• Prior -1.5%
• Market index 173.5 vs 191.6 prior
• Purchase index 140.7 vs 148.7 prior
• Refinance index 358.2 vs 437.6 prior
• 30-year mortgage rate 6.76% vs 6.83% prior

This article was written by Justin Low at www.forexlive.com.

The last two months can be characterised by the theme of sell the dollar, buy everything else. Upon coming back to the new year yesterday, we got a treat of the opposite. And then in trading today, we’re seeing more of the same once again. It’s hard to read into opening week flows at times but what if the price action we’re seeing is no fluke?

Are market players starting to realise that they have brought the euphoria a little too far at the end of last year?

Looking at broader markets today, the dollar is higher while almost everything else is lower. Stocks are struggling again as bonds are also offered i.e. higher yields, while we are seeing gold and Bitcoin also track lower on the day. What gives?

When you look at the CME Fedwatch tool here, the odds of a March rate cut have dwindled down to ~67% currently. Just a little over a week ago, it was ~85%. It points to some unwinding of the aggressive rate cut pricing by traders in recent weeks and if that continues, it looks like there may be more pain to come for risk trades.

In turn, that itself will set up the dollar for a stronger correction of sorts – especially if the FOMC meeting minutes today conforms to the thinking that the Fed is not preparing for such an early rate cut.

This article was written by Justin Low at www.forexlive.com.

Equities are feeling a bit of a squeeze once again for a second day running, as we are looking to see more of a retracement move to the price action in November and December. US futures are nudging lower with S&P 500 futures down 0.3% and Nasdaq futures down 0.4%. European indices are also seeing red now, down by 0.7% to 1.0% across the board. Ouch.

It’s now just stocks that are being squeezed at the moment though. Oil is down as well to test the $70 mark, threatening a break below its 200-week moving average of $70.83. The key technical level has been a major support for oil all through 2023, so that will be one to watch going into the weekly close this week.

Besides that, Bitcoin is also down over 1% to $44,580 and we are seeing the dollar catch more of a bid as well. It’s a case of traders reversing course from the sell the dollar, buy everything else in the past two months. That is the case as gold is also down 0.3% to $2,052 and 10-year Treasury yields up another 3 bps to 3.978% on the day.

This article was written by Justin Low at www.forexlive.com.

USD

• The Fed left interest rates unchanged as expected at the last meeting with a shift in
  the statement that indicated the end of the tightening cycle.
• The Summary of Economic Projections showed a
  downward revision to Growth and Core PCE in 2024 while the Unemployment Rate
  was left unchanged. Moreover, the Dot Plot was revised to show three rate cuts
  in 2024 compared to just two in the last projection.
• Fed Chair Powell didn’t push back against the strong dovish pricing
  and even said that they are focused on not making the mistake of holding rates
  high for too long.
• The latest US PCE missed expectations across the board with
  the Core 6-month annualised rate falling below the Fed’s target at 1.9%.
• The labour market has been softening via less job
  opportunities rather than more layoffs with the Initial Claims hovering around cycle lows and Continuing Claims
  remaining high.
• The latest ISM Manufacturing PMI missed expectations falling further into
  contraction, while the ISM Services PMI beat forecasts holding on in expansion.
• The market expects the Fed to start cutting rates
  in Q1 2024.

CAD

• The BoC kept the interest rate steady at
  5.00% as expected at the last meeting with
  the usual caveat that it’s prepared to raise the policy rate further if needed.
• BoC Governor Macklem recently has been leaning on a more
  neutral side and even started to talk about rate cuts although he remains
  uncertain on the timing.
• The latest Canadian CPI beat expectations across the board with
  the underlying inflation measures remaining elevated, which should give the BoC
  a reason to wait for more data before considering rate cuts.
• On the labour market side, the latest report beat expectations
  although the unemployment rate ticked higher again.
• The Canadian PMIs continue to fall
  further into contraction as the economy keeps on weakening amid restrictive
  monetary policy.
• The market expects the BoC to start
  cutting rates in Q2 2024.

USDCAD Technical Analysis –
Daily Timeframe

On the daily chart, we can see that USDCAD bounced
on the 1.32 handle and started to correct higher after an aggressive selloff in
the past few weeks. We can see that we have a good resistance zone
around the 1.3382 level where we can also find the confluence with the
50% Fibonacci retracement level
and the red 21 moving average. This is
where we can expect the sellers to step in again to target a new low.

USDCAD Technical Analysis –
4 hour Timeframe

On the 4 hour chart, we can see that the latest leg
lower diverged with the
MACD which is
generally a sign of weakening momentum often followed by pullbacks or
reversals. In this case, the target for the pullback should come right around
the resistance zone where we can expect the sellers to start piling in. If the
price breaks above the resistance zone, the bearish setup would be invalidated,
and the buyers will likely increase the bullish bets to start targeting the
1.36 handle.

USDCAD Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can see that from
a risk management perspective, late buyers might want to wait for a pullback
into the 1.3270 level where we can find the confluence of the recent swing
high, the 50% Fibonacci retracement level and the 4-hour 21 moving average.

Upcoming Events

This week is full of key economic data which will
culminate with the NFP report on Friday. We begin today with the US ISM
Manufacturing PMI and Job Openings and given the recent trends there could be
room for disappointment. Later in the day, we will get the release of the FOMC
Minutes, but it’s not expected to be market-moving given that it’s three weeks
old data. Tomorrow, we will have another slate of US labour market data with
the release of the US ADP and Jobless Claims figures. Finally, on Friday, we
conclude the week with the Canadian Jobs data, the NFP report and the ISM
Services PMI.

This article was written by FL Contributors at www.forexlive.com.

The recent upsurge in Houthi and
Hezbollah attacks on ships in the Red Sea has prompted the world’s two largest
container shipping lines, Moller-Maersk and Hapag-Lloyd, to halt transit.

Subsequently, two oil majors have
insisted on adding a clause to their contracts allowing them to divert their
vessels through Africa if they deem the waters near Yemen unsafe.

Now, most of the major shipping lines,
responsible for more than 60% of the world’s container transport, have given up
using the Bab-el-Mandeb Strait and the Suez Canal, respectively.

What
will be the result of all this?

Locally, this could turn into an economic disaster for Egypt. Thirty percent of the world’s container
traffic passes through the Suez Canal, generating some $10 billion a year in
tolls for Egypt.

In addition, the conflict in the
neighboring Gaza Strip threatens to disrupt tourist stocks and natural gas
imports. As a result, prices will rise in the country, while people’s incomes
will fall.

In the long term, this could lead to
social unrest.

On a larger scale, it could lead to
widespread trade disruption and increased logistics costs, triggering another
round of price hikes and forcing central banks to delay changes in monetary
policy.

What
do countries plan to do in response?

No one wants to jeopardize the progress
made in the fight against inflation. So, it is no surprise that the United States has officially
announced the launch of Operation Prosperity Guardian to ensure safe navigation
in the Red Sea.

To achieve this, an international naval
coalition comprising the United States, the United Kingdom, Canada, Italy,
France, the Netherlands, Spain, Seychelles, and Bahrain has formed.

These ships will escort merchant ships
and protect them from Houthi attacks.

In response to his U.S. counterpart
Austin’s announcement of the launch of an operation, Yemen’s Defense Minister
Al-Atifi declared, „We will turn the Red Sea into your graveyard.“

What
next?

The Houthis will continue to send drones
and rockets. These drones and missiles will be successfully intercepted 99% of
the time. However, unfortunately, 1% of the time, the targets will still be
hit.

Further down the road, this could become
a new trigger for the continuation of the bloody conflict. And there is a
possibility that, again against its will, Iran will sooner or later be drawn
into it.

What
should an investor do?

Usually, when the geopolitical situation
worsens, gold (XAUUSD) tends to benefit. Oil could also have seen a
significant rise, but the markets see no real reason to do so for now.

Yes, some 7 million barrels of oil pass
daily through the Red Sea from north to south and vice versa. If logistics were
to change for a long time, spot prices could rise by $3 to $4 per barrel.

The good news is that there is still
capacity to reroute shipments, so Goldman Sachs analysts do not expect the
situation in the Red Sea to have much influence on oil prices.

This article was written by FL Contributors at www.forexlive.com.