Dollar regains poise, but Fed's Watch tool points at slower rate growth this year

Market Recap

• European equity markets open higher on Wednesday as the European Union is set to introduce new regulation for the financial sector.

• Nasdaq and S&P500 record intraday and closing highs on the first trading day of the year. Wall Street expects a strong year for equities

• USD regains some shine as euro takes a breather. EURUSD down 0.2% and AUDUSD down 0.175%.

• Gold slips a quarter percentage point overnight, giving back some of yesterday’s gain, but stays above 1310$ per ounce. Silver under pressure, down 0.65% following a 1.49% gain yesterday.

• Asian shares soared to record highs, lifted by strong risk- appetite driven by a batch of strong manufacturing data across the globe.

• Geopolitical tension lifted WTI Crude oil prices higher earlier, touching its best level since mid-2015. Prices rose on the news about violent protests in Iran, which have so far resulted in more than a dozen deaths. Despite concerns that the unrest would disrupt Iranian supply of oil, this has not yet materialized, relieving such fears.

The European session started with Swiss Retail Sales data at 09:15 but the most relevant data during the morning will be the German Unemployment Rate. The common currency is rallying as inflation in US is missing the Fed’s target, thus making it quite difficult that policymakers will adopt a hawkish approach this year. The FOMC Minutes is a guide to the future interest rate policy in the US, and after the 25-basis point hike of last month, the next rate hike will depend on the structural inflation rate, thus excluding transitory factors.  The financial community also is evaluating the approach that the next Fed Chairman, Jerome Powell, would adopt.

Chart of the day

After 3 rate hikes of 25 bps each during the last year (March, June and December) that lifted Fed Funds rate in the 125-150 bps range, the CME FedWatchtool gives a probability of another rate hike, based on futures contract, at the March meeting.

Technical Analysis

FTSE MIB Index (daily timeframe)

The Italian index found support on its 200-day moving average and made a bullish spike. It could make a pullback near 22,080, and if the index rises above this level it may rally to test the supply line that links lower highs, and a breakout could lift the gauge to its 2017 top at 23,133.  Below 21600, the stock index may retrace to 21,000. The bearish projection is of around 2,000 points below the lower band of the bullish channel that was broken in November, thus in the area 20,500.

DAX Index (daily timeframe)

The German stock index closed off its intraday lows and managed to remain above the static support 12,848. Above the psychological level 13,000 DAX could rally to test 13,100 and then the supply line near 13,300. Beneath yesterday’s low of 12,745 the gauge could slide to test its 200-day MA at 12,619 and then beneath this level it may test 12,500, the 61.8% Fibonacci retracement of the rally started in August.

EURUSD (Daily timeframe)

EURUSD pair’s bullish trend continues. Strong resistance is found at 1.2088. If the pair breaks that level, it will target 1.2234.  On the other hand, if pair trades below 1.1961 support, this will turn intraday bias to neutral and bring consolidation before staging another rally.

 

 XAUUSD (Daily timeframe)

XAUUSD continuous its upward trend. If gold breaks above 1322 resistance level, it will target 1331. We need to follow the resistance of 1322 carefully. Otherwise if XAUUSD stays below 1315 minor support level, it can pull back to 1300.