Risk Appetite Improves Ahead of Tomorrow’s US CPIs

The US dollar slid against most of the other major currencies yesterday and today in Asia, while equities traded north. With a very light agenda yesterday, investors may have decided to take advantage of the earnings results. Hopes that a war in Ukraine could be avoided may have also helped. However, with the US CPIs scheduled to be released tomorrow, we prefer to take a cautious stance for now.

USD SLIDES, EQUITIES GAIN AMID LIGHT AGENDA, BUT US CPIS LOOM

The US dollar traded lower against the majority of the other major currencies on Tuesday and during the Asian session Wednesday. It gained only against CAD, while it was found virtually unchanged versus JPY. The greenback lost the most ground versus AUD and NZD.

The weakening of the US dollar and the Japanese yen, combined with the strengthening of the risk-linked Aussie and Kiwi, suggests that financial markets traded in a risk-on manner yesterday and today in Asia. Yes, the Loonie is also a risk-linked currency, but it may have suffered due to the slide in oil prices. Turning our gaze to the equity world, we see that, indeed, major EU and US indices were a sea of green, with the upbeat appetite rolling into the Asian session today. The only exception was UK’s FTSE 100 which closed fractionally negative.

It seems that with a very light agenda yesterday, market participants may have decided to take advantage of the better-than-expected earnings results, with European investors having another reason to buy. Remember that on Monday, ECB President Christine Lagarde pushed against expectations over a rate hike by her Bank in July. On top of that, talks between Russian President Vladimir Putin and his French counterpart Emmanuel Macron kept alive hopes that a war in Ukraine will be avoided, which may have also encouraged some risk increase.

That said, with the US CPIs looming tomorrow, we prefer to adopt a cautious stance, despite many equity indices showing sings that further advances could be possible. Both the headline and core rates are expected to have continued rising, which could add to the view of aggressive tightening by the Fed and may result in a pullback in the stock market and a rebound in the US dollar. That said, even if this is the case, we will not call for a trend reversal, as market participants are already pricing in 5 quarter-point increases by the Fed for this year. In other words, they are willing to buy stocks even if they anticipate so many rate liftoffs. Maybe, they are in a rush to take advantage of the low-interest-rate environment before the Fed starts the hiking process.

DJIA — TECHNICAL OUTLOOK

The Dow Jones Industrial Average cash index traded higher on Tuesday, breaking above the 35320 barrier, marked by the highs of February 4th and 8th. Overall, the index remains above the upside support line drawn from the low of January 24th, and even if we see a setback tomorrow due to the US CPIs, as long as the price stays above that line, we would consider the short-term outlook to be positive.

A break above the peak of February 2nd, at 35705, would confirm a forthcoming higher high on both the 4-hour and daily charts and may initially target the 36000 zone, marked by the peak of January 17th. If the bulls are not willing to stop there, we could see them climbing towards the 36460/36540 zone, defined as a resistance by the highs of January 12th and 6th, respectively.

On the downside, we would like to see a dip below 34785 before we start examining the bearish case. This would not only confirm the break below the upside line, but also a forthcoming lower low. The bears may then get encouraged to push towards the low of January 31st, at 34425, the break of which could carry larger bearish implications, perhaps paving the way towards the low of January 28th, at 33745.

AUD/USD — TECHNICAL OUTLOOK

AUD/USD edged north yesterday, after it hit support near the 0.7110 zone. Overall, the pair has started forming higher lows, marked by the upside line drawn from the low of January 28th, but it has yet to start printing higher highs and thus, we will adopt a cautiously-bullish stance for now.

A clear break above the 0.7170/80 zone, marked by the highs of February 3rd and January 26th, would confirm a forthcoming higher high and may open the path towards the peak of January 21st, at 0.7215, the break of which could extend the advance towards the peak of January 20th, at 0.7275.

Now, in order to start examining whether the bears have stolen the bull’s swords, we would like a clear dip below 0.7085. This may confirm the break below the upside line and could trigger declines towards the low of February 4th, at 0.7050, or the low of January 31st, at 0.7035. If neither barrier is able to halt the slide, then we could see extensions towards the round figure of 0.7000.

AS FOR TODAY’S EVENTS

The calendar remains very light. The only release worth mentioning may be Germany’s trade balance for December, with the forecast pointing to a small decline in the nation’s surplus, to EUR 10.4bn from EUR 10.9bn. That said, Germany’s trade balance has rarely been a market mover and thus, we don’t expect any reaction by the euro at the time of this release.

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