Inflation worries abound in the market as China’s reopening might lift global inflation rates

What You Need To Know

The Japanese Yen continues to gain against all major pairs and is strengthened up to 0.8% against the dollar. Investors speculate that the Bank of Japan (BoJ) may reduce its ultra-loose monetary policy especially after the institution widened its yield curve control last month. It is expected that the BoJ may increase its interest rate as the inflation rate in the country is soaring. On the other side, European and U.S. equity markets declined over worries that China opening up its economy could potentially lift the global inflation rate. In addition, the oil prices declined slightly as the China purchasing manager index contracted for the 4th consecutive month. 

Look Out For

Current rate hike bets on 1st February Fed interest rate decision: 

25 bps (100%) VS 50 bps (0.00%)

Market Movements

DXY

The Dollar Index, which trades against a basket of six major currencies, continued to edge lower during the early trading session as market participants expect US inflation to peak in 2023 in response to restrictive monetary policy. Meanwhile, International Monetary Fund Managing Director Kristalina Georgieva warned that the global economic outlook would remain pessimistic while reiterating that one-third of the world economy will enter recession as the ongoing stagflation risk continues to jeopardise economic momentum. Recent data have indicated that the economic growth in the US, EU, and China are all slowing down simultaneously, spurring doubts about whether the restrictive monetary policy should be maintained on a long-term basis

The Dollar Index is trading lower following the prior breakout below the previous support level. MACD has illustrated diminishing bullish momentum, while RSI is at 37.50, suggesting the index might trade lower in short-term as the RSI stays below the midline.  

Resistance level: 105.05, 108.35

Support level: 101.30, 99.95

XAU/USD

Gold prices continue to hover near the crucial resistance level, buoyed by risk-off sentiment. Amid exceptional uncertainty in the global financial market, investors are concerned that the global economy will enter a recession in 2023, underpinning market demand on safe-haven assets such as gold. Nonetheless, the overall trend for the gold market will be expected to remain subdued as investors are now waiting for the crucial US job data, which is due later this week.  

Gold prices are trading higher following prior breakout above the previous resistance level. However, MACD has illustrated diminishing bullish momentum, while RSI is at 69, suggesting the commodity is entering the overbought territory. 

Resistance level: 1870.00, 1910.00

Support level: 1820.00, 1770.00

EUR/USD

The pair has continued to trade sideways with a slight gain and is approaching its near-resistance level. The German Harmonised Index of Consumer Prices data has escalated higher than the market estimated; this means that the inflation rate in the country is still surging and ECB may be more aggressive in its monetary policy to tame inflation. On the other hand, the dollar index, DXY, is expected to be more volatile recently as the FOMC meeting minutes will be released tomorrow ( 4th January); a Hawkish statement from the minutes will see the DXY index to rebound. 

The pair continues to trade sideways, awaiting further catalysts to spur the pair’s price movement. The RSI has been hovering above the 50-level suggesting that the buying power is slightly stronger than the selling power. The MACD flowing above the zero line depicts that the bullish momentum is not strong. 

Resistance level: 1.0743, 1.0988

Support level: 1.0495, 1.0277

BTC/USD

BTC has stayed extremely sideways and is consolidating in the price range between 16206 to 17030 for the past 2 trading weeks. BTC remained calm entering the year of 2023 with a relatively low trading volume since the collapse of FTX, a catalyst needed to spur the BTC’s price movement. The FOMC meeting minutes which will be released tomorrow (4th January ), may see higher volatility from the dollar index. A hawkish statement in the minutes which is against the market consensus, may see a rebound of the index and will suppress the price of BTC. 

The price volatility and the trading volume remained low in the new year. The RSI indicates that the selling power for BTC is easing as it rebounded from the near-oversold zone and stayed above the 50-level but the signal remained neutral. The MACD is testing to break above the zero line, perhaps needing a catalyst; the bullish momentum seems minimal. 

Resistance level: 17640, 18397

Support level: 16166, 15448

DJ30

The Dow is trading flat, with investors bracing for a string of crucial economic data and the Federal Reserve minutes, which are due later this week to kick off the new year. Investors will closely monitor the latest economic data, looking for opportunities to allocate their portfolios to recover from the 2022 carnage. On the microeconomic front, Tesla deliveries hit a record in Q4 but came in below the market expectations for a second straight quarter, dragging the prospect for the EV sectors.  

The Dow is trading flat while currently near the support level. However, MACD has illustrated diminishing bearish momentum, while RSI is at 50, suggesting the index might continue to trade sideways between resistance level and support level. 

Resistance level: 34109, 35320

Support level: 32620, 31165

GBP/USD

The Pound Sterling struggles to find demand as the gloomy economic outlook continues to weigh on a risky asset such as Pound Sterling. Economists warned that the rising inflation rate and the restrictive monetary policy would continue jeopardising the economy in 2023. With disposable incomes expected to decline by another 3.80% from the UK region, households could continue struggling with skyrocketing inflation rates and rising borrowing costs. Nonetheless, investors are advised to continue scrutinising further catalysts from the United States to gauge the likelihood trend of the GBP/USD due to the lack of market catalyst from the UK region on a short-term basis.

The Pound Sterling is trading flat while currently testing the support level. MACD has illustrated diminishing bullish momentum, while RSI is at 50 (midline), suggesting the pair might continue to trade sideways.

Resistance level: 1.2345, 1.2670

Support level: 1.1935, 1.1650

USDJPY

The Japanese Yen surged to a six-month high against the US Dollar as investors continue to digest the Bank of Japan’s decision last month to raise its bond-yield cap. Besides, the Bank of Japan is considering increasing its inflation forecasts in January to its 2% target in fiscal 2024, a move that could provide grounds for a pivot away from quantitative easing policy. The new projections for inflation will be released in the central bank’s following quarterly economic outlook report, due out after its policy meeting on the 17th and 18th of January.

USD/JPY is trading lower following the prior breakout below the previous support level. However, MACD has illustrated diminishing bearish momentum, while RSI is at 32, suggesting the pair is entering oversold territory. 

Resistance level: 131.30, 138.25

Support level: 126.40, 121.30

CL OIL

Oil prices extended their gains as market participants speculated that the oil demand would grow significantly in 2023, driven by the easing of Covid-19 restrictions in China and a less aggressive approach to interest rates in future. In addition, a drop in Russian oil output as fresh Western sanctions against Moscow had further supported the bullish momentum on oil prices. The next round of European Union sanctions on Russian oil products will take effect on 15th February, followed by an EU embargo on seaborne imports and a G7’s price cap moves. Analysts expect the sanctions against Russia will likely result in a significant drop in the Russian production of at least 1 million barrels per day in 2023.

Crude oil prices are trading higher while currently testing the resistance level. MACD has illustrated increasing bullish momentum, while RSI is at 60, suggesting the commodity might extend its gains after it successfully breakout above the resistance level.  

Resistance level: 81.55, 86.15

Support level: 77.45, 73.70