US Inflation Numbers Come to the Spotlight

Risk Appetite remained supported ahead of today’s US CPIs, adding to the view that investors may be in a rush to take advantage of the low-interest-rate environment before the Fed begins its hiking cycle. The CPIs are expected to accelerate further, and perhaps result in a counter market move, but we don’t believe that we will see a trend reversal. As for tomorrow, during the early European morning, we have the preliminary UK GDP for Q4, as well as the manufacturing and production rates for December.

INVESTORS KEEP INCREASING RISK AHEAD OF THE US CPIS

The US dollar traded mixed against the other major currencies on Wednesday and during the Asian session Thursday. It underperformed against NZD, AUD, CAD, and slightly versus CHF, while it gained versus GBP and JPY. The greenback was found virtually unchanged against EUR.

The strengthening of the risk-linked Kiwi, Aussie and Loonie, combined with the weakening of the safe-haven yen, suggests that markets may have continued trading in a risk-on manner ahead of today’s US CPIs. Indeed, turning our gaze to the equity world, we see that major EU and US indices were a sea of green, but appetite softened during the Asian session today.

It seems that investors continued to cheer the overall better-than-expected earnings results, or, as we said yesterday, they may be in a rush to take advantage of the low-interest-rate environment before the Fed begins its hiking cycle. Today’s CPIs are expected to reveal further acceleration in both headline and core terms, something that may 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, and they seem willing to buy stocks even when they anticipate so many rate liftoffs. As we already noted several times, maybe, they want to exploit low interest rates as much as they can.

As for tomorrow, during the early European morning, we get the preliminary UK GDP for Q4, which is forecast to have grown 1.1% qoq, the same quarterly pace as in Q3. However, this is likely to take the yoy rate slightly lower, to +6.5% from +6.8%. At the same time, we get the nation’s industrial and manufacturing production rates for December, and both of them are expected to have declined notably.

At last week’s decision, the BoE decided to lift interest rates by 25bps, to 0.50%, via a 5–4 vote, with the 4 dissenters calling for a 50bps hike. Given that only one member needs to be convinced that a double hike may be appropriate at the next gathering, economic data may attract more attention moving forward. Therefore, a positive surprise could increase speculation for a double hike at the next BoE gathering and perhaps support the pound, while a disappointment could add to the case for another quarter-point liftoff, which could prove negative for the currency, as this is already fully priced in.

S&P 500 — TECHNICAL OUTLOOK

The S&P 500 traded higher yesterday, to hit the key resistance zone of 4595, also tested on February 2nd. Overall, the index is trading above the upside support line drawn from the low of January 24th, and thus we will consider the short-term picture to be positive.

However, in order to get confident on further advances, we would like to see a clear break above the 4595 hurdle. Such a move would confirm a forthcoming higher high on both the 4-hour and daily charts and may see scope for advances towards the high of January 16th, at 4677. If the bulls are not willing to stop there, then we may see them climbing towards the 4745 area, defined as a resistance by the highs of January 12th and 13th.

On the downside, a clear and decisive break below 4445 would not only confirm the dip below the upside line taken from the low of January 24th, but also a forthcoming lower low. The bears may then get encouraged to drive the battle towards the 4360 barrier, the break of which could carry extensions towards the low of January 28th, at 4273.

NZD/USD — TECHNICAL OUTLOOK

NZD/USD also traded higher yesterday, but hit resistance near 0.6700, and then it pulled back. Overall, the pair remains above an upside support line drawn from the low of January 28th, and thus, we would consider the near-term outlook to be positive.

That said, in order to get confident on larger advances, we would like to see a clear break above the 0.6708 territory, marked by the high of January 25th. This could allow extensions towards the 0.6735 barrier or the 0.6755 zone, defined by the peak of January 21st, and the inside swing low of the day before. If neither barrier is able to stop the bulls, then we could see them climbing towards the 0.6805 territory, marked by the high of January 20th.

In order to abandon the bullish case, we would like to see a clear dip below 0.6627. This could confirm the break below the aforementioned upside line and may pave the way towards the 0.6590 zone, where another break could see scope for extensions towards the low of January 28th, at 0.6530.

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