Articles

ECB’s de Guindos: No evidence of second round inflation effects

December 8, 2021 17:02   FXStreet   Market News  

European Central Bank (ECB) Vice President Luis de Guindos made some comments on the inflation outlook during his appearance on Wednesday.

Key quotes

“The current higher phase of inflation could last longer than earlier thought. “

“No evidence of second-round inflation effects.”

“Bottlenecks are likely to shift growth.”

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EUR/USD Outlook: Bulls at the mercy of USD price dynamics, focus shifts to US CPI on Friday

December 8, 2021 16:51   FXStreet   Market News  

  • A modest USD weakness assisted EUR/USD to gain some positive traction on Wednesday.
  • Geopolitical tensions, Fed rate hike bets should revive the USD demand and cap gains.
  • Investors might also refrain from placing aggressive bets ahead of the US CPI on Friday.

The EUR/USD pair regained positive traction on Wednesday and built on the previous day’s late rebound from a one-and-half-week low, around the 1.1230-25 region. Against the backdrop of a generally positive risk tone, retreating US Treasury bond yields undermined the safe-haven US dollar. This, in turn, was seen as a key factor that provided a modest lift to the major, though any meaningful recovery still seems elusive.

Investors turned cautious after US President Joe Biden threatened to impose economic and other measures on Russia if it invades Ukraine. This comes after the US recently announced that it would boycott the Winter Olympics in Beijing in protest of China’s alleged violations of human rights and actions against Muslims in Uyghur. Rising geopolitical tensions should keep a lid on any optimistic move in the financial markets.

Apart from this, firming expectations that the Fed would tighten its monetary policy sooner rather than later to contain rising inflationary pressures should act as a tailwind for the USD. Hence, the market focus will remain glued to the release of the US consumer inflation figures on Friday. The data will influence the Fed’s decision to taper its stimulus at a faster pace and set the stage for an eventual interest rate hike in 2022.

Heading into the key data risk, investors might prefer to wait on the sidelines and refrain from placing aggressive bets. This might further contribute to capping the upside for the major amid absent relevant market moving economic releases from the Eurozone. That said, a scheduled speech by the European Central Bank (ECB) President Christine Lagarde could influence the shared currency and provide some impetus to the EUR/USD pair.

Later during the early North American session, traders might take cues from the release of JOLTS Job Openings data from the US. Apart from this, the US bond yields, along with the broader market risk sentiment will drive the USD demand and produce some trading opportunities around the pair.

Technical outlook

From a technical perspective, the near-term bias remains tilted in favour of bearish traders and any subsequent move up might still be seen as a selling opportunity. The pair’s inability to move back above the 23.6% Fibonacci level of the 1.1692-1.1186 downfall validates the negative outlook. This, in turn, suggests that the intraday move up runs the risk of fizzling out rather quickly. Nevertheless, the pair remains on track to retest sub-1.1200 levels or the YTD low set on November 25.

This is followed by support near the 1.1170-65 resistance breakpoint, below which the pair could slide to the 1.1145 support area. The downward trajectory has the potential to drag the pair further towards the 1.1100 round-figure mark.

On the flip side, momentum beyond the 1.1300 mark is likely to confront stiff resistance near the post-NFP swing high, around the 1.1330-35 region. Some follow-through buying could push the pair back towards the 1.1380-85 resistance zone (38.2% Fibo. level) en-route the 1.1400 mark. The momentum could further get extended towards the next relevant hurdle, around the 1.1440 area or the 50% Fibo. level.

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ECB’s Kazaks sets high bar for Omicron-driven extra stimulus – Bloomberg

December 8, 2021 16:49   FXStreet   Market News  

In order to ramp up emergency stimulus, the new Omicron covid variant must have a significant damaging impact on the euro area economy, European Central Bank (ECB) Governing Council member Martins Kazaks said in a Bloomberg interview on Wednesday.

Key quotes

“At the current moment, we don’t know how the omicron variant will develop.”

“Unless it spills over into significant and large negative revisions to the outlook for growth, I don’t see that March — which the market has been expecting for some time and which we’ve been communicating in the past — should be changed.”

“If in February we see that it’s painful then, of course, we can change our views and that’s the issue of flexibility.”

“In my view, it’s possible both to restart PEPP or increase the envelope if it turns out to be necessary.”

“To exactly what level will it land in 2023-24, of course, there’s lots of uncertainty.”

“With little evidence that soaring prices are triggering wage increases that would risk entrenching faster inflation, “my baseline remains that it slides to below 2%.”

Market reaction

EUR/USD shrugs off these comments, as it continues to trade in a familiar range below 1.1300. The spot is up 0.16% on the day.

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US Consumer Inflation in 2022: The uninvited guest takes up residence

December 8, 2021 16:49   FXStreet   Market News  

  • US consumer prices race to 40-year highs in 2021.
  • Inflation forces a reversal of Federal Reserve policy.
  • COVID-19, lockdowns, supply and labor shortages and government liquidity are culprits.
  • Inflation prospects for 2022 depend on the economic changes from the pandemic.
  • US dollar will benefit from the Fed’s inflation conversion.

Inflation hit the American economy like a bolt from the blue in 2021. In January consumer prices were trundling along at 1.4% a year. The Federal Reserve’s warning the prior September in conjunction with its move to inflation-averaging, that prices might get a bit effusive in the second half as the base effect from the lockdowns played out, turned out to be accurate but wholly inadequate. 

The combination of pandemic induced labor and supply shortages, reviving consumer demand and massive monetary stimulus from Washington and the Federal Reserve, fueled a quadrupling of the Consumer Price Index (CPI) in just ten months. 

CPI

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Though the particulars of this year’s price surge were different than the two previous bouts of inflation, the steep and relatively brief surge in 1950 and 1951 and the prolonged bout in the 1970s, the logic is the same–more money chasing fewer goods. 

In 1948 the aftermath of the withdrawal of the enormous war-time spending and the return of millions of soldiers to the labor force fronted an 11-month recession and a collapse in consumer prices that reversed just as violently as it had begun. 

The Consumer Price Index (CPI, YoY) plunged to -3% in August 1949, peaked at 9.6% in April 1951 and by May 1952 was back at 1.8%. In total CPI spent 20 months, from August 1950 to March 1952 above 2%. 

The origin of the inflation in the 1960s and 1970s lay in Washington’s unwillingness to fund the Vietnam War and the extensive expansion of social programs without commensurate tax increases. Consumer prices crossed the 2% line in February 1966 and did not return to that level until April 1986, more than two decades later. In April 1980 CPI reached 14.6%, still the US record.

Paul Volker’s was appointed to head the Federal Reserve by President Jimmy Carter in August 1979. His implementation of monetarist theory, and the ensuing regime of high interest rates which reached 20% in 1980, eventually squeezed inflation out of the US economy. Despite the two recessions precipitated by the Fed’s rate policies, President Ronald Reagan, who replaced Carter in 1980, backed Volker throughout and the US economy turned in its best post-war performance in his second term.  

Central banks around the world imitated the success of the Fed in adopting strict inflation targets. When these rate policies were combined with the globalization of manufacturing that lowered prices, widened the competitive labor market beyond national borders, restraining wages, inflation commenced a long decline that saw it below 2% for most of the decade to 2020.

The question for analysts, government officials, business managers and consumers is which example of inflationary excess is the US economy likely to follow in 2022 and beyond. 

Before we venture an opinion let’s look at the origins of inflation as standardized by economic analysis. 

Inflation mechanics

Economists generally describe two paths of inflation causality: Cost -push inflation and demand-pull inflation.

Cost-push inflation occurs when retail prices rise due to increases in wages, raw materials and other manufacturing and production inputs. Companies raise consumer prices to cover their own increased costs. 

The lockdowns and subsequent reluctance of workers to return to employment have forced employers to raise wages. The shortage of workers has curtailed the mining and production of raw material and components. Higher wages and shortage pricing have been incorporated into producer expenses and retail prices.

Another good example is the year-long surge in oil prices which began their climb in November 2020 in response to the US presidential election of Joseph Biden. Oil is the industrialized world’s basic commodity. In one form or another, as feedstock or energy, oil is part of the production of almost every consumer good. The 98% rise in West Texas Intermediate (WTI) in the last year has affected every aspect of manufacturing and is a direct contributor to CPI in energy prices. 

Demand-pull inflation happens when the demand for a good or many goods outstrips the supply. It can occur when demand rises on a static supply or when supply falls. The reduction in production for many consumer goods due to labor and material shortages over the past year has made items scarce and more dear. At the same time, overall demand has risen as people first made up deferred consumption and second, with waning restrictions in many places, resumed normal purchasing. In the past decades the cheaper goods available from alternative usually overseas sources largely deprived retailers of pricing power. They could not increase their prices without risking a loss of market share.In the current global scarcity, that restraint has vanished.  

Two other factors often abet the inflationary impulse in consumer prices: fiscal largess and monetary stimulus. 

Governments at the federal and state level respond to economic hardship by sending money directly to the consumer. Whether extended unemployment benefits, direct subsidies for the pandemic, food stamps or the many other government programs, the purpose is to maintain consumption by giving consumers money. 

Fiscal stimulus from the Federal Reserve is also a common response to economic problems. The current incarnation is near zero interest rates for almost two years and a massive bond-buying program. These efforts operate at the market level, propping up equity, bond and housing prices. They do not directly affect consumer inflation as stock and home prices are not  considered in consumer indexes, though by providing a sense of wealth they contribute to a willingness to spend. 

Current inflation

The speed and extent of this year’s inflation is something the US has not seen in a generation.

The Consumer Price Index (YoY) was 6.2% in October and the six-month average was 5.5%. That is the highest monthly rate since 6.4% in October 1990. It is the fastest half-year of price gains since the six month beginning that October.

In the 12 months from November 2020 to October 2021, CPI rose 5%, from 1.2% to 6.2%. That is the quickest annual acceleration in inflation in 71 years. Even the great surges in CPI 1973 to 1975 and 1978 to 1980 had 12-month increases of 4.1% and 4.65% respectively.  

The Personal Consumption Expenditure Price Index (PCE for short), designed as it is to produce lower inflation numbers, has lagged CPI but at 5% in October is the highest rate in exactly the same 31 years since October 1990. 

Producer Prices, harbingers of future consumer inflation, are also setting records. October ‘s Producer Price Index  (PPI, YoY) was 8.6%, up an astonishing 7.8% since November 2020 and the all-time record for this series. 

Headline vs core inflation

The Federal Reserve uses the Core PCE rate in its measurement of US inflation, believing that it is a better representation of long-term price trends. 

Our concern is about the impact of inflation on consumer behavior and the US economy. For that, headline prices are more accurate for the simple reason they represent what consumers see and pay when they make their purchases. 

Current inflation causes 

Inflation’s sudden and virulent emergence this year was a product of price pressure from both sides of the supply and demand equation. 

From the producer’s cost side, the lockdowns and subsequent restrictions put many materials and components in short supply and raised prices dramatically. These increases took place against a background of soaring energy prices, a trend that predated the lockdowns, and whose origin had nothing to do with the pandemic. These price increases were passed on to retailers and consumers.   

Supply-chain problems, initially a matter of business closures, are now primarily one of workers shortages. Businesses cannot find the workers to fill their orders. Producers ran down what stockpiles they possessed. Many components, particularly the ubiquitous computer chips, remain in short supply keeping prices high and rising.  

The vulnerability of just-in-time production schedules to interrupted deliveries was an unpleasant surprise to businesses that have operated on that model for a generation. 

In order to secure employees, businesses have been forced to offer higher wages and signing bonuses. As payroll expenses are normally a business’s  largest line item, the additional cost to consumers is large. 

Annual Average Hourly Earnings (AHE) have averaged 4.3% for the six months to November about double the increase for the decade from 2010 to 2020. 

AHE

FXStreet

On the demand side consumption has remained surprisingly strong though most of the pandemic. First, after the lockdowns last year as deferred purchasing was resumed all at once, and lately as the restrictions have ended in most of the country and normal life returned. 

From August to November this year, Retail Sales climbed 0.58% each month. In 2019 the average gain for the entire year was 0.45%. 

Retail Sales

FXStreet

Personal Spending has increased 0.70% a month from August through November. In 2019, the last full year before the pandemic, this consumption measure averaged 0.36% monthly. 

As the unconstrained consumer has come up against the limited availability of goods, price increases have blossomed everywhere.  

For the first time since globalization became the order of the day, retailers and manufacturers have regained pricing power. In the past if a retailer or wholesaler wanted to raise prices, chances were that there was another outlet, often with an overseas source who was willing to undercut prices and gain sales. The name of the game was market share.

Now the product scarcity is worldwide. There is no alternative source for cars or computers or whatever is hard to find and companies can sell at their asking prices. 

Fiscal and monetary stimulus

Washington has poured more than $4 trillion into the economy, mostly in the form of grants directly to businesses and consumers. Unemployment insurance, pandemic stipends, food-stamps and a dozen other programs have kept cash flowing to families and individuals and this largess has helped to keep consumer spending strong. 

Retail Sales rose 7.6% in January and 10.7% in March, by far the largest gains this year, months of massive government pandemic rescue bills from Congress. 

The Federal Reserve has kept the fed funds rate at a record low of 0.25% for nearly two years. Its $120 billion a month of Treasury and mortgage-backed securities purchases have served to keep commercial rates near all-time lows since March of last year, offering business cheap and nearly inexhaustible funding.  

The Fed’s efforts have limited impact on consumers but are a large factor in asset markets and may have a minor wealth effect on consumption. Asset prices are not included in CPI or PCE measures and so their very evident inflation is not an official concern. 

Fiscal stimulus has been the greatest government factor in inflation. By giving consumers recurrent grants, demand has boosted in an economy suffering from widespread supply restrictions. 

Inflation in 2022: Supply and demand

The pandemic and the lockdowns that were instituted around the world in response have undone much of the old global order. The replacement is not yet at hand.

Supply chains will gradually unkink and the shortages, particularly of computer chips, that have inhibited automobile production and much else, will ease. Ports will gradually return to normal operation and the logistical delays that have inhibited production will end. 

Supply will improve but the pandemic saw the high point of the globalized production and distribution chains. The problems exposed by the pandemic will incur permanent changes.

Nations and manufacturers are now acutely aware of the dangers of sourcing many products exclusively overseas. The vulnerability of foreign factories for key medical, defense and even consumer products to the dictates of governments for whom the international aspects of their decisions are far less important than the national ones, is now painfully evident. 

The pandemic was global with most governments responding in a similar if not copycat fashion. When China shut factories and plants so did Europe and the United States in short order. Last year’s lockdown was worldwide.. 

It would not, however, be hard to imagine a more local crisis, say for the US and China over Taiwan. Would Beijing attempt to use its dominance of, for example, rare earth metals, as a lever against American and Taiwanese political interests? The danger of outsourcing whole crucial industries to competitors cannot be ignored. 

The coming redistribution of new plants away from political competitors and in some cases the repatriation of older institutions to the home country will keep supplies tight and costs higher for years. 

The assumption of the past thirty years that globalization is an unmitigated good has been overthrown. It will take years for a new equilibrium to take shape. The costs associated with the new manufacturing world will necessarily be higher than the old

A similar effect has been wrought on the labor market. 

Workers, to the puzzlement of many analysts, not the least at the Fed, have shown no rush to return to their old jobs. The labor shortage, like the supply crunch, is worldwide.

As we observed a year ago, (The Homeworking Revolution: Change accelerates for businesses, real estate and stock market ), the pandemic has instituted changes and fortified trends in employment and home work that were already taking place.  

The old world is not returning. There is no greater evidence of that than the more than 10 million jobs on offer in the US for more than six months. Workers are not  going back because it’s not necessary. The electronic world has created many other opportunities for professional and home life, and workers are flocking to the new paradigms. 

This does not mean that the old jobs will disappear. Some will be automated but the others, the welders, factory workers, machinists, and dozens of other skilled trades and physically demanding jobs will require higher pay. The pandemic has fostered an immense dislocation in the US labor market. It will take time and money to sort it out.

Inflation in 2022: Government spending

The US economy is, according to the Atlanta Fed, growing at an 8.6% annualized pace in the fourth quarter. Even if the economists are off by a factor of half, the US economy does not need trillions of dollars of deficit spending to recover from the pandemic. 

The $2 trillion infrastructure bill recently passed by Congress may help repair the nation’s bridges and tunnels, or whatever portion is actually headed to its stated purpose, but the resulting spending, which will inject real competitive dollars into an economy already suffering from scarcity induced price increases, must make inflation worse.

The inflation criticism applies even more so to the several trillions of additional spending being contemplated by Congress, which seems oblivious to the real inflation danger.

Inflation in 2022: Federal Reserve policy

Advancing the end of the Fed’s bond program from June to perhaps March, with two fed funds 0.25% hikes in the second half of the year will do little to restrain inflation. That particular genie is out of the bottle. Rates projections for 2023 and beyond are interesting but of little real consideration. 

Treasury rates have been unusually restrained despite the Fed’s clear intention to return to the inflation fight. That will change as the Fed’s seriousness becomes evident but interest rates start toward normalization from such a low level that any inflation impact is a year or more away. 

Inflation in 2022: Markets

Equities will not be deterred by inflation or by rising interest rates as long as the US and global economies continue to grow strongly. Treasury yields and the credit markets in general will follow the Fed once its policy is proven by action and not just commentary.  

The dollar’s direction is determined by the forward rate policy of the Fed and the US economy’s resurgent growth.

Inflation in 2022: Conclusion

The Fed’s initial inflation predictions of a quickly terminating base effect, had assumed that the economic world would quickly resume its original shape once the pandemic ended. 

Instead the pandemic has reshaped the world in unpredicted ways.

The changes in the global supply chain, manufacturing and distribution have only begun and the revisions and relocations will take time and money. The price pressures that began with shortages will continue and abate only slowly as the system reforms.  Labor markets are evolving  away from their industrial and office models and that change will also add to employee costs.

Even if Washington passes no additional pandemeic spending bills, there is more than enough money in the hopper waiting to be distributed to insure that too many dollars will be chasing too few goods for the next several quarters.  

At the beginning we asked if the brief 1950 or the prolonged 1970s inflation was the better model for this year and next. At the moment all indications are that the inflationary pressures are from specific and limited causes, not from a prolonged period of fiscal incontinence.  

Still, even in the brief inflation of 1950 and 1951, it took 20 months for prieces to return to their original state. That would extend the current prices excesses to the end of next year. 

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EUR/USD Price Analysis: Rebound remains capped below 21-DMA

December 8, 2021 16:40   FXStreet   Market News  

  • EUR/USD rises for the first time in three days but 21-DMA offers stiff resistance.
  • Falling Treasury yields keep EUR bulls hopeful amid a quiet session.
  • The EUR bulls need to defend the 1.1232 support on the daily sticks.

EUR/USD is attempting a bounce from weekly lows of 1.1227, although sellers continue to lurk at 1.1300 amid a lack of relevant economic data.

The main currency pair is hovering just shy of the 1.1300 mark, adding 0.23% on the day, as the risk-on flows driven US dollar weakness aids the rebound. Also, the renewed downside in the US Treasury yields adds to the dollar’s pullback, benefiting EUR/USD’s recovery.

Despite the uptick, EUR bulls remain cautious amid the divergent monetary policy outlook between the Fed and ECB, with Friday’s US inflation data likely to bolster the Fed’s tapering expectations.

From a short-term technical perspective, the spot is advancing but remains capped between the 21-Daily Moving Average (DMA) at 1.1315 on the upside.

Meanwhile, the downside remains cushioned by the rising trendline support on the daily sticks at 1.1232.

The 14-day Relative Strength Index (RSI) is trading flatlined below the 50.00 level, suggesting the risks remain skewed to the downside.

Therefore, daily closing below the abovementioned critical support will open floors for a retest of 1.1200.

The next stop for EUR bears is seen at the yearly lows of 1.1185.

EUR/USD: Daily chart

On the flip side, recapturing the 21-DMA is critical for unleashing the recovery towards the 1.1350 psychological level.

Further up, the 1.1400 round figure could be put to test.

EUR/USD: Additional levels to consider

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Top 3 Price Prediction Bitcoin, Ethereum, Ripple: Crypto markets recover, but BTC could ruin the party

December 8, 2021 16:40   FXStreet   Market News  

  • Bitcoin price continues to stride with $53,687 and $56,276 as its short-term targets.
  • Ethereum price pauses before retesting the $4,659, followed by the $4,777 hurdles.
  • Ripple price to face a declining resistance level before it retests $0.956.

Bitcoin price has been on a steady recovery phase after the recent flash crash. Ethereum and Ripple follow big crypto and are on their trajectories of retracement. The upswing for BTC is likely to continue, but investors need to note that a downswing might emerge such that a range forms.

Bitcoin price eyes higher highs

Bitcoin price is recovery from its December 4 crash and is currently hovering around $50,000 psychological level. This ascent comes as BTC tries to flip the inefficiency left by the bears during the recent sell-off.

While $53,687 is still the short-term resistance barrier BTC wants to tag, investors need to know that BTC might sweep the swing low at $46,698 and set a trading range. Although this might result in a brief correction, it can serve as an opportunity to accumulate for sidelined buyers.

Clearing $53,687 will open the path for Bitcoin price to tag the next level at $56,276. In total, this run-up would constitute an 11% ascent from the current position.

BTC/USD 4-hour chart

BTC/USD 4-hour chart

On the other hand, if Bitcoin price retraces to the extent that it produces a lower low below the December 4 swing low at $40,867, it will invalidate the bullish thesis.

Ethereum price promptly follows BTC

Ethereum price has rallied roughly 30% from its December 4 swing low at $3,370 and shows signs that it wants to go higher. The $4,493 resistance barrier is the first level ETH will encounter. Clearing this level will place $4,659 and $4,777 hurdles in its path.

Ethereum will easily tag these levels, but the holders should keep a close eye on the all-time high at $4,878, as ETH might revisit. In a highly bullish case, Ethereum price could extend beyond its record level and set up a new one at $5,000.

ETH/USD 4-hour chart

ETH/USD 4-hour chart

While things are looking up for Ethereum price, a failure to breach through the $4,493 hurdle could indicate a weakness among buyers. If ETH retraces lower and produces a lower low below $3,890, it will invalidate the bullish thesis.

Ripple price faces two hurdles

Ripple price has seen a considerable recovery, similar to Bitcoin and Ethereum. As it stands, the XRP price looks ready to tackle the bear trend line extending from November. Any uptick in buying pressure pushes the remittance token toward this barrier.

A decisive 4-hour candlestick close above this trend line at roughly $0.87 will set a higher high and confirm an uptrend. This move could attract sidelined buyers and propel XRP price to retest the $0.956 barrier.

In total, this climb would represent a 15% gain from the current position.

XRP/USD 4-hour chart

XRP/USD 4-hour chart

On the contrary, if Ripple price fails to slice through the declining trend line, it will suggest that the sellers are not done offloading. In this situation, the XRP price will knock on the $0.764 support level.

A breakdown of this barrier that produces a lower low will invalidate the bullish thesis for XRP.

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Cardano price in phenomenal buying zone as ADA targets $3

December 8, 2021 16:09   FXStreet   Market News  

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FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

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Decentraland price to drop again before MANA hits $5

December 8, 2021 16:09   FXStreet   Market News  

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

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AUD/USD eases from one-week top, holds above 0.7100 mark amid weaker USD

December 8, 2021 15:56   FXStreet   Market News  

  • AUD/USD struggled to preserve/capitalize on its early move to a one-week high.
  • Rising geopolitical tensions acted as a headwind for the perceived riskier aussie.
  • Retreating US bond yields undermined the USD and could help limit the downside.

The AUD/USD pair surrendered its intraday gains to a one-week high and was last seen hovering near the lower end of its daily trading range, around the 0.7120-15 region.

The pair built on this week’s strong recovery from the lowest level since November 2020 and gained some follow-through traction during the early part of the trading action on Wednesday. The uptick was supported by a modest US dollar weakness, though lacked follow-through buying and ran out of steam ahead of mid-0.7100s.

Relations between the US and Russia took a turn for the worse after US President Joe Biden threatened to impose economic and other measures on Russia if it invades Ukraine. This, in turn, kept a lid on the recent optimistic move in the financial markets and acted as a headwind for the perceived riskier Australian dollar.

Meanwhile, reviving safe-haven demand led to a fresh leg down in the US Treasury bond yields, which undermined the US dollar and helped limit the downside for the AUD/USD pair. That said, the prospects for a faster policy tightening by the Fed support prospects for the emergence of some USD dip-buying and warrant caution for bulls.

The markets have been pricing in the possibility for an eventual Fed liftoff in May 2022 amid worries about the persistent rise in inflationary pressures. Hence, the focus shifts to the release of the US CPI report on Friday, which will influence the Fed’s policy outlook and provide a fresh directional impetus to the AUD/USD pair.

In the meantime, the US bond yields will drive the USD demand and produce some short-term trading opportunities around the AUD/USD pair. Apart from this, traders will further take cues from geopolitical developments and the broader market risk sentiment amid absent relevant market moving economic releases from the US.

Technical levels to watch

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IC Markets Europe Fundamental Forecast | 8 December 2021

December 8, 2021 15:29   ICMarkets   Market News  

What happened across the Asia session?

BoJ will decide on the extension of its pandemic relief programmes in a couple of months. The central bank’s deputy governor added that the country’s outlook remains highly uncertain due to the emergence of Omicron.

What does it mean for the Europe and US Sessions?

Risk currencies are likely to lose favour going into the sessions, following sustained government alertness to the new covid variant, Omicron, despite early reports of its mild severity.

The yen is like to lag the Swiss franc in safe-haven demand, following a possible extension of supportive covid-related measures in Japan.

The Dollar Index (DXY) Update

Key news events today

JOLTS Job Openings, 2300 GMT

What can we expect from DXY today?

A continuation of consolidation for the greenback would be the most likely scenario, following another light calendar day. Focus would be maintained on the recent hawkishness reiterated by the members of the US Fed.

Central Bank Notes:

  • Taper at the pre-set pace of US15 billion per month from mid-November
  • Emphasised clear divide between tapering and rate lift-off
  • Next meeting on 15 December 2021

Next 24 Hours Bias

Mixed

Gold (XAU) Update

Key news events today

No major news events.

What can we expect from Gold today?

Advances in the precious metal, anticipated to be technically driven amid a lack of tier-one data from the US, is likely to be capped amid the overarching hawkishness from the US central bank. An upcoming US CPI data set release due on Friday may rock the boat.

Next 24 Hours Bias

Mixed

The Euro (EUR)

Key news events today

No major news events.

What can we expect from EUR today?

ECB’s Kazmir and Muller stated their views that inflation risks remain skewed to the upside, showing signs that the policymakers may move away from a ‘transitory’ view of the current elevated prices increases. A faster pace in removing the PEPP is on the cards.

Central Bank Notes:

  • Still see inflation declining in 2022 and staying below the 2% target in 2023
  • Stated that conditions for a rate lift-off would not be satisfied in the near future
  • Next meeting on 16 December 2021

Next 24 Hours Bias

Weak bullish

The Swiss Franc (CHF)

Key news events today

No major news events.

What can we expect from CHF today?

The sustained seven-day upper price range on the USD/CHF highlights that market fears over Omicron, despite reassurance from early reports on its mild severity, lingers. Any negative headline news on the new covid variant is likely to see the Swiss franc dominate its safe-haven counterparts again.

Central Bank Notes:

  • Reiterated pledge to intervene in FX market to counter upward pressure on CHF, which was classified as ‘highly valued’.
  • Keeping a close eye on mortgage lending and residential property prices.
  • Next meeting on 16 December 2021

Next 24 Hours Bias

Weak bullish

The Pound (GBP)

Key news events today

No major news events.

What can we expect from GBP today?

A light calendar day in terms of both, currency-specific news flow and data, is likely to see movement on the pound dependent on upcoming jobs data and central bank release for the greenback and loonie, respectively, during the last session of the trading day.

Central Bank Notes:

  • Perceived hawkishness in prior forward guidance turned to a dovish picture, with certainty for a rate hike in Q4 dropping significantly
  • Mid-term inflation expectations are still well-anchored
  • Next meeting on 16 December

Next 24 Hours Bias

Mixed

The Canadian Dollar (CAD)

Key news events today

BOC Rate Statement, 2300 GMT

Overnight Rate, 2300 GMT

What can we expect from CAD today?

The loonie is likely to see a continuation of the pricing-in of its strong economic data, easing concerns over Omicron and the currently rally in crude ahead of the BoC meeting later today.

Central Bank Notes:

  • Ended QE program and will only purchase to replace maturing bonds
  • Sees conditions for a rate hike to be satisfied around March 2022
  • Lowered projections for growth in 2021 and 2022; raised CPI forecasts for the same period
  • Next meeting on 8 December 2021

Next 24 Hours Bias

Strong bullish

Oil

Key news events today

No major news events.

What can we expect from Oil today?

According to the latest short-term energy outlook from the EIA, world oil demand growth is cut by 10,000 bpd for 2021 to 5.10 million bpd while the same measure is raised by 200,000 to 3.55 million bpd for 2022.

OPEC+ Notes:

  • The cartel agreed on a roadmap in July to gradually raise its collective output quota by 400,000 barrels per day every month from August to April next year.
  • Cuts 2021 demand forecast by 160k bpd; keeps 2022 figure at 4.2m bpd
  • Next meeting on 4 January 2022.

Next 24 Hours Bias

Weak bullish

Full Article

USD/JPY remains on the defensive below mid-113.00s, downside seems cushioned

December 8, 2021 15:27   FXStreet   Market News  

  • A combination of factors prompted some selling around USD/JPY on Wednesday.
  • Reviving safe-haven demand underpinned the JPY and exerted some pressure.
  • Retreating US bond yields weighed on the USD and contributed to the selling bias.
  • Hawkish Fed expectations should help limit the USD fall and lend some support.

The USD/JPY pair remained on the defensive through the early European session and was last seen trading with modest intraday losses, just below mid-113.00s.

The pair witnessed some selling on Wednesday and snapped two consecutive days of the winning streak that pushed spot prices to a one-week high, around the 113.75-80 region touched on Tuesday. Rising geopolitical tensions kept a lid on the recent optimistic move in the financial markets and benefitted the safe-haven Japanese yen.

The US recently announced that it would boycott the Winter Olympics in Beijing to protest China’s alleged violations of human rights and actions against Muslims in Uyghur. Similarly, relations between the US and Russia took a turn for the worse after US President Joe Biden threatened to impose economic and other measures on Russia if it invades Ukraine.

Bearish traders further took cues from retreating US Treasury bond yields, which undermined the US dollar. The USD downside, however, remained cushioned, at least for the time being, amid the prospects for a faster policy tightening by the Fed. This, in turn, warrants some caution positioning for any meaningful decline for the USD/JPY pair.

Investors seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. Hence, the market focus now shifts to the release of the US CPI report on Friday, which will influence the near-term USD price dynamics and provide a fresh directional impetus to the USD/JPY pair.

In the meantime, traders will take cues from the broader market risk sentiment to grab some short-term opportunities. Apart from this, the US bond yields will drive the USD demand and further provide some impetus to the USD/JPY pair amid absent relevant market moving economic releases.

Technical levels to watch

Full Article

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