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The S&P 500 consolidates gains over strong corporate earnings and improved economic outlook.

The divergence between the 20 and 30-day moving averages indicates an acceleration in the rally. Though there is a chance of a pullback after the RSI shot into the overbought area. The bullish bias means that buyers may be eager to jump in during a correction.

The index is hovering above 4660. 4625 on the 20-day moving average would be the second line of defense. On the upside, a rebound would lead to 4750.

Bullion's rise as the US dollar retreats ahead of the release of inflation data. A bullish MA cross on the daily chart is a sign that sentiment could be turning around.

Silver is testing the September high of 24.80. A bullish breakout would trigger an extended rally towards 26.00. However, the RSI’s double top in the overbought area has held buyers back as the market awaits new catalysts.

A combination of profit-taking and fresh selling could drive the price lower. The base of a previous breakout at 23.70 would be a support.

The euro finds support from an upbeat economic sentiment from across the block. The pair have met buying interest in the demand zone around 1.1520.

A bullish RSI divergence suggests that sellers may have taken their feet off the pedal. Subsequently, a break above 1.1560 prompted the short side to cover.

1.1615 is a key supply zone from last week’s sell-off, after which the bulls need to lift offers near 1.1690 before a reversal could gain traction. On the downside, a fall below 1.1550 may call the rebound into question.

The British Pound started a decent recovery wave from the 1.3430 level against the US Dollar. The GBP/USD pair climbed above the 1.3500 resistance zone.

The pair also traded above the 1.3550 level, but the pair struggled to clear the 1.3600 zone and the 50 hourly simple moving average. It is now consolidating near the 1.3550 level. An immediate resistance is near the 1.3580 level.

The main resistance is now forming near the 1.3600 level. If there is a clear break above the 1.3600 resistance, the pair could climb higher towards 1.3660 on FXOpen.

An initial support is near 1.3550. There is also a key bullish trend line forming with support near 1.3550 on the hourly chart. A break below the 1.3550 support level could even push the pair below the 1.3500 support. The next support sits at 1.3450.

Technical analysis

The RSI is below level 50.

The Stochastics is near the oversold zone.

Most likely scenario – SELL

Target prices: 1,819.78 1,811.46

Alternative scenario – BUY

Target prices: 1,829.60 1,835.00

Key levels

Support 1,819.78 1,811.46

Resistance 1,829.60 1,835.00

Markets

The US 10y real yield hit the August all-time low of -1.2%. Since last week’s Fed and BoE meetings, the gauge – proxy for future growth, but these days especially monetary policy expectations – shed around 16 bps. US inflation expectations over that same time span added some 10 bps. Similar dynamics are at play in Europe. The German 10-yr real yield declined from -1.94% to -2.21% while inflation expectations rose from 1.77% to 1.91%. Markets are sending a clear signal to G3 central banks: postponing policy normalization risks an un-anchoring of inflation expectations while simultaneously putting future growth at stake. Stock markets initially thrived on the central bank delay with all three US indices recording all-time highs on a daily basis. The EuroStoxx50 set a new recovery high. The rally on Monday already arrived in thin air. The Fed’s financial stability report and the continuous decline of real yields convinced investors to nevertheless take some chips off the table. Main US benchmarks dropped around 0.6% yesterday, but short-term technical pictures suggest that the move could be prolonged. The combination of dropping real yields and rising inflation expectations helps explain the dollar’s difficulties to extend overall gains. EUR/USD is going nowhere between 1.1550 and 1.16 while the trade-weighted greenback failed to take out 94.47/74 resistance. USD/JPY lost 113.23 support.

The intraday rise of US Treasuries yesterday ended after the $39bn 10-yr Note auction. Contrary to secondary market action, investors for a second day straight snubbed primary sales. The auction stopped through the 1 PM bid side with a below average bid cover. We expect a similar outcome at today’s 30-yr Bond sale which could cap the bond rally. Today’s other highlights are inflation numbers. Chinese ones are already out (see below) and point to… ever rising price pressures for consumers and especially producers. US CPI inflation is expected to accelerate to 5.9% Y/Y for the headline reading and to 4.3% Y/Y for the core measure. We look out whether (higher) inflation expectations will start outweighing the setback in (real) yields which would help a stabilization in nominal terms. In FX space, it is unlikely to boost the dollar. A fragile risk environment could be more supportive for the greenback. Sterling for now remains rather immune to hawkish brexit rhetoric (see below), but event risk is clearly building. In such context, it will be difficult for sterling to start a near-term comeback. EUR/GBP currently changes hands around 0.8550. First resistance stands just below the 0.86 big figure.

News headlines

Both Chinese firms and consumers again had to cope with higher prices in October. Factory gate price inflation (PPI) accelerated a faster than expected 13.5% (from 10.7% in September), the fastest pace in 26 years. According to comments from the National Bureau of Statistics, the rise in producer prices was mainly due to imported inflation, tight domestic supply of energy and raw materials. The mining industry recorded prices rises of 66.5% Y/Y. Raw materials were 25.7% higher compared to the same month last year. The rise in costs risks squeezing profits in large parts of the Chinese industry. Even so CPI consumer prices also accelerated a faster than expected 1.5% Y/Y up from 0.7% in September. The rising in consumer inflation was both due to a bigger rise in non-food prices (+2.4% Y/Y) and a slower decline in food prices (-2.4% Y/Y versus -5.2%) in September. Rising inflation complicates potential action from the PBOC to support growth or address the consequences of stress in the real estate sector.

Irish Deputy Prime Minster Varadkar yesterday joined other recent comments that the EU and Ireland should prepare contingency plans in case London would suspend some parts of the Northern Ireland Protocol. According to Varadkar, the EU will have no option but to take retaliatory measures if the UK takes unilateral action. This EU retaliation potentially includes ending the post-Brexit Trade and Cooperation agreement. UK Brexit minister David Frost and EU Commissioner Maros Sefcovic will have a key meeting on Friday this week.

Daily Pivots: (S1) 152.66; (P) 153.15; (R1) 153.55; More...

With 154.63 minor resistance intact, fall from 158.19 is in progress and would target 148.93 structural support level. On the upside, break of 154.63 minor resistance will revive near term bullishness and turn bias back to the upside for 158.19 high.

In the bigger picture, rise from 123.94 is seen as the third leg of the pattern from 122.75 (2016 low). The stay above 55 week EMA affirms medium term bullishness. Current rise should now target 61.8% retracement 195.86 (2015 high) to 122.75 at 167.93 next. In any case, outlook will remain bullish as long as 148.93 structural support hold, even in case of deep pull back.

Daily Pivots: (S1) 130.62; (P) 130.94; (R1) 131.21; More....

EUR/JPY's fall from 133.44 is still in progress and outlook is unchanged. Downside should be contained above 130.45 resistance turned support to bring rebound. On the upside, above 132.55 minor resistance will bring retest of 133.44 first. Firm break there will resume larger up trend from 114.42. However, firm break of 130.45 will dampen our bullish view and bring deeper fall back to 127.91 key support.

In the bigger picture, rise from 114.42 (2020 low) is still in progress and the strong support support from 55 week EMA affirms medium term bullishness. Further rise would be seen to retest 137.49 (2018 high). Decisive break there will resume the whole long term rise from 109.03 (2016 low). Next target will be 100% projection of 109.03 to 137.49 from 114.42 at 142.88. This will now remain the favored case as long as 127.91 support holds.

Daily Pivots: (S1) 0.8528; (P) 0.8544; (R1) 0.8568; More...

Intraday bias in EUR/GBP remains neutral for the moment. On the upside, above 0.8593 will target 0.8656 resistance. Firm break there will argue that whole down trend from 0.9499 has completed. Stronger rise would be seen to 38.2% retracement of 0.9499 to 0.8401 at 0.8820. On the downside, break of 0.8459 minor support will bring retest of 0.8401 low instead.

In the bigger picture, price actions from 0.9499 (2020 high) are still seen as developing into a corrective pattern. Deeper fall could be seen as long as 0.8656 resistance holds, towards long term support at 0.8276. However, firm break of 0.8656 resistance would argue that a medium term bottom was already formed. Stronger rise would be seen to 0.8861 support turned resistance to confirm completion of the corrective pattern.

The Chinese inflation hit a 13-month high in October, and the producer prices topped 13%. And later today, the US inflation data will likely confirm a further overheating in American consumer prices last month, as well.

A consensus of analyst estimates points that the consumer price index in the US may have advanced to 5.8% in October from 5.4% printed a month earlier. The positive trend in inflation is a bit too dynamic to call it ‘transitory’, and we don’t even know when it will stabilize. The banks stopped giving that call long ago, and now, come what may!

But the interesting thing is that, the Federal Reserve (Fed) doves still find a way to remain in charge of the market. The latest news that Lael Brainard went for a job interview to the White House to become the next Fed Chair is giving the Fed doves a decent boost presently, as Brainard is seen as a more dovish candidate than Jerome Powell.

But what can she do? She can’t stop the QE tapering, she can’t pull the interest rates lower, and she can’t even push back the rate hike expectations with inflation rising at such speed.

One thing is sure, the rising inflation doesn’t seem to sour the market mood as much as it did a couple of months earlier, as investors are well conscious that the Fed will continue turning a blind eye on the problem, regardless of who will take the helm in February. Therefore, we may not see a negative market reaction to the overheating in inflation.

It’s also important to note that real yields are under a decent pressure and the low risk, low yielding assets are now increasingly negative yielding when adjusted to inflation. The negative real yields make the equity markets look like the only alternative to deal with the rising inflation, other than the cryptos, of course!