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.

In the final two months of last year, market players were convinced that the disinflation narrative is going to prevail and that major central banks are going to cut rates much sooner than anticipated. That resulted in aggressive pricing for rate cuts, which saw the dollar sink heavily alongside Treasury yields while risk trades ripped higher.

It settled on that note but on the first day of the new year, we’re running it all back again in reverse mode. The dollar is gaining solid ground now in European trading while stocks are seeing their opening day optimism get dashed quite badly.

EUR/USD is down 0.7% to 1.0970 while USD/CHF is up 1.1% on the day to 0.8501 currently. This comes as 10-year Treasury yields are holding higher by nearly 9 bps to 3.951%. As such, USD/JPY is also keeping in a solid spot as it is up 0.7% to 141.80 on the day.

It is just one of those things that tells you that if you’re thinking 2024 is going to be as straightforward as what markets have been saying at the end of last year, it certainly isn’t going to progress that smoothly. And that’s a big lesson that we already learned last year. Are we in for a repeat in 2024?

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

There was so much promise and hope for equities coming into the new year but we’re seeing all of that get dashed on opening day as the mood turns sour. US futures were little changed and marginally higher to start the session but are now down all the way amid a steep drop in the past hour or so.

S&P 500 futures are now down 0.7% with Nasdaq futures down 1.0% and Dow futures down 0.5% currently. That has also seen European indices erase their early gains as well with the Eurostoxx down 0.4%, DAX down 0.3% and CAC 40 down 0.4% on the day.

It is still early on but all of this is helping to see the dollar firm further across the board in a run against the supposed consensus outlook for 2024.

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

Last week, we saw a bit of a Christmas rally in the
Dow Jones, although some of the gains got erased in the final couple of days.
The market is all-in on the soft-landing trade with the Fed expected to cut
interest rates soon, the labour market coming into better balance and the
inflation rate on track to reach the 2% target by the end of the year. It’s
hard for the bears to fight the current positive sentiment, especially without
significant bearish catalysts, but such crowded trades are generally liable to
fast unwinding in case the prevailing narrative proves to be wrong, so the bulls
should be extra careful going forward.

Dow Jones Technical
Analysis – Daily Timeframe

On the daily chart, we can see that the Dow Jones continues
to print new all-time highs amid positive risk sentiment and the support from
the recent Fed’s pivot. From a risk management perspective, the buyers would be
better off waiting for a pullback into the most recent swing low around the
37070 level where they will also find the red 21 moving average for confluence.

Dow Jones Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can see that the
trendline has been defining the strong uptrend since last October. Last week
though, the price broke below the trendline, and
we can also notice that the latest leg higher diverged with
the MACD. This
is generally a sign of weakening momentum often followed by pullbacks or
reversals. This might be a confirmation that a deeper pullback into the 37070
level could be in the cards.

Dow Jones Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can see more
closely the current price action and the divergence with the MACD. The sellers should
pile in around these levels with a defined risk above the high to target a drop
into the 37070 level. The buyers, on the other hand, will likely lean on the
37070 level with a defined risk below it to position for a rally into another
all-time high.

Upcoming Events

This week is full of key economic data which will
culminate with the NFP report on Friday. We begin tomorrow with the 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. On Thursday, 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 NFP report and the ISM Services PMI.

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

It is only the Australian dollar that is sitting higher than the US dollar in trading so far today. Traders adopted a more risk-on approach early on but we have seen equities pare most of that gains in European morning trade as flows are slowly trickling back in to start the new year.

USD/JPY is up 0.5% to 141.60 while USD/CHF is up 0.7% to 0.8473 currently. The former is still shying away from a test of the 140.00 mark while the latter looks to be holding above the 0.8400 level after attempted breaks below that in thin trading last week.

Meanwhile, EUR/USD is down 0.3% to retest the 1.1000 level while GBP/USD is down 0.2% to 1.2700 after some back and forth action with the high earlier touching 1.2760. It is only AUD/USD that is up 0.1% to 0.6818 but off earlier highs in Asia of 0.6839 on the day.

In other markets, gold is starting off January on a solid note with price up 0.6% to $2,075 while oil is also up 2.5% to $73.43 at the moment. In the bond market, yields are higher with 10-year Treasury yields up over 7 bps to 3.935%. It is but a small bump higher as the downtrend since November remains intact for the most part.

In the equities space, European stocks were off to the races at the open but have cooled a fair bit with the Eurostoxx now up just 0.2%, DAX up 0.5%, and CAC 40 up 0.2% on the day.

It is a time where traders are settling in and getting back their groove, with flows returning after the holiday period. So, be mindful of looking too much into the trends we’re seeing. As a side note, just be wary that we also do have US non-farm payrolls on Friday to work through this week.

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

Last week, we saw a bit of a Christmas rally in the
S&P 500, although all the gains got erased in the final couple of days. The
market is all-in on the soft-landing trade with the Fed expected to cut
interest rates soon, the labour market coming into better balance and the
inflation rate on track to reach the 2% target by the end of the year. It’s
hard for the bears to fight the current positive sentiment, especially without
significant bearish catalysts, but such crowded trades are generally liable to
fast unwinding in case the prevailing narrative proves to be wrong, so the
bulls should be extra careful going forward.

S&P 500 Technical
Analysis – Daily Timeframe

On the daily chart, we can see that the S&P 500
is now roughly 1% away from the all-time high. This is truly incredible if we
think that it happened amid many headwinds like the second most aggressive
tightening in history and geopolitical attritions. From a risk management
perspective, the buyers would be better off waiting for a pullback into the
recent swing low around the 4700 level where we can also find the red 21 moving average for confluence.

S&P 500 Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can see that the
price has been trading inside a rising channel with the latest leg higher diverging with
the MACD. This
is generally a sign of weakening momentum often followed by pullbacks or
reversals. In this case, we should see a pullback into the lower bound of the
channel where the buyers will look to lean onto to position for a rally into
new all-time highs. A break below the channel and the 4700 level would
invalidate the bullish setup and likely trigger a selloff into the 4548 level.

S&P 500 Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can see more
closely the current price action with the recent fall erasing all the gains
from the Christmas rally. The buyers might want to split their position in half
as the price could bounce either on the lower bound of the channel or the 4700
level, where we have also the 38.2% Fibonacci
retracement level for confluence. The sellers, on the
other hand, will want to see the price breaking below the 4700 level to
position for a drop into the 4548 level.

Upcoming Events

This week is full of key economic data which will
culminate with the NFP report on Friday. We begin tomorrow with the 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. On Thursday, 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 NFP report and the ISM Services PMI.

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

UPCOMING EVENTS:

• Tuesday: China Caixin Manufacturing PMI, Canada Manufacturing
  PMI.
• Wednesday: Switzerland Manufacturing PMI, US ISM Manufacturing
  PMI, US Job Openings, FOMC Minutes.
• Thursday: China Caixin Services PMI, US Challenger Job Cuts,
  US ADP, US Jobless Claims, Canada Services PMI.
• Friday: Eurozone CPI, Canada Labour Market report, US NFP,
  US ISM Services PMI.

Wednesday

The US ISM Manufacturing PMI is expected
at 47.1 vs. 46.7 prior. The last
report saw the index falling further into
contraction in November and the general commentary was pretty grim. The negative
data continued in December with the US S&P
Global Manufacturing PMI missing
expectations and reaffirming the drag on the economy from the Manufacturing
sector.

The US Job Openings are expected at 8.850M
vs. 8.733M prior. The last
report saw Job Openings falling much more
than expected with the weakest reading since March 2021. The labour market continues
to soften via less jobs availability rather than more layoffs, which
coupled with the falling inflation rate, supports the soft-landing narrative. Such
episodes occur right before a recession though, so time will tell if the
“most crowded trade on Wall Street” was indeed the right one all along.

Thursday

The US ADP is expected to show 113K jobs
added in December compared to 103K in November. The last
report missed expectations and, of course,
we got a beat across the board in the NFP report a couple of days later. Although
this release is pretty useless to forecast the NFP number, it can be
market-moving and maybe give some broad insight into the US labour market.

The US Jobless Claims continue to be one
of the most important releases every week as it’s a timelier indicator on the
state of the US labour market. Initial Claims keep on hovering around cycle
lows, which shows us that layoffs have not picked up notably yet, but
Continuing Claims have been rising at a fast pace and that’s indicative of
people finding it harder to get another job after being laid off. This week
the consensus sees Initial Claims at 215K vs. 218K prior,
while Continuing Claims are expected at 1882K vs. 1875K prior.

Friday

The Eurozone Headline CPI Y/Y is expected
at 3.0% vs. 2.4% prior,
while the Core Y/Y measure is seen at 3.5% vs. 3.6% prior. The market is
pricing in around 160 bps worth of rate cuts in 2024 with the first 25 bps cut
coming in April. The ECB members have been pushing back against the aggressive
market pricing and the consensus among the officials is that they want to
wait for Q1 data before deciding if a rate cut in Q2 will indeed be warranted.
Looking at the M/M inflation readings, the ECB can already call it “mission
accomplished” and we could see the Y/Y inflation rates falling below 2% already
in Q2 2024.

The Canadian Labour Market report is
expected to show 12K jobs added in December vs. 24.9K in November
and the Unemployment Rate to rise further to 5.9% vs. 5.8% prior. This
report is unlikely to influence the January BoC decision as the central
bank might want to see more data in Q1 before deciding on the next move,
especially after the last hotter than expected inflation
report. If you want to know more about the
2024 outlook for Canada, you can read Adam’s articles on the BoC
and the Canadian
Dollar.

The
US NFP is expected to show163K jobs added in December compared to 199K in November and the Unemployment Rate to tick higher to 3.8% vs.
3.7% prior. The Average Hourly Earnings are seen cooling further with the Y/Y
measure expected at 3.9% vs. 4.0% prior and the M/M reading at 0.3% vs. 0.4%
prior. The major central banks have ended their tightening cycles, so the
markets’ reaction function has changed from “strong data equals more rate
hikes” to “strong data equals less rate cuts”.

The US ISM Services PMI is expected at
52.6 vs. 52.7 prior. The November
report beat forecasts as the US Services sector continues to remain
resilient given its lower sensitivity to rate hikes. This tendency was
reaffirmed further with the release of the December
S&P Global Services PMI were the data
beat expectations closing the year with the fastest growth since last
July.

This article was written by Giuseppe Dellamotta at www.forexlive.com.