The beginning of the week observed the Reserve Bank of Australia (RBA) increase the Cash Rate by 25 basis points to 3.10% from 2.85%—the highest level since late 2012. This, its last meeting of 2022, is also the central bank’s 8^th consecutive rate hike this year. Key points from the RBA’s December statement were that the board expects to continue hiking rates, though did note that it is not on a predetermined course. Additionally, the board believes Aussie inflation is likely to continue heading north until around the 8% mark. The Bank of Canada (BoC) then seized the spotlight on Wednesday, increasing the target for the Overnight Rate by 50 basis points to 4.25% from 3.75% and noted the central bank will continue quantitative tightening. This is its 7^th consecutive rate hike and is the highest policy level seen in nearly 15 years, pulling the interest rate an eye-popping 400 basis points this year to tackle soaring inflation far beyond the central bank’s target.

Friday was an interesting one for the US. Following a stronger-than-expected ISM services print of 56.5 earlier in the week (a contrast to the prior week’s ISM manufacturing reading of 49.0), US Producer Price Index (PPI) inflation rose 7.4% on a year-over-year basis, marking a fifth consecutive slowdown since reaching 11.2% in June. Although lower than previous, the key observation is the release came in above the economists’ forecast range of 7.3% and 7.0%.

The week ended with the preliminary University of Michigan (UoM) consumer sentiment data, rising to 59.1 in December and beating both previous and forecast figures (56.8 and 56.9 respectively). According to several economists, the jump in consumer confidence is due to easing gas prices. The UoM’s yearly inflation expectations also fell to 4.6% from 4.9% in the month of December and is the lowest reading in 15 months, according to the report.

Blockbuster Economic Week Ahead

It is a busy one for the financial markets this week as four major central banks are poised to hike rates.

In the US, ahead of the Federal Reserve’s rate decision on Wednesday, consumer price inflation (Consumer Prices Index [CPI]) is released on Tuesday. Since topping at 9.1%, annual US inflation has slowed for four consecutive months to 7.7%, with economists expecting (current median forecast) inflation to slow once again to 7.3% in November. Core inflation, which excludes food and energy, is also anticipated to soften to 6.1% in November. October’s core inflation data (6.3%) influenced heavy-handed dollar softness as well as dragging US Treasury yields south. The benchmark 10-year note closed under 4.0% and has since fell 40 basis points to a low of 3.4% clocked last week.

The release of better-than-expected US data last week calls into question that the Fed may begin slowing the pace of monetary tightening as soon as December. According to the Fed Funds futures market, however, at the time of writing, a 78.2% probability of a 50 basis-point increase is seen, movement that would bring the target range for the Federal Funds rate to between 4.25% and 4.5%.

(CME FedWatch Tool)

Across the pond in the UK, the Bank of England (BoE) are back in the spotlight this week on Thursday, expected to lift the Bank Rate another 50 basis points, according to short-term interest rate derivatives markets (a 90.9% probability of a 50 basis-point increase is currently priced in). Note that the central bank hiked the interest rate by a mammoth 75 basis points in November, hauling the Bank Rate to 3.0%.

UK inflation is due to be released a day ahead of Thursday’s interest rate decision, with annual inflation anticipated to slow to 10.9% on a year-over-year basis from October’s 11.1% annual reading. Nevertheless, the current economist forecast range resides between 11.5% and 10.6%.

In addition to the Fed (Wednesday) and the BoE (Thursday), we have the SNB (Swiss National Bank) and the ECB (European Central Bank) interest rate decisions to look forward to on Thursday.

Technical View for Key Markets this Week

Charts: TradingView

US Dollar Index: Comfortable South of its 200-Day Simple Moving Average

Daily Timeframe

It is always a good idea to begin with the US dollar’s position in the currency space, in particular the US Dollar Index: a geometrically weighted average of the US dollar’s value against six foreign currencies. Note that not only is the euro the world’s second most traded currency in the FX market, it makes up approximately 57.6% of the Dollar Index’s value.

The Dollar Index concluded the week off best levels, pulling back from the 200-day simple moving average at 105.74. The research team wrote about the position of the USD in previous reports, noting the index respecting the lower side of its 200-day SMA (mean reversion traders, maybe?). It was also communicated in recent writing that the trend on the daily scale favours sellers. Aside from the price drop under the 200-day SMA offering a bearish indication, price structure forging a series of lower lows and lower highs since peaking at 114.78 bolsters a bearish stance. Further, we can see that the 50-day SMA at 109.28 flattened out in mid-November and subsequently rotated south (the dynamic value pointed higher since June 2021). Further declines for the moving average could form what technicians will recognise as a Death Cross: the 50-day SMA crossing under the 200-day SMA: action suggesting the possibility of a longer-term downtrend.

Further selling on the daily timeframe this week shines the technical spotlight as far south as support from 102.36, complemented by a 61.8% Fibonacci retracement ratio at 102.34 as well as a 50.0% retracement at 102.18.

From the relative strength index (RSI), the indicator’s value is seen rejecting channel resistance, extended from the high 78.21, merging with additional indicator resistance residing at 41.42. It should also be noted that we are nearing oversold, which could eventually prompt a dollar rebound. Though it is important to remember that the momentum gauge can remain oversold for prolonged periods in downtrends and produce a number of false signals.

What does the above analysis mean for the buck this week?

If sellers can maintain position south of the 200-day SMA, this is likely to remain a sellers’ market, with swing (and short-term) traders perhaps selling into any rallies and targeting 102.36 support structure.

EUR/USD: DXY South; Euro North?

It was a muted week for Europe’s single currency. Against the US dollar, the weekly chart shows price fashioned a clear-cut doji indecision candle.

With the US Dollar Index poised to navigate lower terrain, the EUR/USD, technically speaking, is set to dethrone daily resistance from $1.0602 and continue its advance this week. This is bolstered by scope to climb north on the weekly scale to resistance at $1.0778: a Quasimodo support-turned resistance formation. However, it is important to note that the overall trend for the pair has been lower since early 2021 and the recent (albeit sizeable) pullback from 28 September low at $0.9536 could simply be just that: a pullback within the downtrend.

Of technical relevance on the daily timeframe, however, the currency pair forged a series of higher highs and higher lows since pencilling in the noted bottom on 28 September. This, together with the breach of trendline resistance, extended from the high $1.1495, as well as the 200-day simple moving average ($1.0351), suggests an early trend reversal is underway. Standing in the way of additional outperformance is daily resistance mentioned above at $1.0602. Clearance of the aforementioned base paves the way for an approach to prime resistance coming in at $1.0954-1.0864, set just north of the weekly resistance also noted above at $1.0778.

As for the relative strength index (RSI), we do see mild negative divergence as the indicator levels off just ahead of overbought space. A break of the indicator’s channel support (drawn from the low 25.12) would help validate the aforementioned divergence. Alternatively, chart pattern enthusiasts may take any break seen below the nearby ascending triangle pattern’s lower boundary as additional confirmation, drawn from the low 58.58.

As a result of the above analysis, in line with a possible fall in the greenback this week, chart studies indicate EUR/USD bulls may go on the offensive and absorb daily resistance at $1.0602 for further upside.

S&P 500: Vulnerable Support?

Daily Timeframe

The S&P 500 ended the week lower by 3.4%, comfortably snapping a two-week winning streak.

It is all about support at 3,938 this week, a level welcoming price action on Tuesday. The support was brought into view following a reaction from a combination of technical resistances, including two trendlines and a nearby 100% projection (AB=CD bearish pattern) at 4,116.

The response from the aforesaid support has been somewhat lacklustre, suggesting that the Quasimodo resistance-turned support could greet price at 3,887. You may also note that the relative strength index (RSI) is testing the mettle of the 50.00 centreline, a base that held firm at the beginning of November. The point is should this level give way, this informs market participants that average losses are then exceeding average gains: negative momentum.

Where are we in terms of the trend?

We are seeing early signs of an uptrend on the daily chart in price structure. However, the index failing to find acceptance north of the 200-day simple moving average at 4,037 is a concerning sign.

Therefore, going on the above analysis, price support mentioned above at 3,938 and 3,887 will likely be closely watched this week for a break. Support as far south as 3,551 could subsequently be targeted by breakout sellers.

XAU/USD: Things are Looking Up for the Yellow Metal?

Daily Timeframe

Against the US dollar, gold ended the week unchanged, though failed to produce a doji candle given the unit finished considerably off worst levels. This followed the prior week’s 2.5% ascent.

Has the trend changed for the price of gold?

According to the price structure, it has. Following a triple-bottom pattern off support at $1,623, and a break of trendline resistance (taken from the high $2,070) and the 50-day simple moving average (which has since turned higher at $1,711), along with a defined higher high/low, the precious metal is testing the grip of the 200-day simple moving average. Currently fluctuating around $1,792, price failed to derail the dynamic value at the beginning of December, yet ended last week closing marginally north.

Quasimodo support-turned resistance at $1,828 is overhead, shadowed by resistance coming in at $1,871. Should price dip south this week, the decision point from $1,701-1,722 could be thrown back into the light, arranged just beyond the higher low forged at $1,727.

The relative strength index (RSI) is interesting, bounded between indicator support from 60.00 and the underside of the overbought threshold at 70.00. We also see channel resistance overhead should the indicator voyage north, extended from the high 59.51.

Given the Dollar Index analysis suggests USD softness, this could underpin XAU/USD this week, helping to cement a position above the 200-day SMA to target $1,828 resistance.

BTC/USD: Rangebound

Daily Timeframe

The price of bitcoin against the US dollar (BTC/USD) has been entrenched within a downtrend since topping in late 2021. Since mid-November this year, nonetheless, after touching gloves with a pattern profit objective at $15,523 derived from a bearish pennant formed in May (forged between $25,338 and $31,418), volatility has markedly decreased.

Technicians may also note that the crypto has traded south of the 200-day simple moving average at $21,007 since the beginning of this year and we saw the 50-day simple moving average ($17,997) cross under the 200-day SMA in mid-January (signalling a longer-term downtrend: Death Cross). Consequently, it is safe to say that this market is trending south, and selling rallies is likely to remain the dominant strategy for many BTC/USD traders and investors.

Overhead, resistance calls for attention at $18,099 (joined by a 50-day SMA and the relative strength index [RSI] 50.00 centreline resistance), followed by $20,000. Should the unit push through $15,523, as suggested by the underlying trend, $12,216 is a visible support, a 100% projection which represents an AB=CD bullish formation. Also of note, between mid-June and mid-August, we welcomed a bearish flag pattern (extended from between $17.567 and $21,711), which recognises a pattern profit objective (green) as far south as $7,674.

Therefore, given the clear-cut downtrend, it should not surprise to see $15,523 eventually cleared and perhaps a test of $12,216.

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