Canada:- Inflation Tiptoes in the Right Direction in November

Consumer price inflation took a small step down in November, to 6.8% YoY, after holding steady at 6.9% through September and October.

Canadians got some relief at the pumps in November, with prices down 3.6% m/m, after prices surged 9.2% in October. However, gasoline prices are still up 13.7% versus a year ago.

Food inflation was back on the rise in November, up 10.3% y/y, up from 10.1% in October. Food purchased from stores was up even more versus a year ago at 11.4% y/y.

On net, underlying inflation pressures appeared to have picked up slightly in November. CPI ex-food and energy was 5.4% higher versus a year ago, a tick higher than 5.3% in October. Perhaps more importantly, the two measures that the BoC has indicated provided a more timely gauge of underlying inflation through the pandemic – CPI-trim and CPI-median showed no signs of cooling.

Shelter inflation accelerated again in November, up 7.2% y/y from 6.9% y/y. Upward pressure came from higher mortgage interest costs – which saw the highest increase since 1983 – and rents. Inflation for homeowners replacement cost did to 5.8% y/y thanks to a slowing resale market.

Yesterdays inflation report was a step in the right direction, in line with forecast for a gradual cooling in inflation over the coming year. Core inflation pressures have been somewhat slow to cool, but are roughly consistent with our December forecast. Canadian consumers are showing signs of strain under the weight of high inflation and higher interest rates, with retail sales losing momentum in recent months. This is expected to translate to softer price pressures, which are starting to show up in categories like furniture and clothing.

The Bank of Canada will get to see another inflation report before their next interest rate announcement at the end of January. With the battle against inflation not yet won, expectation is that the Bank will hike a quarter point, and then take a pause to assess the cumulative impact of a year of dramatic tightening on the economy.

The Euro:- An Uncertain Path

Euro fell below parity with the USD in October. Since then, it has rebounded, but hasn’t returned to the levels at the start of the year. Naturally, the question is whether the pair will continue the trend higher, or turn around for another run at parity. And what does this mean for Euro crosses.

One of the main drivers of the fluctuation in the shared currency last year is likely to be the theme for next year as well. At least through the first half. And that is the ECB’s unique approach to a unique challenge facing the Euro. Other currencies operate within a single economic jurisdiction, but the ECB has to balance the fiscal policy of 19 different countries.

The Euro’s underperformance this year was primarily driven by the ECB being slow to rate hike party. Even when it finally got around to raising rates, it was so far behind everyone else that the currency continued to be weaker until it became relatively clear that the Fed was getting ready to slow down its hiking. The Euro then appreciated, understanding that the ECB will keep hiking through the first quarter, and then start selling bonds in March.

Meanwhile, the Euro’s main trading partners, the US and UK, are seen to be slowing down if not stopping rate hikes. The US is expected to slip into recession during the first half, with inflation coming down quicker than expected over the last couple of months. The UK’s inflation remains high, but it already is in a recession. Meanwhile, the EU is expected to manage modest economic growth in the first quarter, assuming there is no major disruption with energy supplies over the winter.

The pending issue is inflation. Through most of 2022, there was a wide gap between headline and core inflation, as Europe was particularly affected by the high cost of energy. However, crude prices came down at the end of the year. That implies less Euros were being sold to buy energy. IF that trend continues, the downward pressure on the shared currency could be somewhat alleviated.

The higher costs have been filtering through to core inflation. While not as high as the headline number, it is still well over twice the ECB’s target. The issue is that this measure might be more sticky than the headline figure. Which could keep pressure on the ECB to keep tightening, even if the economy starts to suffer. That could put Europe in line to follow the US and the UK into a recession, just later in the year.

EUR/USD Slides to three week low

The US dollar is showing strong gains against the majors yesterday, with the exception of the Japanese yen. EUR/USD has tumbled by 1.27% and is trading at 1.0528 in Europe.

EUR/USD is sharply lower, despite a very light economic calendar. The only release of note is German CPI, which was released yesterday. Despite the lack of fundamentals, the USD is taking advantage of risk aversion in the markets. There are headwinds everywhere we look. The war in Ukraine, the threat of recession in the US and the eurozone and China’s slowdown all make for a gloomy outlook as we start the new year.

Germany’s inflation has been falling, and the downtrend is expected to continue. The consensus for December CPI is 9.0%, compared to 10.0% in November. If the consensus proves accurate, it could put further pressure on the euro, as the ECB may have to reconsider its hawkish stance on rate policy.

The International Monetary Fund didn’t bring any festive cheer with its pessimistic message on Monday. The IMF warned that 2023 would be tougher than 2022, as the US, EU and China would all see a decline in growth.

After Christmas and New Year’s holidays, the markets are easing back in, as the data calendar gets busier as of Today. We’ll get a look at the Fed minutes from the December meeting, which was a hawkish affair that surprised investors and gave the US Dollar a boost. On Friday, the US release the employment report, which always plays an important factor in the Federal Reserve’s rate policy.

Decent US Data ahead of Payrolls | Xtreamforex

Today brings this week’s most important data releases both from the Euro area and the US.

In Euro area, flash inflation print for December will be released. Individual country data released thus far suggest that while headline inflation probably continued to decline in December, underlying price pressures remain strong. Consensus is looking for core inflation to have picked up from 5.0% in November to 5.1% in December. Going forward, interpretation of euro area inflation data will become more and more cumbersome as country-specific fiscal measures that compensate households for the rising energy costs will also affect consumer price developments.

In the US, it is time for December payrolls. Consensus expects 200k new jobs while a figure around 100k would be consistent with demographic developments and any higher number implies labor shortages are likely to prevail in US jobs market, upholding wage and price pressures. We will also get IMS Services index where consensus looks for a decline to 55.0 in December from 56.5 in November. Factory orders are also expected to have declined in November.

Heading into the payrolls release today we got some tier-2 data out yesterday. Initial jobless claims showed a downward surprise with a decline to 204k still signaling a robust labor market. The ADP employment report also surprised to the strong side rising 235k in December from 182k in November. While it is not a great predictor of non-farm payrolls it still indicates decent labor demand in line with the job openings data released earlier this week, which were also better than expected and pointed to still strong demand for labor.

ECB member Villeroy said yesterday that the ECB should reach the terminal rate by summer and then hold suggesting rates would stay there for some time. He also stated that the ECB should be pragmatic and not become obsessed with rate increases that are too mechanical. Markets price close to 150bp of further hikes by summer. Central banks have gotten much relief on the inflation front from falling commodity and freight prices but the tight labor markets remain a challenge.

US CPI Preview:- Will lower inflation data cause the Fed to pause

In general, inflation has been slowing over the last few months. Tomorrow, markets will get a look at December’s CPI print. Expectations are that the headline print will continue to move lower to 6.5% YoY vs a November reading of 7.1% YoY. Last month’s reading was the fifth straight monthly decline after reaching a high of 9.1% YoY in June 2022. The print was also the lowest reading since December 2021.

Markets have also now seen that wage growth is slowing. Average Hourly Earnings for December slowed to 4.6% YoY and expectation of 5% YoY and a lower November revised print of 4.8% YoY from 5.1% YoY. The Fed has been worried about wage growth, and this data was the first sign that wages may be rising at a slower pace.

A lower-than-expected inflation reading should prove to be good for stocks and bad for the US Dollar. USD/JPY had been climbing into October 21st , as the MoF intervened for the second time in 2022 in the fx markets. The pair then began moving lower in an orderly channel. However, notice that when the lower-than-expected US CPI prints were released on November 10th and December 13th, the USD/JPY moved aggressively lower. The November 10th move fell 545 pips, more than on either of the intervention days.

The December US CPI reading is to be released on Thursday, January 12th. Inflation has been trending lower since the summer, but will it continue? If CPI continues to be weaker than expectations, watch for USD

Australian Dollar Bright Start in 2023

The Australia dollar has started 2023 strongly, rising above 70 cents to highs since August. A softer USD and improved China sentiment have been key. This week’s highlights include Australia’s jobs data, the Bank of Japan decision and US retail sales.

The SUD has risen about 1.6 cents or 2.3% so far in January, to just under 0.7000. Price action was quite mixed in the first few days of the year, the Aussie rally only igniting on 6 January when the USD slumped in response to soft data. While the US December payrolls gain of 223k was quite solid and unemployment rate edged down to 3.5%, there was a declaration in wages growth. Moreover, on the same day the US services ISM survey showed a shocking slide in the headline index, to 49.6 in December from 56.5 in November.

Adding to the softer US dollar tone was last week’s US December inflation data. Overall CPI slowed to 6.5% from 7.1% in November, while the ex-food and energy CPI eased to 5.7% yr from 6.0%. There is clearly a long way to go to the Fed’s 2% target, but economists found signs in the report’s details indicating ongoing softening in inflation pressure.

The improved China mood is helping AUD on crosses, including AUD/NZD rallying above 1.09, from around 1.05-1.06 in mid-December. Any pronounced weakness in China’s Q4 GDP or December activity data seems likely to be downplayed as old news, given the pace of change in China’s Covid rules.

Australia’s key data release this month is Q4 CPI on 25th January, but there is always market interest in the monthly labor force survey. Westpac looks for a 30k rise in total employment, keeping the unemployment rate at a very low 3.4%.

25bp Hike from Bank Of Canada expected

The Bank of Canada are expected to hike interest rates by 25bp tomorrow according to market pricing and economists. The hike would see their benchmark rate rise to 4.5% – its highest level since October 2007 – and on par with the Fed yet above the RBNZ’s 4.25% rate. A 25bp hike would be the slowest pace since their first hike of this cycle in March 2022, after which they moved up 50bp increments, a 100bp hike and a 75bp hike along the way. The central bank will also provide minutes from the meeting on February the 8th, which is the first time in their history.

Money markets suggest an 80% chance of a 25bphike, whilst 25 of 26 economists polled by Reuters also anticipate the move. With a 25bp hike all but a given, it could take a surprise hold to start volatility for traders. But then looking through the latest business and consumer sentiment surveys suggest we could be fast approaching the BOC’s terminal rate.

The BOC pay close attention to their quarterly business and consumer outlook surveys, and the general trend across both is a concern of high inflation weighing on their outlook for the economy. So on that front the rate hikes are doing their job to cool the economy by lowering demand. However, with inflation remaining stubbornly high and both Trimmed Mean and Median CPI hovering near their multi-decade highs and nearly twice the upper bound of their 1 – 3% target range, it leaves the potential for at least 1 or 2 more 25bp hikes.

GBP/CAD Chart: With the BOE making increasingly hawkish comment and the BOC likely nearing the end of their tightening cycle, GBP has risen over the past two weeks. Yet prices have also pulled back the past two days and we’re waiting to see if the cross can hold above support around 1.6445, which comprises of previous highs, the monthly pivot point and the 20-day EMA

Gold Steady and Dollar Undermined:

After silver’s big plunge on Monday, both precious metals have managed to steady the ship, suggesting the move at the start of the week was probably a bear trap.

The US Dollar has come back against the Canadian dollar thanks to a 25- basis point rate hike from the Bank of Canada, with its governor saying that interest rates will be kept at its current level while the bank assesses the impact of the cumulative interest rate increases.

But elsewhere, the likes of the Pound, Euro and Yen all remain supported against the US dollar. This is helping to keep buck-denominated metals supported.

Investors are growing confident that more central banks will be pausing their interest rate hikes soon, as more signs emerge than global inflation is slowing – although the outlook remains uncertain and there have been some surprises here and there. So, Gold remains supported on the view that the days of rate hikes are numbered, but given the impressive gains over past two and a half months, some would argue that much of the positive news is now priced in.

The trend remains bullish and until we see a key reversal pattern in the gold or silver charts, fading the dips continues to remain the dominant strategy.

Gold has found support around $1,920, a level which had served as resistance in the past. For as long as it doesn’t break the structure of higher lows and higher highs, the path of least resistance remains to the upside and a run towards $2,000 cannot be ruled out as a result.

Currency Pair of the Week: EUR/USD

The pair started on a positive note thanks for Spain’s Harmonized CPI, which came in at +5.8 YoY vs 4.7% YoY expected and +5.5% YoY last. Today, Markets will get a look at CPI from France and Germany, ahead of the Eurozone January Preliminary CPI tomorrow. Expectations are for a print of the headline CPI to drop to 9% YoY from 9.2% YoY in December. The Core rate is expected to drop to 5.1% YoY from 5.2% YoY in December. Expectations are for 50bps rate hike, which would bring the key rate to 3.00%. Many members of the committee, including ECB President Christine Lagarde, have already indicated that a 50bps hike is a done deal. Anything different will disappoint the markets. But traders will be watching for signals that another 50 bps rate hike is in the cards for March.

Last week, the US released one of the Fed’s favorite measures of inflation, the Core PCE Price Index. The print was 4.4% YoY, as expected, vs a prior reading of 4.7% YoY. Today, the US will release another important gauge of inflation which the Fed relies heavily on: The Q4 Employment Cost Index. Expectations are for an increase of 1.1% vs a Q3 reading of 1.2%. How will these prints affect the FOMC when it meets tomorrow ? The markets are already pricing in a 99% chance of a 25bps hike, which would bring the Fed Funds rate to 4.75%.

On a daily timeframe, EUR/USD has been moving in an orderly upward sloping channel since the end of November 2022, When price made a near-term low of 1.0223. However, since January 12th, when the pair reached 1.0852, price has been fairly tight, trading near the top trendline of the channel. Since January 18th, the pair has been trading in an ascending wedge with a low of 1.0766 and a high of 1.0930. On Friday, price dipped below the bottom trendline of the wedge but moved back inside it on Monday.

On a 4 hour chart, EUR/USD is moving lower once again out of the ascending wedge. If price continues to move lower, first support is at the low from January 27th at 1.0838. Below there, price can fall to the bottom of the ascending wedge at 1.0766 then horizontal support at 1.0713. However, if price does move back into the wedge, there is a band of resistance at a horizontal trendline dating to April 22nd, 2022, the top trendline of the channel, and the top trendline of the ascending wedge. These all cross between 1.0936 and 1.0966. Above there, price can move all the way back up to the highs from March 31st, 2022 at 1.1185.

FOMC Hikes Rates and Signals More to Come

As universally expected, the FOMC raised its target range for the federal funds rate by 25 bps at the conclusion of its policy meeting today. But the tightening cycle likely is not over yet as the FOMC noted that it “anticipates that ongoing increases in the target range will be appropriate”.

The FOMC said that “inflation has eased somewhat’” which Chair Powell reiterated in his post-meeting press conference. But he also noted that the committee “has more work to do” in terms of monetary tightening to bring inflation back to the FOMC’s target of 2% on a sustained basis. Powell also stated that policy will need to be restrictive for some time.
We look for the FOMC to hike the fed funds target rate by 25 bps each at its next two policy meetings. That said, we do not have a high level of conviction regarding the exact amount of tightening that the Committee will need to deliver. The FOMC is in the fine-tuning stage of its tightening cycle, and future rate hikes will depend on incoming data in coming weeks and months.

We look for the FOMC to hike the fed funds rate by 25 bps at each of its next two meetings on March 22 and May 3, which would bring the target range for the fed funds rate to 5.00%-5.25%. That said, we do not have a high level of conviction regarding the exact amount of further tightening that the FOMC will deliver. The Committee is in the fine-tuning stage of its tightening cycle, and the number of remaining rate hikes will depend on incoming economic data in coming weeks and months. We have a degree of conviction, however, in our belief that the FOMC will not be quick to ease policy. Committee members appear to be united in their view that inflation remains too high, and that policy will need to be restrictive in order to bring inflation back to the FOMC’s target of 2% on a sustained basis.

We look for the U.S. economy to slip into a mild recession this year, although we acknowledge that the Fed could potentially still pull off a “soft landing” in which inflation returns to 2% without a significant retrenchment in the labor market. In that regard, stocks and bonds rallied on Powell’s comment that the disinflationary process has started without notable weakening in the labor market. It appears that markets are increasingly buying into the “soft landing” scenario.

RBA Expected to Hike by 25bps

The RBA are expected to rise interest rates by 25 bp to 3.35% tomorrow, which would take rates to their highest level since September 2012. If so, it would be their fourth consecutive 25bp hike and ninth back-to-back hike this cycle – which is their most aggressive in history. Even so, their rates remain well below RBNZ’s 4.25% and Fed’s 4.75%, both of those central bank started hiking considerably sooner than the RBA, and continue to battle high levels of inflation.

Unemployment is 3.5% compared with the RBA’s 3.4% forecast in November, but this is not likely a large enough deviation for it to matter, and employment numbers are robust overall. Wage prices are on target at 3.1% q/q, but inflation is a fly in the ointment for the RBA.

According to a Reuters poll, 30 out of 31 economists expect a 25bp hike to 3.35% tomorrow, up from 23 out of 27 in January. 19 out of 30 see the cash rate peaking at 3.6%, but there is a greater chance of it eventually rising above 4% than the consensus currently estimates. US inflation peaked in July yet the Fed are still hiking, and inflation in Australia has not yet peaked. And whilst China’s reopening has brought with it cheers of a soft landing, it is also inflationary which could see CPI reaming higher and stickier than anticipated later this year. And whilst the employment situation remains robust and inflation remains high, it’s a green light for the RBA to continue hiking.

The Aussie took quite a battering on Thursday and Friday following the Fed’s meeting and strong NFP report, and fell -3.7% from its YTD high by Friday’s close. There’s been a mild attempt move lower today, but we’ve seen the meat of the downside move for now. And with the RBA tipped to hike tomorrow, this leaves the potential for AUD/USD to post a countertrend move ahead of the meeting – with its fate to then be decided by the level of RBA tightening.

Read More : https://www.xtreamforex.com/rba-expecte … -by-25bps/

Powell Continues to be “Less Hawkish”

Fed Chairman Powell continued with his less hawkish commentary today. He started by noting once again that the disinflationary process has started, but it will be bumpy. He also noted that it will be a long process. As a result, the US Dollar initially sold off while stocks moved higher. He said that the surprise in the 517,000 Non-Farms Payroll print proved that it would be a bumpy road. Exactly how long of a process will it be ? Powell said that 2023 will be a year of significant inflation declines and that it will probably take into 2024 to get inflation back down to the 2% target.

The US Dollar Index initially sold off as Powell stuck to the script of the disinflationary process starting. Markets saw this as dovish. Notice that the DXY fell to the gap opening from the past weekend and the support held. However, once it became clear the NFP report did nothing to affect the outlook of the Fed, the DXY moved higher towards the unchanged level from when Powell began speaking. In all, the DXY fell from 103.65 down to 103.00 within 30 minutes, then reversed and bounced all the way back over the next 1 hour.

EUR/USD has been moving higher in a channel formation since mid-November 2022. Price broke above the top, upward sloping trendline of the channel on February 1st after FOMC meeting. However, on February 2nd, price reached a high of 1.1033 and reversed following the ECB meeting. This brought the pair back into the channel and price continued moving lower. Today, EUR/USD reached the bottom trendline of the channel and the 50 Day Moving Average, then bounced to close near unchanged on the day. IF price continues to move lower, the first support below the trendline of the channel is the 38.2% Fibonacci retracement from the lows of November 3rd 2022,to the highs of February 2nd at 1.0535.

Below there, price can move to the lows of January 6th at 1.0482 and then the 50% retracement from the above-mentioned timeframe at 1.0380. However, if the channel support holds, the first resistance is at the top of the channel trendline near 1.0995, then the February 2nd highs at 1.1033. IF price moves above there, the next resistance isn’t until the highs of March 31st 2022 at 1.1185.

One sure thing is that Powell is not the uber hawk he once was and there won’t be any surprise 75bps hikes coming down the line. Markets seem to be enjoying the “less dovish” Powell. Let’s see how long this can last!