The US PCE inflation report is arguably the event of the week, and with traders having vigorously sold the US dollar ahead of it I am left wondering if it is a case of ‘sell the rumour, buy the fact’ – especially if it comes on hot. And with AUD/USD and gold stalling around key levels on Wednesday, the potential for mean reversion seems apparent.
By :Matt Simpson, Market Analyst
Market Summary:
- US growth expanded at its fastest pace in nearly two years, with the 2nd estimate of annualised GDP being upgraded to 5.2% from 4.9%. GDP sales was up to 3.7% from 3.5%, although consumer spending was downgraded to 3.6% from 4%.
- Inflation was also downgraded with core PCE at 2.3% from 2.4% and PE now 2.8% from 2.9%.
- US bond prices are on track for their best month since 2008 which saw yield continue to decline, as hopes of a Fed pivot continue to be priced in with Fed Fund futures now implying a 48.4% chance of a cut in May.
- The US OIS (overnight index) curve was broadly lower with the 1-year OIS fast approaching 5% on expectations of a Fed cut.
- Despite lower yields, Wall Street failed to hold on to earlier gains and fell for arguable oversold levels, which suggests APAC equity markets may also be in for a weak session.
- Gold briefly tapped $2050 before retracing during a low volatility session, which to me suggests bulls are losing their grip and may want to be cautious around thee highs if trading on lower timeframes. Given its close proximity to record high, a retracement from here wouldn’t come as a surprise – especially if US inflation data is not as soft as liked.
- Whilst the US dollar was weaker during the Asian session, EUR/USD met resistance at its 200-week EMA and soft inflation data from Germany sent EUR/USD slightly lower for the day / DXY higher
- EUR/USD initially rose to a 16-week high during yesterday’s Asian session but met resistance at its 200-week EMA, then closed the day with a small bearish hammer after German inflation came in softer than expected
- Billionaire fund manager Bill Ackman appeared to be talking his book again earlier this week by saying he suspects Fed could arrive as soon as Q2 (lower rates are usually beneficial for bond prices, which he hinted he was long on a few weeks ago)
- The RBNZ held their cash rate at 5.5% as expected, although their statement was deemed hawkish with reference to inflation being “too high” in the first paragraph, sending NZD pairs broadly higher.
- The hawkish RBNZ statement and softer AU inflation report saw AUD/NZD fall to a 6-week low during its worst day in eight months
- AUD/USD also reversed almost perfectly at trend resistance after a false break above the Q3 open. And a hot US PCE report could see some more mean reversion kick in for AUD/USD.
Events in focus (AEDT):
- 10:50 – Japan’s industrial production, retail sales, foreign investment in bonds and stocks
- 11:00 – New Zaland’s business confidence (ANZ)
- 11:30 – Australian building approvals, housing credit, building capex
- 12:00 – South Korea interest rate decision
- 12:30 – BOJ member Nakamura speaks
- 12:30 – China’s manufacturing, services, composite PMIs (NBS)
- 16:00 – Japan’s construction orders, household confidence, housing starts
- 18:00 – UK house price index, German retail sales
- 21:00 – Euro CPI
- 00:30 – US PCE inflation, jobless claims
AUD/USD technical analysis (chart):
I’ve been conscious of the potential for the rally on AUD/USD to lose steam, given it has risen over 6% since the late October low. So that fact we have seen a 2-bar bearish reversal around trend resistance and the Q3 open price after RSI had tapped oversold has piqued my bearish interest. At a minimum I suspect some mean reversion back to its 200-EMA around 0.6570 could be on the cards, so any low volatility moves higher within yesterday’s range could be an opportunity for bears to fade into, while prices remains beneath yesterday’s high.
Gold technical analysis (chart):
Gold has done a decent jo of keeping me on the sideline, as I incorrectly thought it may have had a pullback from the 1985 – 2000 area before its next leg higher. Instead, it broke higher. However, now we have seen a false break of $2050 with a small bearish hammer, alongside an overbought RSI with a bearish divergence – I now see a higher chance of some mean reversion. Although it likely requires a hot CPI report from the US.
The $1990 – $2000 will likely provide solid support given the amount of trading activity, although I’m not yet convinced we’ll see it retrace so far unless inflation points the wrong way. Overall, my bias is for a retest and eventual break above the record highs, but an initial pullback seems plausible.
View the full economic calendar
– Written by Matt Simpson
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