Equities Fall on Hot CPI Numbers

13 June 2022, 02:53

Market Focus

US equity markets lost ground on Friday following the CPI rising 8.6% in May, the highest level since 1981. The Dow Jones Industrial Averages slid 2.73%, the S&P 500 shed 2.91% to 3900.85, while the Nasdaq Composite dropped 3.56%, to 11832.82. Inflation accelerated further in May with the CPI rising 8.6% from a year ago, while the core CPI was up 6%, also higher than the expected 5.9%. The markets reacted negatively as investors became worried of more aggressive behavior from the Fed. Some economists even predicted the Fed might possibly hike rates by as much as 75 basis points or, 0.75% next week.

In the bond market, markets were closely monitoring and fearful of a recession. The 2-year Treasury yield reached 3.06%, while the 10-year Treasury yield reached 3.159. The spread between the two bonds was only 10 basis points. If the 2-year Treasury bond yield moves above the 10-year’s, the  yield curve becomes inverted, which signals a recession.

Main Pairs Movement

Gold recovered from a multi- week low, reaching 1871.61 on a volatile Friday. Fundamentally, gold is still being confronted with sizable losses as investors continue to seek refuge in the safe- haven greenback amid soaring inflation and a more aggressive monetary policy from the Fed. Further price action depends on the  upcomingFOMC meeting.

EUR/USD lost ground on Friday, sliding 0.92% to 1.05170. The safe-haven greenback dominated the markets after the US CPI report and consumer confidence data from the US, signaling a strong move to the greenback as the Fed might be more aggressive on its policy.

USD/JPY continued to head north, finishing with 134.317, breaking its 20-year peak. The BoJ’s dovish isolation, keeping its YCC measures and ultra- loose policy, continued to put pressure on the Japanese yen.

AUD/USD dropped to a fresh two-week low, back below the 0.7100 level in reaction to higher-than-expected US CPI. The Aussie faced aggressive selling as investors sought for refuge, thus the demand of the safe- haven greenback increased.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD continued to head lower on the last trading day of the week. The rallying dollar exerted strong selling pressure on the euro. The highly anticipated U.S. CPI report came in red hot at 8.6%, year over year.  The benchmark U.S. 10-year Treasury yield shot above 3.1% as market participants  priced in a possibility of a further interest rate hike by the Fed. The ECB’s Thursday meeting did not add confidence to the Euro as the central bank is only committed to a 25 basis point interest rate increase and lowered economic guidance for the rest of the year.

On the technical side, EURUSD has dropped below our previously estimated support level of 1.06477 and is heading towards 3 year lows. Support levels for EURUSD now sits at near the 1.05031 price region, which is a 2017 low. RSI for the pair sits at 39.93, entering oversold territory. On the four hour chart, EURUSD is trading below its 50, 100, and 200-day SMAs.

Resistance:  1.07691

Support: 1.06477

GBPUSD (4-Hour Chart)

GBPUSD fell sharply on the last trading day of the week as the Dollar rallied. The red hot U.S. CPI report propelled the U.S. 10 year treasury yield above the 3.1% level. On Thursday, British Prime Minister Boris Johnson announced a proposed tax cut for households in an attempt to boost the British economy. However, the British pound failed to gain traction. Next week’s FOMC meeting will be closely watched by market participants.

On the technical side, GBPUSD has dropped below our estimated support level at 1.24539 and is pulling towards the next near term support level at 1.21996. RSI for Cable sits at 38.26,as of writing. On the four hour chart, GBPUSD is currently trading well below its 50, 100, and 200-day SMAs.

Resistance: 1.25944

Support: 1.21695

USDJPY (4-Hour Chart)

USDJPY rose on the last day of the trading week as the Dollar index rallied past the 104 level. The U.S. CPI data came in at 8.6%, year over year. With inflation continuing to run high, market participants are pricing in possibly more aggressive interest rate hikes by the Fed. Next week’s FOMC should provide guidance on the interest rate trajectory for the rest of the year.

On the technical side, USDJPY has risen near our estimated resistance level at 134.56. RSI for the pair has risen to 67.05 and once again entering overbought territory. On the four hour chart, USDJPY is trading above its 50, 100, and 200-day SMAs.

Resistance: 134.56

Support: 133.5, 132.5