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CPI dropped, market expects Fed to reduce rate hike in December

November 14, 2022

US stocks advanced higher on Friday, preserving their upside momentum and extending the rally amid a slowdown in inflation and the upbeat market mood on the last trading day of the week. The risk-on sentiment is mainly supported by the soft inflation data from the US and news of China easing the Covid-related restrictions, as the US Consumer Price Index (CPI) declined to 7.7% yearly in October.

The probability of a 50 basis points Fed rate hike in December jumped above 80% from 50% earlier in the week after the readings came in below market expectations. On top of that, China’s National Health Commission announced that they have decided to reduce the required quarantine times for travellers and people who had close contact with identified Covid cases, supporting the risk-positive market environment. On the Eurozone front, the hawkish stance from European Central Bank (ECB) policymakers acted as a tailwind for the Euro, as ECB member Robert Holtzman said he would vote for a 50 or 75 bps hike at the December meeting.

The benchmarks, S&P 500 and Dow Jones Industrial Average both advanced higher on Friday as the S&P 500 closed near session highs in the biggest weekly gain since June. The S&P 500 was up 0.9% daily and the Dow Jones Industrial Average also advanced slightly with a 0.1% gain for the day. Six out of eleven sectors in the S&P 500 stayed in positive territory as the Energy sector and the Communication Services sector are the best performing among all groups, rising 3.06% and 2.47%, respectively. The Nasdaq 100 meanwhile climbed the most with a 1.8% gain on Friday and the MSCI World index was up 1.9% for the day.

Main Pairs Movement

The US dollar tumbled sharply on Friday, extending its previous slide and dropped to a daily low below 106.5 in the late US trading session as the upbeat market mood continue to dominate financial markets. The expectations for a slowdown in the Federal Reserve (Fed) tightening cycle following the CPI release continued to exert bearish pressure on the greenback, which extended its losses to four consecutive weeks. Investors are beginning to price in a less hawkish Fed and a 50 bps rate hike in December.

GBP/USD advanced higher on Friday with a 0.97% gain after the cable appreciated to fresh multi-month highs above the 1.1850 mark amid upbeat UK data. On the UK front, the UK’s GDP contracted less than expected in Q3 and allowed the pair to extend its sharp two-day rally. Meanwhile, EUR/USD finished the week on a higher note and surged above the 1.0350 mark amid a weaker US dollar across the board. The pair was up almost 1.35% for the day.

Gold climbed higher with a 0.90% gain for the day after refreshing its two-month high and extended its rally towards the $1,770 mark during the late US session, as the release of a soft US Consumer Price Index in October weighed on the US Dollar and provided support for the precious metal. Meanwhile, WTI Oil advanced sharply with a 2.88% gain for the day following China’s easing Covid-19 restrictions.

Technical Analysis

EURUSD (4-Hour Chart)

The EURUSD has extended its rally and climbed to its highest level in three months above 1.0320 as of writing following the impressive gains on Thursday. The safe-haven US Dollar remains in its post-CPI downtrend as risk flows continue to dominate the financial markets ahead of the weekend. After the data from the US showed on Thursday that the annual Consumer Price Index (CPI) declined to 7.7% in October from 8.2% in September, the USD suffered heavy losses against its major rivals. The US Dollar Index dropped 2.3% on Thursday, registering one of the largest one-day losses of 2022.  Now, investors continued to scale back 75 basis points (bps) Federal Reserve (Fed) rate hike bets in December on soft inflation report and the benchmark 10-year US Treasury bond yield fell more than 10%. According to the CME FedWatch Tool, markets are currently pricing in an 80% chance of a smaller, 50 bps, rate hike at the last FOMC meeting of the year.

From the technical perspective, the four-hour scale RSI indicator dramatically extended advanced to the overbought zone 75 figured as of writing, suggesting that the pair was surrounded by strong upside traction and investors need to be cautious about any possible pullback soon. As for the Bollinger Bands, the pair was surging along with the upper band and the size between upper and lower bands became larger, signalling the pair amid a strong bullish tendency.

Resistance: 1.0615, 1.0774

Support: 1.0167, 0.9961, 0.9730

GBPUSD (4-Hour Chart)

The GBPUSD has preserved its bullish momentum and advanced toward the 1.1800 level as of writing, with risk flows continuing to impact asset valuations, the pair looks to extend its rally despite having turned overbought in the short term. The data published by the US Bureau of Labor Statistics revealed on Thursday that the Consumer Price Index declined to 7.7% yearly in October from 8.2% in September. Moreover, the Core CPI, which excluded food and volatile energy price, edged lower to 6.3% from 6.6%, coming in below the market expectation of 6.5%. The safe-haven greenback tumbled by more than 2% on Thursday, as investors assessed the soft inflation data as an opportunity to unwind USD longs. Apart from this, the UK’s Office for National Statistics reported that the Gross Domestic Product (GDP) expanded at an annualized rate of 2.4% in the third quarter. This print came in better than the market forecast of 2.1% and helped the Pound Sterling, which has already been benefiting from the improving market mood, gather more strength.

From the technical perspective, the four-hour scale RSI indicator dramatically extended and rallied to 70, the overbought area, figured as of writing. Is suggests that the pair was surrounded by a strong upside tilt and investors need to be careful about the expected pullback soon. As for the Bollinger Bands, the pair was moving upward along with the upper band and the size between the upper and lower bands became larger, signalling the pair amid strong upward momentum.

Resistance: 1.1438, 1.1623

Support: 1.1634, 1.1334, 1.1123

XAUUSD (4-Hour Chart)

Gold continues to push higher and traded above the $1760 mark for the first time in nearly three months on Friday, as investors cheer the soft US inflation report. The Consumer Price Index in the United States rose 7.7% YoY, down from 8.2% in September and clearly below the 8.0% consensus forecast. The CPI accelerated by only 0.4% on the month, down from 0.6% in September and core figures rose 0.3%, rather than the 0.5% expected. The highly anticipated economic release from the United States triggered a massive risk rally on increased expectations of a smaller rate hike by the US Federal Reserve (Fed) in December. Markets now price roughly an 81% probability of a 50 bps December Fed rate hike vs. odds of about 55% at the start of the week. Furthermore, the slump in the US Treasury bond yields and the dovish comments from the Federal Reserve policymakers on Thursday further exacerbated the pain in the greenback. The benchmark 10-year US Treasury bond yields plunged over 30 bps to 3.811%, falling below the psychological 4% level on the US CPI release. The sell-off in the US Treasury yields boded well for the non-interest-bearing Gold price.

From the technical perspective, the four-hour scale RSI indicator remained in the overbought zone of  78 figures as of writing, suggesting that the XAUUSD is amid crazily bullish momentum and investors need to notice any possible pullback. As for the Bollinger Bands, the gold was pricing along with the upper band, which is a signal that the yellow metal in the near-term would persist the positive traction.

Resistance: 1802, 1857

Support: 1748, 1702, 1660