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%.

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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

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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)

CB CONSUMER CONFIDENCE
The Conference Board Consumer Confidence Index® decreased in for a second month of declines. The Index now stands at 100.2 down from 102.2 in October.
DXY moves lower after the report, back towards the daily zone of support, formerly resistance.
The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—decreased to 137.4 from 138.7 last month.

The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—declined to 75.4 from 77.9.

Digging a little deeper into the Present Situation Index, expectations of ‘good’ economic conditions rose, while expectations of ‘bad’ economic conditions declined – revealing that the largest driver of the overall drop in the CB consumer confidence data came from pessimistic expectations for the short term (6 months).

Consumer confidence is believed to have declined on higher gas and food prices. This, added with increased signs of slowing economic activity by big ticket items like homes, sees overall conditions deteriorate. The US dollar continues to sway according to market sentiment after the November 10th US CPI print and continued to respond to news flow yesterday, rising higher as the Fed released its group of ‘hawks’ ahead of Fed Chair Powell’s anticipated appearance tomorrow.

IMMEDIATE US DOLLAR BASKET (DXY) REACTION
DXY breached above the daily range ahead of the data print and turned sharply lower in the moments after, back towards the prior zone of resistance (blue rectangle).

— Written by Richard Snow for DailyFX.com

The Australian Dollar had another crack higher last week, notching up a 2-month high of just under 68 cents before recoiling amid a US Dollar reclaiming the ascendency.

The rally unfolded in the aftermath of the US PPI missing forecasts early in the week, following on from a benign CPI print the week before. This appeared to lead to hopes in the market of the Federal Reserve stepping back from its aggressive tightening cycle,

As the week progressed, we heard from a procession of Fed Board members including Mary Daly, John Williams, Chris Waller and Neel Kashkari.

They all re-iterated the hawkish Fed script ahead of the chief cheerleader of the rate hike brigade, St. Louis Fed President James Bullard. He said, “the policy rate is not yet in a zone that may be considered sufficiently restrictive.”

Equities tanked and the US Dollar dusted itself off and moved to the higher ground going into the end of the week, putting AUD/USD under pressure.

Domestically, the unemployment rate came out on Thursday, and it remained at multi-generational lows of 3.4% in September. This was below the 3.5% rate anticipated.

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Among all the data and Fed speak the geopolitics of the Ukraine war added some volatility with a missile landing in Poland. Worries of an escalation in the conflict led to US Dollar buying to undermine AUD/USD.

The human cost of this battle cannot be overstated.

From an economic perspective, the conflict has illustrated that Russia is a direct competitor with many Australian exports.

Sanctions on Russia have seen Australia’s trade balance ramp up in 2022. The surplus of AUD 12,444 billion in September is a record. We will get the data for October in early December.

Ahead of that, the RBA will meet on Tuesday 6th December to decide on a cash rate target move. The market has priced in a possibility of a 25 basis point (bp) lift.

The next Fed meeting is on the 14th of December and there are expectations of a 50 bp hike from them. AUD/USD movements this week reflected the price action in AU-US yield spreads.

As the return From Treasury bonds increased more than Australian Commonwealth Government Bonds (ACGB), AUD/USD appeared to roll over at the same time.

This relationship might provide clues for the direction of the Aussie in the week ahead.

— Written by Daniel McCarthy, Strategist for DailyFX.com

Market sentiment notably improved this past week. On Wall Street, Nasdaq 100, S&P 500 and Dow Jones futures soared about 8.4%, 5.7% and 4.02%, respectively. This was some of the best performances in months. Risk appetite also improved around the world. The Dax 40, Nikkei 225 and Hang Seng soared 5.68%, 3.91% and 7.21%, respectively.

The key driver of sentiment last week was October’s US inflation report, where both the headline and core rate of CPI unexpectedly softened. Traders quickly pared back 2023 Fed rate hike bets as odds of a 75-basis point rate increase in December virtually disappeared overnight. The US Dollar tumbled as gold prices soared.

From a financial markets’ standpoint, this data overshadowed US mid-term elections, where expectations of a Republican ‘red wave’ faltered. Cryptocurrencies were in the hot seat last week amid FTX filing for bankruptcy after Binance walked away from a possible acquisition. Despite the surge in stocks, Bitcoin was down about 20 percent last week.

As far as economic event risk goes next week, the US will see more Fedspeak, PPI and retail sales data. Unexpectedly strong showings here may to a certain extent risk reversing some of the market moves to the CPI print last week. For the British Pound and Canadian Dollar, the UK and Canada will release inflation data.

Meanwhile, the group of G-20 nations will be meeting in Bali, Indonesia during the middle of the week. Tensions are high amid the war in Ukraine and ongoing high levels of inflation. Earnings season is also in play, with major retailers in focus such as Walmart and Home Depot. What else is in store for financial markets in the week ahead?

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US stock indexes finished the week with healthy gains despite ongoing bond market volatility that sent US rates to fresh multi-year highs. The benchmark 10-year Treasury yield rose as high as 4.335%, its highest level since November 2007. Equity traders weren’t all that phased by the moves, as higher rates effectively tighten financial conditions. That said, the need for further Federal Reserve action lessens—a tailwind for equity valuations. The S&P 500 Index, Nasdaq-100 and the Dow Jones Industrial Index finished the week with gains of 2.37%, 2.39% and 2.47%, respectively.

The US Dollar DXY Index took a breather last week, falling around 0.75% as the policy-sensitive 2-year yield lost steam. The Federal Reserve entered a blackout period on Saturday, which forbids FOMC members from commenting on monetary policy before the November 02 policy meeting. Rate traders see a terminal rate of around 5% early next year, leaving plenty of rate hikes on the table between now and then. The US is set to see updated purchasing managers’ indexes from S&P Global. US factory activity has remained stubbornly strong, with a Fed report stating that factory production utilization hit the highest level since 2000. The consensus estimate sees manufacturing PMI for October remaining in expansion territory at 51.0, according to a Bloomberg survey.

Chinese President Xi Jinping is expected to take the stage on Sunday, marking the start of a third term in office. That would be a precedent-breaking move that further consolidates his power and influence as “leader,” a revered term previously reserved for Mao Zedong, which has started circulating among his followers. The Chinese Yuan weakened around 0.5% against the Dollar, hitting a record low. Traders are keen to see GDP numbers due this week after the high-impact print was delayed last week. The Bloomberg consensus sees China’s third-quarter growth rate at 3.5% from the previous three-month period.
The Japanese Yen was nearly unchanged from last Friday after USD/JPY trimmed mid-week strength. A broadly weaker USD helped alleviate JPY pressure, but policymakers likely intervened after the exchange rate rose above the 150 level. A still-ultra-dovish Bank of Japan is casting doubts on the ability of Japan’s Ministry of Finance to hold the line against JPY shorts, although capitulation now would signal an embarrassing failure and likely see the Yen plummet. A Kobayashi Maru indeed.

Elsewhere, US natural gas prices plummeted over 23% as warmer weather across much of the Continental United States combined with a larger-than-expected US inventory build dashed supply shortage fears going into the winter months. Brent oil prices rose a modest 1.9%, while WTI crude slipped 0.6%. The US and global benchmarks remain on track to break a 4-month losing streak, although prices are still well off yearly highs.

It is an eventful week ahead in terms of rate decisions. On Wednesday, the Bank of Canada is expected to hike its benchmark lending rate by 75 basis points, according to overnight index swaps (OIS). Canadian inflation remains above estimates, with the latest core CPI reading at 5.4% in September solidified chances for a larger hike. The Canadian Dollar rose nearly 2% against the Greenback on the week. The European Central Bank (ECB) will announce its interest rate decision on Thursday. OIS pricing is showing an 89% chance for a 75-bps rate hike. EUR/USD rose around 1.5% last week.
（From Thomas Westwater）

CENTRAL BANK WATCH OVERVIEW:
The Bank of Canada is expected to raise rates by 50-bps when policymakers meet later this month.
While the Reserve Bank of Australia and Reserve Bank of New Zealand won’t meet again until November, both central banks are forecast to raise rates by 50-bps next month.
Retail trader positioning suggests that AUD/USD rates have a bearish bias, NZD/USD rates have a mixed bias, and USD/CAD rates have a bullish bias.
RATE HIKE PATH SLOWING
In this edition of Central Bank Watch, we’re examining the rates markets around the Bank of Canada, Reserve Bank of Australia, and Reserve Bank of New Zealand. After raising rates aggressively over the course of 2022 – frontloading rate hikes, if you will – the three commodity currency central banks appear poised to slowdown their pace of monetary policy tightening moving forward. Relative to the Federal Reserve’s still-aggressive intentions, this change in perception has been a negative development for the Australian, Canadian, and New Zealand Dollars.
RBA DISAPPOINTMENT WEIGHING ON AUSSIE
Recent comments by key Reserve Bank of Australia officials suggests that the central bank still has some ways to go in order to bring its main rate into neutral territory, the level as which monetary policy is neither expansionary nor contractionary. RBA Assistant Governor for Economics Luci Ellis remarks this week effectively pegged the neutral rate between 2.5% and 3.5%; currently, the RBA’s main rate is 2.6%. More tightening may be ahead, but it may come in more measured increments over the next few months.
According to Australia overnight index swaps (OIS), there is an 82% chance of a 25-bps rate hike in November and a 59% chance of a 25-bps rate hike in December. Rates markets are priced such that the RBA will bring its main rate to 2.997% by the end of 2022, which is a meaningful reduction from where markets were priced in early-September, when the main rate was expected to rise to 3.259% by the end of the year.
AUD/USD: Retail trader data shows 80.49% of traders are net-long with the ratio of traders long to short at 4.13 to 1. The number of traders net-long is 7.84% lower than yesterday and 1.35% higher from last week, while the number of traders net-short is 27.51% lower than yesterday and 6.14% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/USD prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bearish contrarian trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist

The US Dollar Index surged nearly 6.6% off the September lows with DXY stretching to multi-yearly highs this week. An outside-day reversal off uptrend resistance yesterday may be signaling the threat for topside exhaustion here and while the broader outlook remains constructive, immediate advance may be vulnerable in the day ahead. These are the updated technical targets and invalidation levels that matter on the US Dollar Index weekly price chart heading into the October / Q4 open. Review my latest Strategy Webinar for an in-depth breakdown of this DXY technical setup and more.
— Written by Michael Boutros, Technical Strategist with DailyFX