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Daily Pivots: (S1) 1.0503; (P) 1.0542; (R1) 1.0577; More...

Range trading continues in EUR/USD and intraday bias remains neutral. On the downside, break of 1.0442 support will indicate rejection by 1.0609 fibonacci level. Bias will be back on the downside for 1.0222 support and below. However, firm break of 1.0594/0609 resistance zone will carry larger bullish implication. Next near term target is 61.8% projection of 0.9729 to 1.0481 from 1.0222 at 1.0687, and then 100% projection at 1.0974.

In the bigger picture, focus is now 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) 1.2216; (P) 1.2257; (R1) 1.2307; More...

No change in GBP/USD's outlook as range trading continues. Intraday bias stays neutral for the moment. Further rally is expected as long as 1.1898 support holds. Break of 1.2343 will resume larger rally from 1.0351 and target 1.2759 medium term fibonacci level next. However, firm break of 1.1898 support will confirm short term topping and turn bias back to the downside.

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.

Daily Pivots: (S1) 0.9323; (P) 0.9352; (R1) 0.9389; More...

USD/CHF is losing downside momentum but there is no sign of rebound yet. Focus stays on 0.9287 fibonacci level. Decisive break there will target 0.9149 structural support next. On the upside, though, break of 0.9454 resistance will now indicate short term bottoming. Intraday bias will be turned back to the upside for 0.9545 resistance and above.

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 55 day EMA (now at 0.9621) holds.

Daily Pivots: (S1) 136.84; (P) 137.34; (R1) 138.16; More...

Break of 137.84 suggests that USD/JPY is resuming the rebound from 133.61. The development also affirms that case of short term bottoming at 133.61. Intraday bias is back on the upside for 38.2% retracement of 151.93 to 133.61 at 140.60, which is close to 55 day EMA (now at 140.80). On the downside, however, break of 135.59 minor support will bring retest of 133.61 low instead.

In the bigger picture, price actions from 151.93 medium term could be just a corrective pattern to up trend from 102.58 (2021 low). Strong support from 38.2% retracement of 102.58 to 151.93 at 133.07 and 55 week EMA (now at 131.71) will set the range for such corrective pattern. However, sustained break of 55 week EMA will pave the way to 61.8% retracement at 121.43.

Markets

European and American stocks parted ways yesterday. The former closed half a percent lower in choppy trading (EuroStoxx50) as investors eye the impact on power markets from this winter’s first real cold snap. Wall Street finished up to 1.58% higher (DJI) with some pointing to the NY Fed inflation survey (see below) serving as a catalyst. But this doesn’t dovetail with the uptick in yields occurring around the same time. The US auctioned $40bn 3-y and $32bn 10-y auction notes. The former went well but the latter tailed by almost 4 bps. It reinforced the ongoing advance in US yields with net changes ranging between 2 and 3.5 bps in the 2y/10y bucket. Germany’s yield curve inversion deepened, seeing +3.7 bps at the front and -2.9 bps at the longest tenor. The dollar was slightly stronger in general but so was the euro. EUR/USD as a result closed unchanged around 1.053. Japan’s yen underperformed. USD/JPY rose from 136.36 to 137.67. EUR/JPY topped 145, coming from 143.79. Sterling had another decent run. EUR/GBP continues to hover near key support at 0.856/7. Economic data contained an industrial update (IP, manufacturing production, construction) which overall topped estimates.

Hong Kong relaxed some more Covid restrictions, amongst others scrapping a ban on international arrivals going to bars or eating at restaurants. It’s part of China’s rapid shift away from its economically damaging zero-Covid strategy. HK bourses are among the better performers during Asian trading hours this morning, although gains of about 1.3% were halved in the meantime. Core bonds eke out a slight gain, resulting in a 1 bp decline in UST cash markets currently. The dollar loses a few ticks in generally subdued trading.

Tight trading ranges suggest markets adopted a holding pattern as they await the outcome of today’s US CPI (November). It is the final critical data the Fed gets as it kicks of its two-day meeting later today. Consensus expects headline inflation to come in at 0.3% m/m and settle at 7.3% y/y, down from 7.7% the month before. Core inflation should ease from 6.3% to 6.1% y/y (0.3% m/m). We hold a neutral view on the actual outcome but expect an asymmetrical market reaction where a downside surprise is likely to cement rate cut bets and trigger an equity and core bond/US Treasury surge. Resistance in EUR/USD at 1.0611 (38.2% recovery of the 2021-2022 decline) would surely be tested. This would raise the stakes going in to the Fed decision as we expect chair Powell to push back against such market pricing. The British economic update continues with the October labour market report surpassing expectations on all accounts. Sterling in a first reaction ekes out a small gain.

News Headlines

The EU and Hungary reached a way out of their stalemate ahead of the EU Summit at the end of the week. Hungary yesterday dropped its veto against the implementation of an EU-wide minimum effective corporate tax rate (15%) and against an €18bn funding package for Ukraine. As a quid pro quo, the EU will conditionally approve the country’s €5.8bn Covid recovery plan. Member states also agreed to freeze €6.3bn of cohesion funding (instead of €7.5bn earlier proposed). Rule of law reform requirements will be integrated in Hungary’s recovery plan so that the country only really gets access to the money once all conditions are met. The forint gained some ground yesterday in the run-up to the decisions, with EUR/HUF down to 415 from 420. It’s too early for a big forint relief rally as long as the country doesn’t get the necessary funding.

The NY Fed household survey yesterday showed that inflation expectations decreased in November at both the 1y (from 5.9% to 5.2%), 3y (from 3.1% to 3%) and 5y (from 2.4% to 2.3%) horizons. Home price growth expectations continued to decline. Labor market expectations strengthened, while household income growth expectations increased to a new series high. Mean unemployment expectations—or the mean probability that the US unemployment rate will be higher one year from now—decreased by 0.7 percentage points to 42.2%.

In November, UK payrolled employees rose 107k or 0.4% mom to 29.9m. That also means a rise of 777k or 2.7% yoy over the 12-month period. Early estimates indicate that median monthly pay rose 8.0% yoy. Claimant count rose 30.5k comparing to expectation of 3.5k.

In the three months to October, unemployment rate rose 0.1% to 3.7%, matched expectations. Employment rate rose 0.2% to 75.6%. Economic inactivity rate dropped -0.2% to 21.5%. Average earnings excluding bonus rose 6.1% 3moy, versus expectation of 5.9%. Average earnings including bonus rose 6.1% 3moy, below expectation of 6.2%.

Full release here.

European equities traded in the red at the start of the week, but equities in the US rebounded as investors are hanging on to hope of slower inflation and reasonably hawkish Federal Reserve (Fed) by their fingernails.

Today and tomorrow will tell whether they are right being optimistic or not.

The latest US CPI data will reveal whether inflation in the US eased, and by how much. It’s highly likely that we will see a number below the 7.7% printed a month earlier. But a number below 7.7% won’t be enough as analysts expected it to ease all the way down to 7.3%.

Last Friday, the PPI figure showed that the US factory gate prices eased in November, but not as much as penciled in – leading to some disappointment among investors. Today, a similar disappointment could erase yesterday’s 1.43% rebound in the S&P500 and could easily send the index below its 100-DMA.

But if, by any chance, we see a softer CPI figure, then the S&P500 could easily jump above its 200-DMA, and even above the ytd descending channel top.

But, but, but...

Today’s US CPI data, unless there is a huge surprise, will probably not change the Fed’s plan to hike the interest rates by 50bp this week. Activity on Fed funds futures gives 77% chance for a 50bp hike, and a slim chance of 23% for another 75bp hike.

What will probably change is where investors see the Fed’s terminal rate, and for how long.

More importantly, it will give us an idea on how the market pricing for the Fed’s terminal rate will clash with the dot plot projections that will come out tomorrow, and that will, in all cases, hammer any potentially optimistic market sentiment.

Therefore, even if we see a great CPI print and a nice market rally today, it may not extend past the Fed decision on Wednesday.

Energy up

European stock investors are uncomfortable this week due to the icy cold weather, that will get the countries to tap into the natural gas, and other energy supplies.

The US nat gas prices jumped more than 30% since last week due to a powerful Pacific storm bringing cold and snow to the norther and central plains in the US.

In the UK, power prices hit another ATH yesterday.

Happily, we haven’t seen a significant rise in the European nat gas futures, which in contrary kicked off the week downbeat.

But crude oil rallied as much as 2.60% on Monday as Russia said that the EU’s $60 cap on its oil could lead to supply cuts, as Goldman said that Chinese reopening could boost demand by 1mpd - which would mean a $15 recovery in crude’s price - and as a key pipeline supplying the US closed following a spill discovered last week.

I think that the oil rebound due to these three factors could be short-lived and may offer interesting top selling opportunities for medium term bears looking for a further dip in oil prices to below $70pb. Because, the Russia is not harmed by $60pb currently, US supplies will be restored and the Chinese reopening may not be smooth due to potential disruptions in economic activity, because people are sick.

Don’t count on strong UK GDP

The British GDP grew more than expected last month and that was mostly due to the rebound in activity after Queen Elizabeth’s death slowed activity earlier. But strikes across the country are so severe that they could wipe half a billion pounds off the hospitality industry’s pre-Xmas earnings. PM Rishi Sunak thinks that military staff could help cover for striking workers.

Cable consolidates gains below 1.23 but is at the mercy of the US dollar. The Bank of England (BoE) is expected to hike by 50bp at this week’s MPC meeting, but the hike will certainly be accompanied by dovish statement as the UK economy is not strong enough to withstand a Fed-like tightening in the middle of an energy, and cost-of-living crisis.

Market movers today

The market highlight today will be the US CPI for November. We see upside risks to consensus expectations and look for a decline in headline inflation to 7.4% (from 7.7% in October) on the back of lower energy prices, but with core inflation holding steady at 6.3%. Further signs of peak inflation should strengthen the case for Fed slowing the hiking pace to 50bp at its meeting tomorrow, but an upside surprise could trigger another repricing of a higher terminal rate in 2023. With the latest easing in financial conditions and still strong labour market conditions, we think more tightening will be needed (read more in Fed Preview - Tightening pressure persists into 2023, 8 December).

In the euro area, ZEW expectations are on the agenda and it will be interesting to see whether sentiment improved for a second consecutive month in December.

The 60 second overview

Market sentiment: Calm sentiment continued ahead of the key US CPI release today and central bank meetings starting from tomorrow. The New York Fed's consumer survey signalled easing inflation expectations yesterday, with 1y expectation declining to 5.2% (from 5.9%) and 5y to 2.3% (from 2.4%), somewhat more optimistic than the last Friday's University of Michigan survey, which showed 5y expectations still elevated at 3.0%. Overall the strength in the latest round of data, including the November Jobs Report as well as the last week's ISM services and November PPI, still suggests that Fed's communication should remain on the hawkish side tomorrow despite the more moderate hiking pace.

China: November credit growth was weaker than expected, as aggregate financing growth slowed down to 10.0 y/y (from 10.3%). The stimulus measures still supported the M2 money growth, even though investments remain weak. That being said, the optimism around reopening will likely be more important than the current data in the near-term, and for example oil prices edged higher yesterday amid prospects of recovering demand. On the political front, yesterday China launched a trade dispute at the WTO against the US over the export controls of microchips announced in October. The announcement marks another step towards weakening bilateral ties between China and the US, which we have expected to remain tense (see Research China - CPC Congress cements Xi's power - and US-China rivalry, 24 October).

FI: Yesterday's rates markets can best be characterised by a wait-a-see session ahead of today's US CPI and the central bank meetings on Wednesday and Thursday. 10y EGB yields ending virtually unchanged on the day. EUR curves pivoted around the 7-10y point with short end selling off by 5bp only late in the session on no apparent news or central bank comments as most are in blackout. 30y point declined 3-4bp.

FX: Brent oil strengthened 5% intraday from the trough yesterday, which helped support commodity currencies somewhat. Otherwise an FX trading session mostly characterized by positioning before today's US CPI with EUR/USD closing flat on the day despite a trading range of one big figure. As for today, we expect markets to sit tight early in the session and later take its cue from the US CPI figure.

Credit: Yesterday, credit markets continued the cautious sentiment ahead of the US CPI report for November, leaving iTraxx Main unchanged (+0.1bp) at 89.4bp, while iTraxx Xover widened by 5.5bp to close the session at 464.1bp. In addition, the primary market activity was relatively muted.

Daily Pivots: (S1) 0.9841; (P) 0.9858; (R1) 0.9880; More....

Sideway trading continues in EUR/CHF and intraday bias stays neutral at this point. On the upside, firm break of 0.9953 resistance will resume larger rally from 0.9407 to 1.0072 fibonacci level. However, break of 0.9720 will extend the decline from 0.9953 to 61.8% retracement of 0.8407 to 0.9953 at 0.9616.

In the bigger picture, price actions from 0.9407 medium term bottom are currently seen as a corrective pattern, rather than trend reversal. Down trend resumption through 0.9407 is mildly favored at a later stage. This will remain the favored case now, as long 38.2% retracement of 1.1149 to 0.9407 at 1.0072 holds.

Daily Pivots: (S1) 0.8571; (P) 0.8595; (R1) 0.8615; More...

Intraday bias in EUR/GBP stays neutral and outlook is unchanged. Further decline is expected with 0.8674 resistance intact. Break of 0.8545 will resume the fall from 0.9267, and target 61.8% projection of 0.9267 to 0.8647 from 0.8827 at 0.8444 next. On the upside, above 0.8674 minor resistance will indicate short term bottoming, and bring stronger rebound back to 0.8827 instead.

In the bigger picture, current development suggests that fall from 0.9267 is a down leg inside long term range pattern. Deeper fall could be seen towards 0.8201/8338 support zone. But strong support should be seen there to bring reversal. Nevertheless, firm break of 0.8827 resistance will turn favor to the case that such decline is merely a correction in the up trend from 0.8201. That is, further rally would be seen at a later stage through 0.9267.