Key US CPI awaits: US dollar, Straits Times Index, EUR/USD

Market Recap

Ahead of the US consumer price index (CPI) data release today, US indices managed to start the week on a positive footing but trading volume was lighter than usual, which suggests a handful of market watchers on the sidelines. The VIX also surged 9.5% higher, largely a reflection of immense hedging activities and some underlying fears heading into the key inflation data. The catalyst for indices’ gains overnight may be attributed to the New York Federal Reserve (Fed)’s November release of its Survey of Consumer Expectations, which showed that consumers’ inflation expectations were well-anchored by the Fed’s policy moves thus far. One-year expected inflation was running at a 5.2% pace, down from the previous 5.9% and is at lowest level since August 2021. The three-year and five-year inflation rate projections also edged slightly lower to 3% and 2.3% as well, with the moderating inflation outlook supportive of slower rate hikes ahead. The US dollar is largely flat while Treasury yields find their way slightly higher.

That said, reaction to the survey has been short-lived in general and the upcoming US CPI will remain the key significant determinant of market trend towards the rest of the year. Current expectations are pointing to a 7.3% year-on-year (YoY) increase in headline inflation, while the core aspects are forecasted to come in at 6.1%. Any reading below the 6% handle may prompt a risk-on environment, although meeting expectations could see market bulls attempting to tap on the disinflation narrative for a move higher as well.

The US dollar remains stuck below the 105.00 level, struggling to revert its downward bias for now with the formation of lower highs and lower lows intact since September this year. Any upside surprise in US inflation data could prompt another attempt to overcome its 200-day moving average (MA), where a retest last week was met with a bearish rejection. On the other hand, lower-than-expected readings could drive further unwinding of previous bullish bets in the US dollar, paving the way towards the 102.00 level next.

Asia Open

Asian stocks look set for a mixed open, with Nikkei +0.50%, ASX +0.58% and KOSPI -0.10% at the time of writing. Coming after recent de-risking, the positive handover in Wall Street has provided some near-term breather across the region, but volume will remain lower than usual with sentiments largely on hold for the upcoming US data. After retesting its key 200-day MA for the first time since July 2021, the Hang Seng Index (HSI) is currently hanging below the resistance line. Much may depend on the broader risk environment to trigger another push above the trendline, considering that positive headlines over Covid-19 reopening could run the risk of being replaced by news of Covid-19 spreads as restrictions eased.

For the Straits Times Index (STI), it continues to hang above its neckline of a double-top formation, which coincides with its 200-day MA. That will leave the 3,220 level in focus in the near term as a potential key support. A previous hammer candlestick formation also pointed to some dip-buying at this level. Resistance may be at the 3,320 level, where the index failed to break above on two occasions over the past month.

On the watchlist: EUR/USD continues to consolidate below resistance ahead of ECB meeting

After surging close to 10% over the past two months, the EUR/USD has been consolidating below a key resistance at the 1.058 level, where a 38.2% Fibonacci retracement stands. The near-term upward trend remains intact for now, but the flat-lined moving average convergence/divergence (MACD) suggests sentiments largely on hold for the next catalyst. The US CPI data will be on close watch ahead and market watchers will want to see a downside surprise in US inflation to provide an uplift for EUR/USD. Any push above the 1.058 level may mark a break above its week-long ranging pattern and potentially pave the way towards the 1.078 level next.

Monday: DJIA +1.58%; S&P 500 +1.43%; Nasdaq +1.26%, DAX -0.45%, FTSE -0.41%