POWELL’S KEY COMMENTS:
The Fed chairman embraces a hawkish stance and indicates that the FOMC terminal rate will likely be higher than initially anticipated
Powell says the central bank will stay the course until the job is done and that the bank is prepared to accelerate the pace of tightening in light of inflation risks
The U.S. dollar extends gains after Powell’s remarks cross the wires, bolstered by the hawkish repricing of the central bank’s monetary policy outlook

Jerome Powell appeared today before the U.S. Senate Committee on Banking, Housing and Urban Affairs to deliver the Federal Reserve’s Semiannual Monetary Policy Report, kicking off his two days of appearances on Capitol Hill.

In prepared remarks, the Fed chief embraced a hawkish position, reiterating that the central bank is committed to restoring price stability and will stay the course until the job is done, a sign that borrowing costs will continue to climb for the foreseeable future in the U.S. economy.

Powell also warned Congress that resilient economic activity poses upside inflation risks and that determined measures will be required to tame them. Further, the central bank chief stated that the FOMC terminal rate is likely to settle higher than initially anticipated and that policymakers are prepared to increase the pace of tightening if needed.

Focusing on the outlook, Powell said that officials will make their decisions meeting by meeting, based on the totality of incoming data. At the same time, he cautioned that there are little signs of disinflation in core services excluding housing, and that a softer labor market may be needed in order to win the fight against inflation.

Immediately after Powell’s remarks crossed the wires, the U.S. dollar extended its advance as the short-end of the Treasury curve moved higher, along with expectations for the FOMC’s peak rate, as shown in the chart below. Fed swaps also repriced to favor a 50 bp hike in March over a 25 bp move, a clear indication more forceful actions may be on the horizon in response to sticky inflationary pressures. Monetary policy dynamics are likely to be bullish for the U.S. dollar in the near term, suggesting that the DXY index could prolong its recovery this month.

UPDATE US DOLLAR (DXY) TECHNICAL ANALYSIS
In terms of technical analysis, the U.S. dollar (DXY) daily chart shows that price has broken above an important trendline resistance in play since October 2022, reinforcing the greenback’s near-term positive bias. With this bullish breakout, the focus shifts to January’s high at 105.63, the next ceiling to keep an eye on. If bulls manage to clear this level, we could see a move towards 106.18, the 38.2% Fib retracement of the September 2022/February 2023 slump. On the flip side, if sellers return and trigger a pullback, initial support appears at 104.90, and 104.00 thereafter.

From Diego Colman, Contributing Strategist

US DOLLAR OUTLOOK: BULLISH
The U.S. dollar, as measured by the DXY index, rallies and closes the week at its best level since early January
The greenback’s gains are driven by surging U.S. Treasury yields following hotter-than-expected PCE results
ISM data will be in focus in the coming days, but the DXY heads into the new week with strong upside momentum.US DOLLAR OUTLOOK: BULLISH
The U.S. dollar, as measured by the DXY index, rallies and closes the week at its best level since early January
The greenback’s gains are driven by surging U.S. Treasury yields following hotter-than-expected PCE results
ISM data will be in focus in the coming days, but the DXY heads into the new week with strong upside momentum.Written by Diego Colman, Contributing Strategist

US Dollar, USD, DXY Index, Fed, TIPS, Yields, ECB – Talking Points
US Dollar resumed strengthening last week on Fed hawkishness
Treasury and real yields appear to be lending USD support for now
Today’s US holiday is ahead of some crucial US data later in the week
Traits of Successful TradersTraits of Successful Traders

The US Dollar has started the week slightly firmer as the markets contemplate a Federal Reserve turning more hawkish at their Federal Open Market Committee (FOMC) meeting in late March.

The possibility got legs after Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard made hawkish comments last week.

They both indicated that they would consider a 50 bp lift of the Fed funds target rate at the next meeting. While Ms Mester is on the board, she is currently a non-voting member.

This saw Treasury yields move north into the end of last week and although the US bond market is closed today, the increase in real yields appears to be underpinning the US Dollar.

Real yields are the nominal Treasury yield minus the market-priced inflation rate derived from the Treasury Inflation Protected Security (TIPS) over the same period.

If the Fed decides to go with 50 bp moves, this would be a surprise to markets as the swaps and futures markets are both currently pricing in 25 bp at the next two FOMC gatherings.

The European Central Bank has indicated that they will be moving by 50 bp at their next meeting but their cash rate is more than 200 bp below the Fed.

Geopolitical tensions in the APAC region continue with North Korea firing 2 missiles over the Japan Sea on the weekend. This was followed by the US and South Korea performing combined military exercises today and then 3 more missiles were fired by North Korea on Monday.

This comes on the back of simmering US-China relations after the balloon saga of last week. This has contributed toward a broader concern for risk assets although APAC equities were mixed today.

Australian and Japanese stock indices are fairly flat while China and Hong notched modest gains.

A notable underperformer today has been New Zealand’s S&P/NZX 50 Index which is down over 1%. The cost of cyclone Gabrielle and the prospect of the Reserve Bank of New Zealand (RBNZ) hiking by 50 bp to 4.75% on Wednesday appear to be dragging it lower.

Crude oil prices eked out small gains with the WTI futures contract pressing toward US$ 77 bbl while the Brent contract is having a look above US$ 83.50 bbl. Gold is steady, trading near US$ 1,842 at the time of writing.

Looking ahead, it could be a quiet day with the US on holiday and aside from EU consumer confidence, there is little in the way of data.

Later in the week, FOMC meeting minutes will be released on Wednesday and the Fed’s preferred inflation gauge of Core PCE will be out on Thursday as well as some 4Q US GDP figures.

— Written by Daniel McCarthy, Strategist for DailyFX.com

The Australian Dollar finished lower at the end of last week with broad-based US Dollar strength sinking AUD/USD.

The unemployment rate nudged higher to 3.7% in January against the 3.5% anticipated and prior. 11.5k Australian jobs were lost in the month, which was below forecasts of 20k being added.

This might be helpful for the Reserve Bank of Australia which is battling to get inflation. RBA Governor Philip Lowe appeared before a Senate estimates committee and then he delivered his semi-annual testimony to the House of Representatives Economics committee.

There were no real surprises across the two days with some testy posturing by some politicians. His answers did have an economics 101 angle to them, generally explaining the reasons why inflation is bad for the Australian economy and society in general.

The futures market has priced in two rate hikes of 25 basis points at the central bank’s March and April meetings.

Australia and China are expected to hold virtual trade talks this week. It has raised hopes of a potential visit to China by Australian Prime Minister Anthony Albanese later in the year.

While an easing of tensions in the relationship would be welcomed by some Australian exporters, the trade surplus is already at a record level. Many businesses that were shunned from the Chinese economy have found other markets.

The US Dollar has resumed strengthening with solid economic data pushing Treasury yields higher, underpinning the currency. Most notably, CPI and PPI both came in higher than anticipated last week.

Several speakers from the Federal Reserve have maintained the hawkish mantra with some now pondering a return to 50 bp lifts at their March meeting rather than the 25 bp that the market has pencilled in.

A return to outsized hikes by the Fed might lead to higher yields which might see the greenback gain traction.

— Written by Daniel McCarthy, Strategist for DailyFX.com

ASX: The local share market is expected to rise this morning despite a mediocre session on the US market overnight.

Jobs: The Aussie jobs market is expected to have remained very tight when the Australian Bureau of Statistics releases unemployment data today.

The unemployment rate hovered around 50-year lows for much of last year, landing at 3.5 per cent in December.

Budget blowout: The National Disability Insurance Scheme is set to cost half a billion dollars more this financial year compared to estimates produced in the October budget.

At the time, the budget said the scheme would cost $35.5 billion for the financial year but is now projected to cost $36 billion

Car ban: Aussie drivers may have little choice other than to buy an electric vehicle within 12 years, after Europe effectively banned the sale of petrol and diesel cars by 2035.

The European Union formally approved plans to cut car emissions by 100 per cent in 2035, following similar restrictions in countries including China, Japan, Canada and Hong Kong.

Housing crisis: A battle looms for the federal government after clearing the first hurdle to deliver a key election promise on housing affordability.

The government’s signature $10 billion housing fund passed the lower house but faces a battle in the senate, with the Greens demanding further measures to ease the property squeeze.

$60 million: A look inside the most expensive property sold in Australia in 2021Scroll back up to restore default view.
Plastic nation: ​​Clean Up Australia has released its National Rubbish Report for 2022, which is a snapshot of the types of waste contaminating ecosystems nationwide.

About two thirds of the rubbish volunteers plucked from the environment last year was plastic, a jump of almost 20 per cent in one year, the report revealed.

Garbage strike: As thousands of tourists arrive in Sydney for World Pride, a business group wants a rubbish-collector pay dispute escalated to the NSW government.

Protected industrial action and staff shortages have left tens of thousands of bins uncollected around the City of Sydney as the strikes stretch into their second week.

Flight cancelled: Thousands of passengers worldwide were stranded after an IT fault at Germany’s flagship carrier, Lufthansa, caused flight delays and disruption at airports.

The company said the problem was caused by damage to several of Deutsche Telekom’s glass-fibre cables during construction work in Frankfurt.

From Eliza Bavin·Personal Finance Editor

Global market sentiment generally deteriorated this past week. On Wall Street, the Dow Jones and Nasdaq 100 weakened 0.17% and 2.41%, respectively. Things were not much better across the Atlantic, where the FTSE 100 and DAX 40 fell 0.24% and 1.09%, respectively. Meanwhile, in the Asia-Pacific region, the Hang Seng Index and ASX 200 declined by 2.17% and 1.65%, respectively.

Broadly speaking, markets have been aligning themselves more closely with what the Federal Reserve is anticipating for interest rates this year. That is, traders have almost priced out rate cuts by the end of this year following January’s blowout non-farm payrolls report. We also had relatively hawkish Fedspeak this past week.

Still, it was a mixed bag for the US Dollar. It outperformed the Euro, Japanese Yen and Canadian Dollar. Meanwhile, the British Pound and Australian Dollar fared better. Sterling performed solidly after data earlier this past week showed that the UK economy just narrowly avoided a recession in 2022.

In the week ahead, all eyes turn to the next US inflation report. CPI is seen clocking in at 6.2%, which would represent a further slowdown from 6.5%. With markets incredibly sensitive to US monetary policy, a slight miss/beat would be a key ingredient for volatility. UK CPI data is also due. Keep a close eye on Australian employment data as well for AUD/USD. What else is in store for markets in the week ahead?

— Article Body Written by Daniel Dubrovsky, Senior Strategist for DailyFX.com

— Individual Articles Composed by DailyFX Team Members

Earnings, Apple, Amazon, Google and Nasdaq 100 Talking Points:
The Market Perspective: Bearish Nasdaq 100 Relative to Bullish Dow Index
Amazon and Google both offered mixed earnings results with both companies short of analysts’ EPS forecasts, though revenues were not a detriment
Apple, sporting the largest market cap in the world above $2 trillion, missed on both the top and bottom line; adding pressure to Friday’s Nasdaq outlook.
The bulk of the US tech-sectors’ earnings were released after the New York close Thursday. Following the disappointment of Netflix earnings on January 19th and the mixed performance from Meta the previous day, we would navigate into the stalwarts of the so-called FAANG group. Apple’s market cap is $2.26 trillion and represents 11.8 percent of the Nasdaq 100’s weighting. Amazon is $1.04 trillion and is 6.7 percent. Google (Alphabet) is $602 billion and 3.9 percent. Naturally, given the weight of these big players, their corporate performance carries significant weight in the consistency of the bull trend that we have seen take traction these past weeks. Now, with their mixed performance in earnings, questions over the fundamental currents carrying this enthusiasm may gain traction.

CPI TALKING POINTS:
Tomorrow brings the release of December CPI numbers.
The expectation is for continued softening in both core and headline CPI. The bigger question is by how much and the market response that will follow. Notably, last month brought below-expectation CPI yet stocks reversed anyways, retreating to the 3802-3810 support that held the lows into year-end.
The analysis contained in article relies on price action and chart formations.

While Friday’s NFP report was a mixed bag, the PMI report that followed was not. Services PMI printed at its lowest level since March of 2020 and in contractionary territory. This is sign of continued impact from the Fed’s rate hikes last year and with that data point coming in so far below expectations, (49.6 v/s 55 expected), and the response that followed, market participants are building hope that stacking signs of slowdown may compel the Fed into a less-hawkish position.

Markets seemed to shrug off Powell’s re-commitment to fighting inflation yesterday morning and stocks have continued to rally as USD has remained relatively weak, holding near a key spot of longer-term support around the 103 handle.

Ahead of tomorrow’s CPI report, another drop in both core and headline is expected. Headline inflation is expected to print at 6.5% from last month’s 7.1% print. And core is expected to come in at 5.7% against a 6% expectation. This would continue the pattern of falling CPI, which has been the case since the 9.1% read from May of last year (released in June).

MARKET RESPONSE
Last month saw a second consecutive CPI release in which headline CPI printed below the expectation. With inflation lower than market forecasts, one would logically expect that to push stock prices higher and the US Dollar lower as FOMC rate hike bets further wound down.

But that’s not what happened. Last month saw a strong bearish reaction in equities to that CPI print and that’s a theme that held into last week’s trade with the S&P 500 bracing for support at the 3802-3810 area on the chart.

Putting this data on the chart helps to illustrate how impactful CPI has been through last year. On the below chart, I’m plotting only headline CPI against the expectation. Higher-than-expected reads are in red while lower-than expected readings are in green.

And, also just like last month, we’re seeing a bullish move price into stocks ahead of the release. On the below chart, I’ve added a green box around the lead-in to last month’s CPI release. The extended upper wick printed right at the 8:30 AM release that morning. But, notably, the move was brewing for a few days prior before that capitulation took place.

At this stage, the S&P 500 is continuing a bounce from support at prior resistance, as taken from the symmetrical triangle that had built going into last week’s trade.

The reaction in December happened at a major spot on the chart, just above the bearish trendline that held the highs in the index throughout last year, with the lone bullish instance above that level taking place on December 13th, the morning that CPI was released.

For tomorrow, that same trendline is in-play. There’s resistance nearby at 4k as this is a Fibonacci level and a psychological level. And then a little higher, 4101 looms large after which 4155 and 4186 comes into the picture.

USD
The US Dollar has remained weak since topping just ahead of the Q4 open. There was subtle change around that CPI report, however, as the sell-off in USD went into range and that mean-reversion held into the end of the year.

As I wrote in this week’s USD forecast, I was looking for another probe of support before plotting reversal scenarios and quickly after this week’s open price pushed down to support at the 103 handle on DXY. This is a confluent area of support and so far, it held the lows. But the corresponding bounce has so far been capped at a prior support level that’s showing as resistance. This is at 103.45 and that horizontal resistance, when combined with recent higher-lows, makes for a short-term ascending triangle formation.

EUR/USD
When looking at directional themes in USD it’s important to at least consider EUR/USD. The Euro is 57.6% of the DXY quote so it’s an important variable to take into account. And if looking for support in USD, one would likely want to see resistance in EUR/USD.

And the zone that I talked about in this week’s forecast has already come into play and, as of this writing, has been in the equation for a little more than 48 hours now. The problem is that bears haven’t yet made a mark, indicating that they’re not taking the bait yet.

There was a bullish breakout earlier this morning into that zone and prices has since pulled back; but structure remains bullish given the recent continuation of higher-lows.

This sets up for a possible capitulation scenario around CPI tomorrow, somewhat similar to how the S&P 500 reacted last month. The recent higher-low was just above the 1.0700 handle, a breach below that begins to open the door for bearish scenarios.

— Written by James Stanley

US CB CONSUMER CONFIDENCE KEY POINTS:

The Conference Board Consumer Confidence Index® Increased 6.9 Points in December. The Index Now Stands at 108.3 up from 101.4 in November.
The Gain in Sentiment can be Attributed to an Improvement in the Present Situation Index with Inflation Expectations Hitting their Lowest Level Since September 2021.
US Dollar Trades Broadly Flat in the Aftermath of Today’s Release.
To Learn More About Price Action, Chart Patterns and Moving Averages, Check out the DailyFX Education Section.
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According to the Conference Board, consumer confidence in December rose to 108.3 from a reading of 101.4 in November, ending the run of back-to-back monthly declines. The Present Situation Index saw a broad improvement increasing to 147.2 from 138.3 last month while the Expectations Index based on consumers’ short-term outlook for income, business, and labour market conditions showed improvement to 82.4 from 76.7. Consumer’s assessment of current business conditions improved with 19.0% of consumers stating business conditions were “good,” up from 17.8%. The labor market also received a favorable view with 47.8% of consumers saying jobs were “plentiful,” up from 45.2%.

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The improvement in both the the Present Situation and Expectations Indexes can be attributed to a favorable outlook from consumers regarding the economy and jobs while inflation expectations have hit their lowest levels since September 2021. Consumers were also less pessimistic about the short-term business conditions outlook in December with 20.4% of consumers expecting business conditions to improve, up from 19.8% while 19.5% of consumers expect more jobs to be available, up from 18.5%.

Graphical user interface, chart, line chart Description automatically generated
Plans to purchase big-ticket appliances and homes continue to cool in line with yesterday’s housing data. US building permits tumbled 11.2 percent from a month earlier to an annual rate of 1.342 million in November 2022, the lowest level since June 2020. This comes as a result of rising rates affecting both mortgage demand and activity as cost of living remains high.

The US CB Consumer Confidence is a measure of the degree of optimism surrounding the country’s economic activity as well as the consumers own financial situation. It serves as a great guide for consumer spending. This report is highly regarded by the US Federal Reserve and serves as a key data component of monetary policy decisions. A higher-than-expected points to greater consumer optimism which should translate into a positive for USD.

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Market reaction

DXY- Dollar Index 15M Chart

Chart, line chart Description automatically generated
Source: TradingView, prepared by Zain Vawda

Initial reaction was a spike higher before the index continued its decline with the dollar marginally weaker across the board. The Dollar Index (DXY) much like markets has been in somewhat of a range since the start of the week. There is a real possibility we finish the year around current price as the only ‘major’ FX drivers until the New Year is Friday’s Core PCE data which could see volatility and whippy price action. However, unless we get a major consensus miss i don’t think it will have a major impact on dollar pricing ahead of the new year. This would be in line with the dollars seasonal trend for December as we approach January, a month which has seen the greenback rise in each of the past four years.

— Written by Zain Vawda for DailyFX.com

Market volatility came back to life this past week as the VIX ‘fear gauge’ soared almost 20 percent, the most since August. On Wall Street, the Dow Jones, S&P 500 and Nasdaq 100 dropped 2.08%, 2.71% and 2.72%, respectively. Things weren’t looking too great in Europe either, with DAX 40 dropping 1.5%. Australia’s ASX 200 fell 2.14%.

Much of the volatility occurred towards the end of last week when larger-than-expected US wholesale inflation data for November crossed the wires. It also didn’t hurt the University of Michigan consumer sentiment surprised higher as well. Treasury yields gained across the maturity spectrum, reflecting rising hawkish Federal Reserve monetary policy expectations.

On the chart below, the US Dollar outperformed most of its major counterparts, especially the Japanese Yen. Gold prices were little changed. Crude oil suffered a drop of about 10.9% amid rising concerns of a recession, the most since March. Using statistical analysis, the probability that oil falls 10.9% or more in a given week is roughly 8% based on price action since 2020.

Heading into next week, all eyes turn to the Federal Reserve. Policymakers have been stressing that a slower pace of tightening is likely ahead. Markets are pricing in a 50-basis point rate hike to 4.5%. But, officials have also been increasingly opening the door to tightening for longer. Markets are still looking forward to a pivot, which could result in disappointment.

We will also get the latest CPI report the day before the Fed. US headline inflation for November is seen slowing down to 7.3% y/y from 7.7% prior. An unexpectedly strong outcome could easily send market plunging, boosting the US Dollar and hurting gold. Other notable events include the ECB and BoE rate decisions for the Euro and British Pound, respectively. What else is in store for markets in the week ahead?

From Daniel Dubrovsky, Senior Strategist (DailyFX)