Markets Are Post-Euphoric Amid CPI Data | Daily Market Analysis

Key events:

• Canada – Core Retail Sales (MoM) (Sep)
• USA – FOMC Member Bullard Speaks     
• USA – API Weekly Crude Oil Stock

The past week could be called a parade of inflation indicators. A key parameter now for asset positioning and central bank policy going forward. The Producer Price Index (PPI) in the U.S. in October showed a decline to 8% from the previous value of 8.4%. The market took this with enthusiasm as a continuation of the sensational consumer price index (CPI) decline to 7.7% and confirmation of the prospect of a slowdown in the Fed's rate hike. But the joy for the senior partner was not supported by data from the Old World. The UK CPI rose to 11.1% from 10.1%, and the eurozone CPI rose to 10.6% from 9.9%.

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And it seemed to be a harbinger of rate hikes by the Bank of England and the ECB, which would strengthen their currencies and keep the dollar on a downward spiral. But their inflation is too frighteningly high, foreshadowing an economic slowdown. Moreover, the finance minister of Great Britain said on November 17 that the kingdom has already entered recession. And forcing European central banks to raise rates to combat rising prices only increases these risks. Therefore, the prospect of tighter regulatory policies is not helping the euro and the pound by limiting the decline in the overall DXY dollar index.

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Conversely, looming economic cataclysms and strong European inflation make the dollar more attractive as a defensive asset. Even though there may well be a recession in the U.S. itself. The release of the data about the decline of retail sales in the USA in October to 6,37% from 8,59% reminded of it once again this week.

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Besides, in any case, the pace and size of the Fed's rate hike, even with the prospect of a slowdown, will still be higher than that of other regulators.

Such considerations lead to the growth of U.S. treasury yields. After falling to 3.67% on the U.S. inflation data, it ended the week at 3.83% for 10 years.

The market has realized that the danger is yet to come, having abandoned the optimism of the first half of November.

The S&P 500 has been sinking recently to this 3910-bp level. After a slight rise we should expect it to rise to this level again and below, to 3800-bp. The DXY index has really started rising from 106.2 to 107.4 in recent days, i.e. buying would be profitable. A "hammer" reversal pattern has been formed on its chart on a serious weekly time frame.

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This "hammer" pattern may continue to hit risks. It reverses upward before reaching strong support at 104.4, the prior weekly low, and the 50% Fibonacci zone from the last upside momentum since January 2022. We maintain our forecast of the index climbing to 108 p. for now. And then, perhaps, to 110 p.

The same as for the currency pairs. EUR/USD, as expected, went down to 1.0250, almost to the indicated target, showing a "shooting star" pattern on the weekly chart, with the targets going down. The next technical target is 1.0180. The USD/JPY interrupted a four-week fall and rose to 140.80, and it is also moving towards the mentioned targets. The pound against the dollar also showed a "falling star" on the W1, turning down around 1.18. The target of 1.16 remains.