Clearly in focus this week are central banks, first and foremost the ECB and thereafter the Federal Reserve, as decisions come up for the continuance of their next steps in rapidly changing economic conditions. With new challenges facing the US regional banks, every trader is thinking about a pause in rate hikes likely to be considered by the Fed.
Investors will be tracking this week’s US CPI report for more information on future monetary policies as inflation figures and market sentiment play the pivotal roles.
US CPI Report: The Key to Market Sentiment, Wednesday
For this week, the US CPI release takes center stage on Wednesday. Inflation data is the key to determining how next week’s Fed may continue with its current interest rates, as recent stressors like pressure on regional banks are feeding rumors of a pause.
Economists expect headline CPI to slide from 6% to 5%, in reflection of slowing inflation. Attention will, however, also be on core CPI—which takes away volatile items such as food and energy—and if core is seen sticky, the Fed might find it difficult to shift policy stance.
A softer-than-expected CPI would give markets a much-needed boost and reinforce traders’ expectations of a rate hike pause. Hotter-than-expected inflation could reignite fears of a prolonged aggressive tightening cycle, leading to risk-off trading and stronger US dollar demand.
US Market Outlook: Technical Analysis (Monday)
The market calendar is thin, and so, Monday is expected to be a quiet session. Nevertheless, traders will eye market sentiment, especially after last week’s US Non-Farm Payroll. The figure is expected to continue leading the market mood and risk appetite.
US 30
The index that represents the largest cap stocks in the US stays bullish, aiming for the yearly high at 34,515. This level might act as a breakout point, with traders looking to maintain a bullish bias if the CPI data supports the pause in interest rate hikes.
For Monday, any price action will be mostly a function of the continuing market reaction to the NFP data. Having said that, a clear break above this important level may pave the way for additional upside.
Australian Retail Sales; Regional Focus (Tuesday)
The spotlight on Tuesday will be on the Australian retail sector, as retail sales data is released. The Australia 200 index might have greater volatility off the back of these numbers, as they will show how consumers are spending their money. The RBA surprised markets with a rate hike last week, so the retail data could influence future policy expectations. A strong result could encourage bids in the market, while weak data may heighten recession concerns and lead to market sell-offs.
The quadruple top pattern in the Australia 200 index monthly chart between 2021 and early 2023 provides a resistance zone between 7,654 and 7,592. This level will be important for traders to watch for potential reversals or breakouts.
US Dollar Index and Global Outlook (Wednesday)
The bilateral rectangle pattern set up for the US Dollar Index—between 105.8 and 102—will be one to watch amid a well-anticipated release of the US CPI. For now, closer to the lower end of that range, the DXY could extend further to the downside should the CPI surprise on the weak side; and the first line of support is set at 101 and, more importantly, the 50-month moving average coming in at 97.98.
On the other hand, a stronger CPI report may drive the DXY higher toward resistance around 102-103 levels.
Key levels to watch include:
- Support: 101 and 50-month moving average at 97.98
- Resistance: 105.8 and 102-103 Range
A big miss either way in the CPI could set the stage for significant dollar movements, one way or another, in cross-currency pairs as well as commodities.
BoE Interest Rate Decision and GBP Pairs (Thursday)
The BoE is expected to increase interest rates by 25 basis points, from 4.25% to 4.5%, in order to combat persistent inflation of around 10%. However, this move comes amid an economic slowdown, presenting a challenging environment for policymakers.
The GBP/USD has recently tested resistance at 1.2459, near 62% of 2022’s range. A successful breakout above this level could open up a test of 1.30, wherein the 50-month moving average stands at 1.2874. On the other hand, if the BoE’s move fails to inspire confidence, the pair could retreat to support levels near 1.24 and below.
Agricultural Commodities and the WASDE Report (Friday)
Friday’s focus will turn to agricultural commodities with the monthly USDA WASDE report, one of the most important reports that can show supply and demand for crops like corn, soybeans, and wheat. Of course, the most action will likely be in the corn market.
The beginning of the planting season along with the transition from La Niña to El Niño throughout the US will add potential weather excitement into the yield possibilities. Recently, corn futures have tested support around the $5.80 price and traders may look for confirmation for price direction based on the latest WASDE report. Resistance levels at between $6.25 – $6.43.
Conclusion
The week ahead is replete with fundamental economic data and central bank decisions that will no doubt shape market sentiment and price action. Not to overshadow the importance of US CPI, traders should also pay close attention to the banking space, UK GDP, and the BoE’s rate decision.
If that weren’t enough, the WASDE report adds another layer of possible volatility to the trade in agricultural commodities. Traders are advised to be nimble and watchful of changes that may occur, as new directions for global markets could emerge this week.
