Happy New Year!
It was all largely about the US last week.
Despite signs of easing inflation pressures in the US—June’s 9.1% reading appears to be the peak—Federal Reserve officials continued to call for interest rate increases to bring inflation back to the central bank’s 2% target. The FOMC meeting minutes released on Wednesday revealed that the Fed remains data dependent, though made it clear that although the pace of tightening has slowed the central bank remains committed to fighting inflation. In light of the Fed’s comments, and the recent US jobs data, further rate hikes remain on the table at this point.
Thursday saw the US ADP non-farm employment change and initial jobless claims pencil in better-than-expected data. According to the ADP National Employment report, private US employment jumped by 235,000 jobs in December, building on November’s upwardly revised 182,000 print. In terms of the US initial jobless filings, for the week ending 31 December, initial unemployment claims fell by 19,000 to 204,000, comfortably beating economists’ forecasts of 230,000.
The week, of course, concluded with the US employment situation report from the Bureau of Labour Statistics (BLS), also delivering a reasonably robust print. According to the Establishment Survey Data, non-farm payroll employment increased by 223,000 in December, down from November’s (downwardly) revised 256,000 print (though higher than the median forecast of 203,000). Furthermore, the survey showed that average hourly earnings for December, based on non-farm private payrolls, slowed to 0.3%, falling slightly under November’s 0.4% increase. The Household Survey Data showed that the unemployment rate ticked lower to 3.5%, consolidating between 3.7% and 3.5% since early 2022. Notably, unemployment remains at a five-decade low. Evidently, therefore, the jobs data was mixed. On the one hand, a declining unemployment rate highlights a robust labour market, while on the other hand, the wages number suggests limited inflationary pressures. What could this mean for the Federal Open Market Committee’s (FOMC) next meeting on 1 February? According to the Fed Funds Futures market (CME FedWatch Tool), the target rate probabilities show a 75.2% chance for a 25 basis-point hike to 4.50-4.75% over a 24.8% probability of another 50 basis-point hike.
Annual inflation data for Australia is released early on Wednesday. The consensus heading into the event signals for an increase in annual inflation from 6.9% (October) to 7.5% (median forecast) in the 12 months to November, which would be a record-high print.
Fed Chair Jerome Powell speaks on Tuesday heading into the US cash open. US inflation will also be a key watch this week on Thursday. Consumer prices in the US have eased for five successive months, with economists estimating a sixth consecutive slowdown in prices to 6.5% in the 12 months to December. Another noteworthy data point to keep an eye on is preliminary consumer sentiment from the University of Michigan. Confidence in the economy functions as an important leading indicator of consumer spending, accounting for approximately 70% of US GDP. Release forecasts range between 62.0 and 58.5, with the median set at 60.5, its highest value since May 2022.
In the UK, growth data (GDP) will be released on Friday. Expectations heading into the event are for a minus number for November, following October’s 0.5% reading.
Technical View for Key Markets this Week
US Dollar Index: Death Cross, Anyone?
The US dollar, according to the US Dollar Index (a geometrically-average weighted index), ended the week eking out a marginal gain of 0.4% and is on the verge of chalking up a Death Cross. Fashioned through the 50-day simple moving average (106.20) crossing under the 200-day simple moving average (106.31), this signals the potential for a major trend reversal to the downside (though do bear in mind that this is a lagging indicator and reflects past price movement).
While the above opens the door to a possible bearish scenario, prudent technicians tend to include additional analysis before reaching a conclusion. While there is no denying that the daily timeframe’s trend is southbound—supporting a Death Cross—the monthly timeframe has forged a bullish narrative since establishing a bottom in May of 2011.
The research team noted the following in recent analysis (italics):
The latest dip in Q4 of 2022 from the monthly ascending channel resistance (drawn from the high 103.82) is poised to conclude on the doorstep of a decision point on the monthly timeframe at 101.40-103.91. Across the page on the daily timeframe, support also emerged at 103.42 (positioned within the upper boundary of the noted decision point zone), set just north of another daily support in the shape of a Quasimodo formation at 102.36.
Considering the monthly timeframe’s decision point mentioned above at 101.40-103.91 and the accompanying uptrend, a Death Cross forming on the daily timeframe could be short-lived for the bears. Consequently, buyers may pursue bullish setups at daily support from 103.42 or at daily Quasimodo support from 102.36 (joined by a 61.8% Fibonacci retracement ratio at 102.34 and a 50.0% retracement from 102.21). As a result of this, bearish circumstances could also be seen across euro, pound and yen pairs in the weeks ahead.
Commodity Research Bureau (CRB) Index: Lower Levels?
Consisting of a basket of 19 commodities, the CRB index reveals the commodity space dropped 4.7% last week and has trended south since topping at daily resistance from 325.31 in June 2022.
The index retested the underside of a breached Quasimodo support (now resistance) at 298.30 in late August and subsequently pencilled in a bearish flag between 273.26 and 292.06, which has, technically speaking, now ‘completed’. This means the lower boundary of the pattern has been breached and allows chart pattern enthusiasts to estimate a profit objective of around 231.72, arranged just under a Quasimodo resistance-turned support level from 237.47. After the above flag pattern completed, trendline support (taken from the low 101.48) was penetrated and later retested as resistance on two occasions between October and November.
The second half of last week shows sellers commanded position and probed fresh lower lows, touching levels not seen since mid-February 2022. This week, therefore, has support from 256.89 calling for attention. In the event of further underperformance beyond here, the Quasimodo resistance-turned support at 237.47, closely followed by the bearish flag’s pattern profit objective at 231.72, will likely be monitored.
Equities: Overhead Resistance on the Radar
Major US equity indices scaled higher last week, with the Dow Jones Industrial Average rallying 1.5%, the Nasdaq 100 up 0.9% and the S&P 500 also climbing 1.5%. Interestingly, following Friday’s positive US employment data, equities chalked up their largest one-day gain since November last year.
Longer term, however, the trend for the S&P 500—an index tracking the performance of approximately 500 large-cap US companies—has faced south since 2022. The late pullback from a low of 3,491 (approximately 17%) discovered strong technical headwinds in December last year, in the form of two trendline resistances, taken from highs of 4,818 and 4,637, respectively. Adding to this, the 200-day simple moving average (3,996) offered dynamic resistance.
January, as you can see, has thus far respected the late December bottom around 3,797, with resistance overhead at 3,938 likely to draw attention this week. Beyond here, and the index, once again, faces the two trendline resistances noted above, together with the 200-day simple moving average. Should sellers reclaim control this week, downside shows limited demand until reaching support at 3,551.
As for the Relative Strength Index (RSI), we can see that the indicator is testing the underside of the 50.00 centreline. As such, resistance forming here is likely to aid overhead price resistance at 3,938.
In sum, considering the current trend direction and neighbouring resistance, sellers could eventually take things lower and overpower 3,797 support to attempt a run at support from 3,551.
US 10-Year Treasury Yield: Uptrend Weakening?
The benchmark 10-year US Treasury yield fell strongly last week, down 27 basis points and closing on the doorstep of the week’s low.
Technically, price action rejected a support-turned resistance area at 3.921-3.838% early in the week and directed focus to a trendline support, extended from the low 1.668%. As you can see from the daily chart, the trend has been evidently higher since March 2020. However, corrections have been noticeably deeper since mid-2022, indicating upside momentum is weakening. This is also shown through the Relative Strength Index (RSI) as the indicator is seen making its way south of its 50.00 centreline (informing market participants that we are seeing average losses exceed average gains: negative momentum).
Should the noted trendline support give up ground and a deeper correction form within the current uptrend, as well as Fibonacci support between 3.210% and 3.319% failing to offer buyers a platform to work with, a trend reversal to the downside is on the table according to price action.
However, on the other side of the fence, of course, a robust rebound from the noted trendline support could encourage a healthy bid and see continuation buying unfold within the current trend.
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