Summary:

• US inflation surprised to the upside in the US
• EURUSD, US500 reversed initial reactions to the report
• Gold price is at the key resistance zone

Inflation is now the main theme in the United States. Following years of economic recovery there’s a growing confidence that the US consumer is finally able to produce some price pressure, actually enough of it to warrant monetary tightening. That’s not a good news to everyone – an idea of higher markets interest rates has already rattled Wall Street this February and so Wednesday’s data on inflation was highly anticipated. Inflation surprised to the upside but market reactions were not so obvious. We analyse the report and take a look at 3 relevant markets: US500, EURUSD and Gold.

Inflation is on the rise

Inflation in January was at 2.1% y/y, unchanged from December but above expectations of 1.9%. To be sure, part of this surprise came from energy prices. Diesel prices surged 9.5% in January alone and 22.5% over the past year. However, core inflation, a measure stripped from volatile energy and food prices surprised to the upside too. Some analysts discredited a 0.349% m/m increase as being affected by a jump in apparel prices (of 1.7% m/m, the most since 1990 and interestingly fuelled by women apparel) but that should not overshadow an underlying trend. First of all, apparel rebounded after a season of discounts and this pricing power could reflect consumer demand. Second, even without this narrow category core inflation would have been a full 0.1pp above the consensus as services showed a broad-based increases. Rising wages could create cost inflation in this category and accelerate inflation “recovery”. The key point for the markets now is now whether inflation is on the rise (it is) but will it be accompanied by a strong economy (optimistic scenario) or a slowdown. The next few months will tell.  

US500

Is this a proper double-bottom or not? That’s the question for today. Source: xStation5 

The key question for the US market: is the correction over? As we indicated in previous analyses an average of major corrections in this bull market was 15.5% and these correction lasted at least 5 weeks. No box is ticked but maybe this correction is not a major one? (although a severity of declines could suggest otherwise). There’s also another head scratcher – 2011, 2015 and 2016 correction ended with a double bottom formation on a W1 interval. When we look at the current W1 chart there’s no such formation but there’s a very strong double bottom on a D1 chart. So the question is – is this a repeat that’s just taking place faster or is a legitimate second low still about to be printed? For now the bulls face a resistance at 2727 points and a rapid break above this level could be a farewell to the correction scenario.

EURUSD

Some EURUSD could be lurking at a resistance zone but a trend on the pair is strongly positive. Source: xStation5 

The US dollar bulls did not have much time to enjoy inflation surprise. A negation of a reaction to the data is one of many confirmations of an upward trend on the pair. There are other like price staying well above moving averages and accepting the fastest 50-day average as a support. Bears try to defend January highs of 1.2535 so Thursday’s close will be important.

Gold

Gold is testing a zone that is absolutely crucial from a technical standpoint. Source: xStation5 

Gold market is really at the crossroads. A price is testing the key $1350 resistance zone that has stopped bulls for years. It’s obvious that a break would have massive technical consequences. Furthermore, we’ve seen a giant divergence between gold and tnote prices. Usually lower tnote prices were negative for gold prices as higher yields increased alternative cost of parking money in the commodity. Even if markets are afraid of higher inflation a surge in bond yields seems to be compensating higher than expected inflation and many analysts are puzzled by this divergence.