustained break of 1.0609 will raise the chance of trend reversal and target 61.8% retracement at 1.1273.

Daily Pivots: (S1) 1.1981; (P) 1.2034; (R1) 1.2111; More...

Intraday bias in GBP/USD remains neutral for the moment. On the downside, break of 1.1899 and sustained trading below 55 day EMA (now at 1.1938) will target 38.2% retracement of 1.0351 to 1.2445 at 1.1645 next. However, strong rebound from 55 day EMA, followed by break of 1.2124 resistance, will argue that the pull back from 1.2445 has completed, and turn bias back to the upside for retesting this high.

In the bigger picture, rise from 1.0351 medium term bottom is at least correcting whole down trend from 1.4248 (2021 high). Further rise is expected as long as 1.1644 resistance turned support holds. Next target is 61.8% retracement of 1.4248 to 1.0351 at 1.2759. Sustained break there will pave the way back to 1.4248. This will remain the favored case as long as 55 day EMA (now at 1.1916) holds.

Daily Pivots: (S1) 130.82; (P) 131.77; (R1) 133.61; More...

Intraday bias in USD/JPY stays neutral and outlook remains bearish as long as 134.49 resistance holds. On the downside, firm break of 61.8% projection of 148.44 to 133.61 from 138.16 at 128.99 could trigger downside acceleration to 100% projection at 123.33. Nevertheless, break of 134.49 will turn bias to the upside for 138.16 resistance intact.

In the bigger picture, a medium term top was in place at 151.93. Sustained trading below 55 week EMA (now at 131.65) would raise the chance of bearish trend reversal. Deeper fall would be seen to 61.8% retracement of 102.58 to 151.93 at 121.43. This will now remain the favored case as long as 55 day EMA (now at 137.54) holds.

Daily Pivots: (S1) 0.9241; (P) 0.9310; (R1) 0.9367; More...

Intraday bias in USD/CHF stays neutral and risk stays mildly on the upside with 0.9199 short term bottom intact. Break of 0.9397 will resume the rebound from 0.9199 to 55 day EMA (now at 0.9460) and above. On the downside, however, firm break of 0.9199 will resume whole decline from 1.0146 instead.

In the bigger picture, rise from 0.8756 (2021 low) has completed at 1.0146, well ahead of 1.0342 long term resistance (2016 high). Based on current downside momentum, fall from 1.0146 might be a medium term down trend itself. Sustained break of 61.8% retracement of 0.8756 to 1.0146 at 0.9287 will pave the way to 0.8756. In any case, risk will stay on the downside as long as 0.9545 resistance holds.

Daily Pivots: (S1) 0.6741; (P) 0.6814; (R1) 0.6910; More...

AUD/USD is still bounded in range of 0.6628/6892 and intraday bias remains neutral for the moment. On the downside, sustained break of 38.2% retracement of 0.6169 to 0.6892 at 0.6616 will indicate rejection by 0.66871 fibonacci level. Deeper fall should then be seen to 61.8% retracement at 0.6445. On the upside, break of 0.6892 will resume the rally from 0.6169.

In the bigger picture, it's still unsure if price actions from 0.6169 medium term bottom are developing into a corrective pattern or trend reversal. Rejection by 38.2% retracement of 0.8006 to 0.6169 at 0.6871 will maintain medium term bearishness for another fall through 0.6169 at a later stage. However, firm break of 0.6871, and sustained trading above 55 week EMA (now at 0.6894) will raise the chance of the start of a bullish up trend.

Daily Pivots: (S1) 1.3409; (P) 1.3545; (R1) 1.3614; More....

Intraday bias in USD/CAD is mildly on the downside with breach of 1.3483 support. Further decline would be seen back towards 1.3224 support zone. Nevertheless, on the upside, break of 1.3704 will resume the rebound from 1.3224 to retest 1.3976 high.

In the bigger picture, as long as 1.3222 cluster support (38.2% retracement of 1.2005 to 1.3976 at 1.3223) holds, larger up trend from 1.2005 (2021 low) is still expected to resume through 1.3976 high at a later stage. However, firm break of 1.3222/3 will indicate that the trend might have reversed. Deeper fall would be seen to next cluster support at 1.2726 (61.8% retracement at 1.2758).

Markets

Yesterday, trading basically followed the pattern from earlier this week. Bonds rallied, with Europe outperforming as investors took further comfort from below consensus (headline) inflation data in most EMU member states. France joined this trend with CPI printing lower than expected at -0.1% M/M and 6.7% Y/Y (from 7.1%). US data brought a more diffuse message. The headline manufacturing ISM suggests a modest contraction in activity easing from 49.0 to 48.4. However, from a policy point of view, details were ambiguous. The prices paid subindex declined from 43.0 to 39.5, suggesting a further easing of inflationary pressures. At the same time, employment rebounded into expansionary territory, highlighting risks to wage growth, annex underlying inflation. JOLT job openings staying at 10458k also suggested a resilient US labour market. The Minutes of the December 13-14 policy meeting confirmed the Fed’s strong commitment to eradicate inflation. In this respect, the MPC clearly wasn’t happy with an easing of financial conditions and again strongly rejected markets discounting rate hikes for the second half of this year. In the end, it hardly changed the market dynamics. US yields declined between 1.7 bps (2-y) and 5.6 bps (10-y), again driven by a further decline in inflation expectations. Bunds still outperformed with yields ceding between 9.1 bps ( 2y) and 12.3 bps (5-y). Investors hope that the worst inflation might be over supported equities with Europe (EuroStoxx50 + 2.36%) again outperforming the US (S&P +0.75%). The dollar (DXY close 104.25) returned part of Tuesday’s gain. EUR/USD rebounded from 1.0541 to close at 1.0604. USD/JPY was the exception to the rule, as the BOJ-driven rally of the Japanese currency ran into resistance. USD/JPY rebounded off the 130 support area to close at 132.63. UK PM Sunak setting out the governments objectives, including halving inflation, reducing debt and restoring growth, didn’t really inspiring sterling. EUR/GBP held a tight range near to 0.88 big figure (close 0.8796).

This morning, sentiment in Asia remains mostly risk-on with China outperforming as investors ponder the potential positive impact of the reopening. The yuan extends its recent upleg (USD/CNY 6.874). The yen trades little changed after yesterday’s correction (USD/JPY 132.5). US yields are inching slightly higher.

Later today, the calendar is modestly interesting with the US ADP labour data, jobless claims and trade balance. Fed speakers (Harker, Bullard) probably will confirm the Fed anti-inflationary commitment. In case of constructive activity data, recent bond rally might gradually slow, with tomorrow’s payrolls potentially holding the key for the next directional move. On FX markets, the dollar shows tentative signs of bottoming, but without a clear technical signal yet. EUR/USD is locked in a ST range between 1.0520 and 1.0713/35.

News Headlines

The National bank of Poland left its policy rate unchanged at 6.75% yesterday. Inflation decreased in November to 17.5% y/y due to lower energy and fuel prices. However, given companies’ ability to pass through higher (operating) costs due to relatively strong demand, core inflation is still trending higher (11.4%). The NBP expects the weakening of global economic conditions to weigh on Polish growth. In those circumstances, it considers the currently delivered tightening sufficient to support a decline in inflation towards the NBP inflation target beyond the short term. This process would go quicker if the zloty trade more consistent with the economic fundamentals. In this respect, the central bank remains prepared to intervene in the FX market. The zloty yesterday appreciated from EUR/PLN 4.676 to 4.667 but that move was inspired by a constructive mood on broader markets supporting  CE FX in general.

Egypt’s pound crashed to a record low against the US dollar yesterday. USD/EGP officially closed at 26.275, a 6.3% surge in what is seen as the third devaluation in less than a year. The two previous ones date back to March and October 2022, after the Egypt government pledged to adopt a flexible exchange-rate policy that allowed it to secure a $3bn loan from the IMF. At the start of 2022, USD/EGP traded around 15.7. Following the conflict between Russia and Ukraine, Egypt is struggling with sharp FX outflows as investors shunned it for being so reliant on the countries at war for its wheat imports. This causes huge dollar shortages and external imbalances that could ease thanks to a weaker pound. Soaring inflation amidst rising raw material prices added to the sense of urgency at the government. It also prompted the central bank in December to jack up interest rates by a whopping 300 bps to 16.25%.

Released yesterday, the FOMC minutes were hawkish enough to get the S&P500 erase early gains, but not hawkish enough to get the index to close in the red. The index closed the session 0.75% higher. Nasdaq gained 0.50%.

The Federal Reserve (Fed) repeated its determination to keep fighting inflation with further rate hikes, and warned that this determination should not be underestimated by investors.

No one talked about a rate cut in the foreseeable future, even though pricing in the market still shows that investors continue to bet that the Fed will start cutting rates before the end of this year.

Yes, there are some data pointing at slowing economic activity in the US, but the jobs market – which is closely watched by the Fed - remains surprisingly tight – while the Fed keeps saying that bringing inflation back to the 2% target requires some ‘softening’ in the jobs market.

Helas, a softening that has not showed up its nose, so far. Released yesterday, the US jobs opening data was again stronger than expected. The JOLTS data showed that there were still around 10.5 million job openings in November – little changed from last month, and a bit less than half a million less than the market expectation.

Today, we will see what the ADP report tells about new hirings in December. Analysts believe that the US economy may have added around 150’000 new private jobs last month.

Note that the latter is not a good indication regarding what’s to come on Friday. Last month, the ADP printed a weak 127’000 figure, while the NFP came in at 263’000. Therefore, even the avalanche of layoff news from big companies, and a soft ADP print may not be enough convince that the US jobs market is cooling.

On the rates front, there will likely be at least another 50bp hike this quarter, and perhaps one or two more 25bp hikes. Right now, activity on Fed funds futures gives a higher chance for a 25bp hike in the next Fed meeting.

To me, that means that there is room for a hawkish readjustment in expectations through January.

Oil tanks

Weaker nat gas prices, combined to the past few days’ recession fears, and news that OPEC output increased in December thanks to the recovery in Nigerian supply from outages – despite the OPEC+ will to cut output to keep prices sustained - pulled the price of American crude 5% lower yesterday. The $75/76 support has been broken; I revise my short-term view from bullish to neutral, and expect the new support, around $70/72 range, to hold on tight supply, and the Chinese reopening story.

In the FX 

The Australian dollar is surfing on the positive Chinese vibes. The Aussie-dollar shortly traded above the 200-DMA, near 0.6850, yesterday, but gains remained capped into the major 38.2% Fibonacci resistance on 2021-2022 selloff, if cleared, should hint at a bullish reversal in Aussie-dollar’s medium term trend. And I think that a bullish reversal in AUDUSD is a matter of time, as the rally in iron ore prices triggered by the Chinese reopening should continue giving support to the Aussie in the coming weeks.

Elsewhere, the US dollar index couldn’t extent the early week gains, and we are about to see a death cross formation on the daily chart, where the 50-DMA will cross below the 200-DMA very shortly.

A death cross formation is closely watched by investors and is seen as a bearish sign. Although it is a lagging indicator, it is in line with our 2023 outlook of softening US dollar against many currencies, and gold.

The EURUSD is bid around 1.0550, as Cable sees buying interest below 1.20 despite its worse economic fundamentals compared to other G7 economies.

One of the most popular trades of the moment is long the Japanese yen against EUR, USD and pound, as the BoJ’s latest decision to double its cap on JGB yields spurred hawkish Bank of Japan (BoJ) expectations. Even though the BoJ warned that this doesn’t mean that a rate hike is imminent, the BoJ won’t be able to maintain rates below zero while rates are soaring elsewhere. Sooner or later, the BoJ will hike, and that’s enough for traders to pile into the yen, which has been the worst performing major currency last year.