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USD weakens despite US inflation coming in on target

The long EUR/USD trade remains intact despite US inflation being in line with the market consensus. We look at the weakening dollar and equity markets still pricing in more rate rises from the Federal Reserve.

(Video Transcript)

US inflation data

There are two big data points to watch out for this week. One has just passed and that's US inflation. The other one is the start of the US fourth quarter (Q4) earnings season out on Friday with the banks which you can trade all sessions on the platform, get those traded early Friday morning.

Let's take a look at what we've got in terms of the consumer price index (CPI) in the States there because this was one of the key points and in fact it's coming absolutely in line with expectations. So there's not been much market move. We'll take a look at the markets in just a minute but sort of quickly run through these numbers that we've got.

Two main rates, the main inflation rate coming through and this includes food and fuel. The volatile element has come through at 6.5%, down from the 7.1% in November. There's no revision to that previous number. We we knew it was going to come in at this sort of level and that's exactly what's happened.

The core inflation rate, you can see there on that list, that's coming in at 5.7%, also in line with expectations. It's lower than the 6% we saw in the month of November. These are December figures for inflation in the States.

Dollar basket

I want to take a look at what's happened bearing in mind it's coming exactly in line with expectations. I thought I'd show you the minute by minute chart on the dollar basket and if anything it's slightly lower.

But if we go back out to the long-term chart and get a better idea as to what's happening and how to trade this, the bottom line is we're getting new lower lows for the dollar basket. This is a basket of currencies against the dollar. And we're at the lowest level now since the 9th of June and this now seems to be the pattern that we're following, these lower lows.

If you are short on this, the next line to watch out for is 10110 which were the lows we had back on the 31st of May and you put your stop-loss just above this line, the prior line of support at 10308. So your stop-loss will be 10350. We're currently at 10250. Your price target would be 10110.


Staying on the charts because this is how to trade the other areas of the market. Now, this is the Dow Jones Industrial Average, and the immediate reaction was for a pullback in the Dow.

Now since then we've seen that recovery, the point about where we are in terms of the long-term picture for inflation is that the Federal Reserve (Fed) looks like it is on a trajectory where we're going to see its foot taken off the gas pedal and I think we are still going to see interest rate rises, but they won't nearly be as aggressive as we saw going into the back end of last year, remember we had four interest rate rises of 75 basis points, in December came 50bp, and there is now the expectation the Fed is going to continue that trend lower on interest rates and bottoming out sometime maybe in the middle of Spring.

Currently trading at 33944 for the Dow and that looks like that possibly may end up higher on the trading day.


The tech-heavy Nasdaq is the other one I think worth watching. And there was an even bigger slide there initially on these one-minute candles and we are lower than where we were at the start of the data figures, and we're currently trading at 11371.


But the big trade of the day for me continues to be euro/dollar. I thought I'd end on this because this is the trade that people follow. I was talking about the dollar basket. But the real way to trade this is by trading a weaker dollar against the euro, the other big currency of volume.

And interestingly enough, just as we speak, we are breaking this line of resistance at 10787. This now takes us on to levels not seen since April last year, we've beaten that high that we had back in May and this is a market now where I'm thinking, and if we certainly got a candle closed beyond the 10787, I'm then on the way pretty much up to this 11180 level, which is the highest we had back in March last year. So looking good.

Tomorrow morning on the Early Morning Call I hope you can join me at 07:30 because I'll be talking about this trade and we'll be putting a trade on on my assumption that we're going to see a continuation of that weaker dollar. And that means money going into the euro, into sterling, into the Japanese yen. We'll take a look at all those tomorrow in the wake of this inflation data, which is coming absolutely in line with expectations.

Just one other thing I'd say about this euro/dollar trade is that we've just got a flip over now on the MACD indicating momentum is now officially on the way up. It's passed this red dotted line down here. So, momentum is now on its way out. People are looking opportunities to get in at a good level, to buy this market and waiting for that candle close beyond the 10787.

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