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Solid data and more hawkish Fedspeak propel USD

Vantage Updated Updated Mon, 2024 February 5 10:38

Headlines

* US bond losses deepen; yields rise as stocks fall on ISM and Fed bets

* US dollar gains additional ground on strong US Services PMI

* RBA to hold as central bank watchers push bank on rate cut expectations

* AUD/USD looks depressed below 0.65 ahead of central bank meeting

FX: USD continued it burst higher after tracking sideways for a couple of weeks. Friday’s stellar jobs report and Fed Chair Powell’s pushback confirmation over the weekend have crushed March rate cut bets. There is now less than a 15% chance of this priced in by money markets. The technical upside breakout has been helped by positive seasonals too. Yesterday’s rebound in ISM Services added to dollar buying, though contradictions are evident in some of the employment data. Fedspeak was generally on the hawkish side. The next upside level is 104.68, a Fib level of the autumn drop.

EUR broke down with December’s low at 1.0723 and then the next Fib level at 1.0712 now in view. Higher US rates and wider spreads are hurting the single currency. Services and Composite PMI were left unchanged and still below 50, albeit with a modest improvement.

GBP underperformed reflecting broad USD strength. Prices look to have broken down decisively out of the recent multi-week range we have been highlighting. Support is now resistance at 1.26. The 200-day SMA is at 1.2561 with the next Fib level at 1.2459. Final PMI data was revised up with the composite the highest since May.

USD/JPY built on the strong move higher on Friday after the blowout NFP report. The January top at 148.80 is the first marker to hold above for more upside. Treasury yields have surged in the last two trading days.

AUD sunk below a major Fib level (61.8%) of the November rally at 0.65. All eyes are on the RBA meeting. USD/CAD popped up to the mid-January top at 1.3541. Next levels above are the 100-day SMA at 1.3555 and 1.3623. It’s a busy week of data for the loonie with the highlight being the jobs report on Friday.

Stocks: US equities started the week off in the red, though off their intraday lows. The benchmark S&P 500 lost 0.32% to settle at 4,943. The tech-laden Nasdaq 100 closed 0.17% lower to finish at 17,613. The Dow Jones underperformed, off 0.71% to settle at 38,380. Caterpillar was firmer despite mixed results while McDonald’s sank 3.8% on disappointing comparable sales. Boeing lost nearly 25 on more 737 issues. Tesla dropped 3.65% to multi-month lows on worries over rising competition and persistent pricing pressures. Nvidia rose 4.79% hitting a fresh all time high. Eli Lilly jumped over 6% ahead of its earnings release.

Asian futures are mixed. APAC stocks were mostly muted post-NFP and Powell’s comments saying a March rate cut is too soon. The ASX 200 was dragged lower by commodity-related sectors. Chinese stocks plunged to five-year lows before recovering. The securities regulator pledged to stabilise markets.

Gold suffered for a second day after Friday’s sell-off.  Prices dropped below the 50-day SMA at $2032.

Day Ahead – Does the RBA turn less hawkish?

The RBA is fully expected to keep the cash rate target unchanged at 4.35%. It will be the first meeting since a revamp and changes took effect. That means a switch to eight meetings per year from the previous 11. There will also be a press conference after each meeting an hour after the policy announcement. The quarterly Statement on Monetary Policy will now be released at the same time as the outcome of board meetings in February, May, August, and November instead of the following Friday.

The bank is likely to caution against premature easing in relation to markets that are pricing part of a rate cut by the May meeting. Expectations are for the RBA to highlight some progress on underlying inflation. But the bank will likely still indicate that readings over 4% y/y for weighted median and trimmed mean CPI remain too hot in relation to the 2–3% headline inflation target. The size of the push back should determine the bid in AUD.

Chart of the Day – Gold falls but still in range

Gold was a victim of the incredible jobs data in the US on Friday, which put more weight on Fed Chair Powell’s comments from two days earlier where he pushed back on March rate cut expectations.

Prices look to have found resistance around $2060 after retracing on Friday. There’s a near-term Fib level at $2019, then next support sits around the $2000 which is near the January low. Central bank pushback over recent weeks has seen bond yields jump. More hawkish Fedspeak will cement the bond yield retracement and potentially hamper any gold upside. Strong support should be around the mid-December lows and midpoint of the October rally at $1979.