13 February 2023

Weekly Outlook - US Inflation Expected to Continue Trending Lower

Technical Analysis

Fed's Powell delivered a sobering message to markets, insisting that the Fed could continue to hike if jobs and inflation data don't reach the target. The latest US CPI figures are on tap while waiting for the formal announcement of the new BOJ governor.

3 Top Stories for the Week Ahead

  • New BOJ might be announced Tuesday

  • US Inflation expected to keep falling Tuesday

  • UK CPI expected to remain stuck in double digits Wednesday

Japan PM Readies Kuroda Replacement 

Press reports on Friday suggested that a relatively unknown former BOJ official Kazuo Ueda, who hasn't made a public comment on monetary policy in over ten years, is the front-runner to replace Kuroda as head of the central bank. The news came after Deputy Governor Amamiya reportedly refused the post. The formal announcement is expected on Tuesday.

Ueda hasn't made a public comment on monetary policy in over ten years, and on that occasion, he criticised the easing policy. The initial announcement led to substantial yen strength. But in an online interview, Ueda said he supported the current policy and should continue. Markets could be shaky until the formal announcement as investors try to determine just how hawkish or dovish he is.

In the aftermath of the announcement, CADJPY could head towards triple digits if bulls recapture 99.32. There, we will either see a rejection for a pullback, reversal, or renewed attempt at 101.20. Breaking higher will increase the chances of completing the inverse head-and-shoulders. On the other hand, losing 96.00 could diminish the probability of a pullback and open the door towards 95.30. If the low holds, a larger head-and-shoulders pattern could be in the making, with a right shoulder at the same level as the left.

Tradingview Chart: CADJPY

US Inflation Expected to Keep Falling
US headline inflation is expected to drop to 6.3% from 6.5% in December, but notably, the core rate is expected to fall slightly faster to 5.4% from 5.7% prior. Jerome Powell's latest statements suggest the Fed is more data-dependent in considering how many rate hikes will be needed before reaching a plateau. Later in the week, the US will also report Monthly PPI, expected to remain negative at -0.3% monthly, compared to -0.5% prior.

Aussie failed to get through the 70-cent threshold in its recent attempt up, potentially forming the right shoulder on a head-and-shoulders pattern. There is a potential of yet another spike the left shoulder's high of $0.7077, but that would most probably depend on the CPI data. If core or headline inflation misses expectations, the chances of a higher right-shoulder peak will increase, as will the probability of pattern invalidation and a leg at $0.7160. But if inflation shows signs of strength, the $0.6858 base could break loose, making its way towards $0.6630.

Tradingview Chart: AUDUSD

UK Inflation Expected Lower, But in Double Digits

UK headline CPI is expected to come down slightly on an annual basis to 10.3% from 10.5% prior. But the monthly figure is expected to shift to deflationary at -0.3% from 0.4% earlier. This comes in the context of BOE's Bailey testifying in Parliament that wage raises for public service staff might not be inflationary.

If the CPI meets expectations or falls deeper into deflationary territories, the FTSE exhaustion could turn into a pullback or reversal, as the data would help the BOE reclaim its confidence status and boost the pound instead. The wedge pattern could be invalidated if the index reclaims the record high of 7950, which could likely lead to the 8k handle. Otherwise, sliding below 7800 could pave the way to 7700 and beyond.

Tradingview Chart: UK100

Top Events in Review

  • Jerome Powell suggested that the Fed could hike more than currently expected if the data warranted it in response to unexpectedly high jobs numbers for January. Comments contributed to higher yields through the rest of the week.

  • Germany released delayed CPI figures below expectations but expected to prompt a revision to the EuroZone inflation numbers.

  • Google's failed launch of its generative AI to compete with Microsoft's ChatGPT saw the company lose over $100B in market cap, the latest in a series of negative corporate news weighing on the tech sector.

  • In testimony before the  Parliament, most BOE officials discussed the need to keep hiking. Isabelle Tenreyo stood out as the first to speak of cutting rates.

Major Calendar Events Feb 13-17 (GMT)

Source: investing.com

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