Weekly analysis

Gold price gained as the USD dropped deeper against its rivals. The metal is trading at $1,919 at the time of writing. 

The bias is bullish; that’s why the yellow metal could resume growth despite temporary drops. Fundamentally, the XAU/USD jumped higher after the US Consumer Price Index reported a 0.1% drop in December, while U.S CPI y/y came in at 6.5%, as expected.
Technically, the price of gold retreated a little. However, the outlook remains bullish despite temporary drops. After taking out the $1,879 resistance, the price action signaled an upside continuation.
After the US inflation data, the XAU/USD registered a false breakdown with a good trend below the $1,879 level. 

Fed Chair Powell failed to deliver the kind of pushback against easy financial conditions that many had the right to expect in his speech yesterday, as the policy guidance was rather light in the speech. Most of the speech centered on a discussion of inflationary risks and where the Fed felt comfortable with the trajectory and outlook, and where it felt less certain, which was especially notable in the labor market/wage dynamics. The heart of the speech discussed the likely permanent reduction in the potential labor force due to older workers leaving the work force during the pandemic and the uncertainty of how quickly the wage pressures would ease. Near the end of the speech, Powell said “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time.” The lack of certainty and Powell suggesting it may be appropriate to reduce the size of Fed hikes to 50 basis points at the December FOMC meeting emboldened the market. 
Soft US data added to the reaction function yesterday and helped US yields lower all along the curve, although this did not unfold until the market had a look at what the Fed Chair had to say. The November Chicago PMI plunged to a scary 37.2 (vs. 47 expected and 45.0 in October) and the November ADP private payrolls change were out at a 21-month low of +127k vs. the +200k expected. Today’s key event risk is the core month-on-month PCE inflation print, expected at +0.3% MoM and 5.0% year-on-year. Any upside surprise would sit very poorly with yesterday’s reaction, as would a stronger than expected November jobs and/or earnings data tomorrow.

USDJPY plunged down through the 137.50 area recent pivot low yesterday in the wake of Fed Chair Powell’s speech as US yields dropped all along the curve, with the US 10-year benchmark yield hitting 3.60%, a new local low ahead of the important 3.50%. The 200-day moving average, currently near 134.50 and rising rapidly, is zooming into view and will be a key test that might be hard to break unless US yields continue lower, which will be far more down to incoming data in coming weeks. The pain trade across markets now will be either a) stronger than expected US data and/or b) more inflationary data regardless of the strength in the real economy (that would require the Fed to remain higher for longer and for the market to eventually reset forward inflation expectations). Also watch global energy prices, a second source of vulnerability for the JPY due to its import of nearly all energy supplies. Some BoJ member jaw-boning overnight on an eventual policy shift also helping the JPY at the margin.

As the Fed Chair Powell himself noted in a speech on inflation late last year, the key risk for further inflationary pressures comes from the labor-intensive services sector of the US economy, so arguably the ISM Services survey should carry plenty of weight today, together with the usual focus on payrolls and earnings growth, with the market leaning for the risk of stronger data today after a very strong December ADP Private Payrolls print 235k  and a revision of November data to 182k from 127k and with a very strong weekly claims number at 204k, the second-lowest print since May.

USDJPY is traditionally the most sensitive USD pair to US data, and would be even more so if any US data surprises add more volatility to the longer end of the US yield curve, as opposed to mostly seeing the market marking the front-end of the curve a bit higher or lower. The rally off the sub -130.00 lows has run into its important first resistance area  the pivot higher near 134.50 and near a prior pivot low back in early December. The next resistance area is the important 138.00+ resistance from early December, although the 200-day moving average comes in well below there at 136.50. To rise significantly above the 136.50-138.00 zone, we may need to see a more significant jump in longer US yields, not just the front end of the US yield curve.

Having a look at EURCAD today to emphasize the huge divergence in these two currencies in recent weeks. CAD is limping on oil prices rushing lower still after last week’s plunge after the news out of China over the weekend, with major oil grades trading at new lows today not seen since all the way back in January. The euro has enjoyed the tailwind of falling oil prices, the sense of emergency around gas prices this winter fading (however fragile the longer term outlook) and on the ECB getting more serious on signaling further rate tightening. Some of today’s boost in the euro may have come on ECB’s Klas Knot (widely considered at the hawkish extreme among ECB members) arguing that “To bring inflation back to target we will need a protracted period of time at which at least growth is below potential because otherwise we will never get the disinflation going.” Still, short EU rates were only a couple of basis points higher from Friday’s close. Can the pair go higher still? I suspect the answer to that is joined to the question of whether EURUSD can run higher still. So far, we have only seen a healthy correction after a tremendous slide in the euro, further euro- upside beyond another percent or two may get more difficult from here if a) US data remains persistently resilient and especially inflationary and b) if the developments in China begin to impact supply side constraints once again.  

The ECB administered a hawkish broadside , raising its forecasts for headline inflation to 6.3% for next year and 3.4% for 2024 (From 5.5% and 2.4% previously, suggesting a far longer time frame with uncomfortably high inflation. The core CPI forecasts were raised to 4.2% ex food and energy for 2023 and 2.8% for 2024, versus 3.4%/2.3% in September). It also outlined its quantitative tightening plan to start rolling off EUR 15 billion of asset per month from March, with ECB President Lagarde claiming the willingness to continue to hike 50 basis points at several coming meetings if necessary, with a general message that there is far more rate tightening to do from here. But after an initial sprint higher that saw EURUSD trading well above 1.0700 despite relative USD firmness elsewhere, the EURUSD collapsed back toward 1.0600 before stabilizing closer to 1.0650 this morning and then easing lower again. Still, the euro was very firm against most of the rest of G10 currencies as the German 2-year yield jumped a full 25 basis points on the day and closed the day at a cycle high (and high since 2008) of 2.39%. EURJPY leaped two figures higher.

The US dollar is biding its time in a range after the huge sell-off that was mostly on the back of the October CPI release. If we get another couple of days or so of waiting for follow through lower in the greenback, the momentum will really have begun to seep out of the move. Still, the move was extensive enough to require a considerable rally indeed to argue that the USD bull market is returning. As I have noted, the next heavy hitting data points aren’t up until the November 30th PCE inflation print, and then the jobs report on December 2 and November CPI on December 13th. 

A huge break higher through 1.0100 in EURUSD was sparked by the hot October US CPI print last Thursday and we have closed every day this week within half a figure of the Friday close. A few days of consolidation is one thing, but if the pair doesn’t follow through higher in the coming couple of days, the move will have lost considerable momentum. Note the 200-day moving average that was touched earlier this week for the first time since June of last year, a remarkable run. That 1.0100 area is an important pivot, with the retracement of this large rally wave not coming into until close to parity. To the upside, the next important zone is perhaps 1.0611  retracement of the sell-off wave from the multi-year high at 1.2349 to the 0.9536 low for the cycle and then the 2020 pandemic outbreak a tad higher at 1.0636. 

Trade accordingly with yiur risk

The GBP/USD weekly forecast is flat as investors will likely sit on their hands until inflation data comes out ahead of the central bank meetings.

This past week, investors were interested in US data, such as the producer price index and initial unemployment claims. There was also PMI data from the UK showing a contraction. The United States had a small increase in the number of new unemployment benefit claims, which shows that the labor market is still strong and tight.

In November, US producer prices rose a little more than expected. The annual inflation at the factory gate registered its smallest gain in 1-1/2 years, signaling a slowdown in the trend. 

Looking at the daily chart, it is clear that the price is in a bullish trend as it is trading above the 20-SMA, and the RSI is above 50. Bulls have consistently broken above resistance levels and are trading at the 1.2300 key resistance level.
Bulls have attempted to break above this key level but have failed. The second attempt is, however, looking weaker than the first. This could mean another failure. Bulls must gather more momentum to break above the 1.2300 key resistance level. If they don’t, bears might reverse the trend.

Another sign of weakness is the fact that the price is trading close to the 20-SMA. Bears must break below the 20-SMA to reach the 1.1850 and 1.1507 support level. 

Gold is heading for its biggest weekly gain since March after the weaker-than-expected CPI print gave metals, including silver, a major boost from the subsequent drop in yields and the dollar. The yellow metal traded up 7% during the past two weeks after once again finding support in the $1615 area, now a triple bottom. Whether the break above resistance-turned-support at $1735 now signals a change in the trading behaviour among speculators from sell-into-strength to buy-on-weakness remains to be seen. 

Copper traded near a five-month high, with the +12% gain during the past two weeks being supported by a weaker dollar and the prospect of China showing willingness to support economic growth by allowing Covid restrictions to be eased despite seeing infections increase to the highest level since April. With the global economic outlook still clouded by the prospect of recession hitting some economies, the potential for a sustained recovery at this stage is probably still too early to call. For now, traders and investors responding to higher prices by reducing negative biased positions.
The copper intensive electrification of the world will continue to gather momentum, following a year of intense weather stress around the world and the need to reduce dependency of Russian produced energy from gas, oil and coal. But for power grids to be able to cope with the extra baseload, a massive amount of new copper intensive investments will be required over the coming years. In addition, producers like Chile, the world’s biggest supplier of copper, struggling to meet production targets amid declining ore grade quality and water shortages. China’s slowdown is viewed as temporary and the economic boost through stimulus measures are likely to focus on infrastructure and electrification – both areas that will require industrial metals. 

Fed Chair Powell failed to deliver the kind of pushback against easy financial conditions that many had the right to expect in his speech yesterday, as the policy guidance was rather light in the speech. Most of the speech centered on a discussion of inflationary risks and where the Fed felt comfortable with the trajectory and outlook, and where it felt less certain, which was especially notable in the labor market/wage dynamics. The heart of the speech discussed the likely permanent reduction in the potential labor force due to older workers leaving the work force during the pandemic and the uncertainty of how quickly the wage pressures would ease. Near the end of the speech, Powell said “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time.” The lack of certainty and Powell suggesting it may be appropriate to reduce the size of Fed hikes to 50 basis points at the December FOMC meeting emboldened the market. 
Soft US data added to the reaction function yesterday and helped US yields lower all along the curve, although this did not unfold until the market had a look at what the Fed Chair had to say. The November Chicago PMI plunged to a scary 37.2 (vs. 47 expected and 45.0 in October) and the November ADP private payrolls change were out at a 21-month low of +127k vs. the +200k expected. Today’s key event risk is the core month-on-month PCE inflation print, expected at +0.3% MoM and 5.0% year-on-year. Any upside surprise would sit very poorly with yesterday’s reaction, as would a stronger than expected November jobs and/or earnings data tomorrow.

USDJPY plunged down through the 137.50 area recent pivot low yesterday in the wake of Fed Chair Powell’s speech as US yields dropped all along the curve, with the US 10-year benchmark yield hitting 3.60%, a new local low ahead of the important 3.50%. The 200-day moving average, currently near 134.50 and rising rapidly, is zooming into view and will be a key test that might be hard to break unless US yields continue lower, which will be far more down to incoming data in coming weeks. The pain trade across markets now will be either a) stronger than expected US data and/or b) more inflationary data regardless of the strength in the real economy (that would require the Fed to remain higher for longer and for the market to eventually reset forward inflation expectations). Also watch global energy prices, a second source of vulnerability for the JPY due to its import of nearly all energy supplies. Some BoJ member jaw-boning overnight on an eventual policy shift also helping the JPY at the margin.

Worth considering how the dovish Bank of England meeting  is weighing heavily on sterling, as it should, with the Bank of England reluctant to signal much tightening energy when it sees an incoming recession. Sterling is down sharply across the board, with EURGBP suddenly well backed up within the old range and now far away from the sub-0.8600 range support. The next area between the 0.8800 and pivot high of 0.8870 area looks key for whether sterling weakness is set to become a bit more unhinged, and the next key event-risk test is likely how the market greets an austere Autumn budget statement on November 17. 

The BoE hiked by 75 bps to 3%, as most expected and as was mostly priced in, but Bailey and company strongly pushed back against expectations for the scale of future moves, saying that the terminal rate priced in currently by the markets would induce a two-year recession. There were also two dovish dissenters at the meeting, one calling for 50 bps rate hike and another for a mere 25 bps. New forecasts were also released, which gave a particularly grim outlook for the economy, looking for a GDP print of -0.5% QoQ in Q3 2022 vs -0.1% expected in September. The inflation forecast now shows a peak around 11% in Q4, which is marginally hotter than the prior meeting’s projection. Sterling was crushed lower, having already fallen heading into the meeting, and it speaks volumes that even though the BoE pushed back against the forward implied expectations for further tightening, which it said would trigger a 2-year UK recession, the market did not budge those expectations. In short: the market refuses to acknowledge what the BoE thinks it might do, probably figuring that the BoE will have no choice due to sterling weakness but to pursue the path to 4.50% or higher rates before mid-next year. I was surprised by the lack of discussion or journalist questioning in the press conference around the risk that currency weakness drives worse inflationary outcomes if the BoE fails to do as much as the market is pricing. Sterling remains in a heap of trouble.