AUD/USD probes support, Gold, Dow Jones burst to record highs in style

The S&P 500 and Dow Jones reached a record high, although the Dow Jones left the S&P for dust rising 1.8% during its best day in 13 months. Strong retail sales and dovish comments from the Fed proved the ultimate combo as it points to lower interest rates and a soft landing, heading into what increasingly appears to be another Trump presidency on the cards, whilst positive earnings from Bank of America and United Health played their part.

The US dollar took an early lead in the US session after retail sales and import inflation came in stronger than expected. Although the initial gains were short-lived as momentum reversed within the hour to see the US dollar index effectively close flat. A softer set of inflation figures from Canada and dovish comments from FOMC member Kugler seemed to have helped.

• Retail exc. gas/autos 0.8% (0.2% expected, prior revised up to 0.3%)
• Retail control increased 0.9% (0.2% expected, 0.4% prior)
• US import prices rose 1.6% y/y (1% expected, prior revised up to 1.4%)
• Canada’s CPI and core CPI deflated by 0.1% m/m

Disinflation is back on track, the Fed are cautiously optimistic inflation is returning to 2% and do not want the labour market to cool too much, according to Kugler. But USD traders are also pouncing on any signs of disinflation elsewhere and cherry-picking the data they want to see.

Canada’s CPI and core CPI both deflated for the first month in six at -0.1% m/m, and while trimmed CPI and core CPI y/y accelerated by 0.1 percentage point to 2.9% and 1.9% respectively, all of the BOC’s preferred inflation metrics remain within the 1-3% target band. Common CPI also dipped to 2.3% y/y from 2.4% prior and expected. Canada’s OIS curve was lower with the one-month implying a 48% chance of a 25bp cut, and the three-month with an 84% probability.

Eyes will now shift to New Zealand's CPI report up shortly to see if it justifies the RBNZ's removal of their hawkish bias, and decision to signal lower inflation expectations. The RBA would also like to see this as it removes another pillar of pressure for a hike in Australia. But the NZ inflation report has the potential to move AUD/USD higher or lower, depending on if it comes in too hot or cod relative to expectations.

For what it’s worth (and not that many will listen), the International Monetary Fund (IMF) said the Fed can “wait a bit to cut rates” to see if consumer price inflation data continues row ease.

Gold, Dow Jones reach record high

Gold traders really latched on to dovish comments and weak CPI data, sending spot gold prices to a record high during its most bullish day in over four months. But before bulls feel compelled to wade in at these highs, they should consider the fact that the adjusted futures gold contract (bottom left chart) has not yet broken above its record high set in May.

This suggests that spot gold prices may pause a little before simply accelerating higher form here. Ot at the very least, traders may want to see if futures prices can reach a record high before assuming continued gains on the spot market, as these markets move hand in hand directionally, although their respective levels do not always agree.

The Dow Jones made light work of breaking above the 41k, after closing above 40k for the first time on record just three days ago. Volumes increased and it was the Dow’s most bullish day of the year. If I had to be picky I’d note that the daily volume delta (bids – ask) is above its upper standard deviation line, but with ‘America first’ likely to make a comeback, I suggest sentiment will continue to favour the Dow bulls for the time being.

Events in focus (AEDT):

• 08:45 – New Zealand CPI
• 09:50 – Japan Tankan (Reuters)
• 10:30 – Singapore non-oil exports
• 11:00 – Australia leading index (Melbourne Institute)
• 11:30 – Singapore trade balance
• 16:00 – UK CPI
• 19:00 – EU CPI
• 22:30 – US building permits
• 23:00 – FOMC Barkin speaks
• 23:15 – US industrial production
• 23:30 – Fed Waller speaks
• 01:15 – US GDPnow (Fed Atlanta, final)

AUD/USD technical analysis:

The Australian dollar retraced lower for a second day, in line with my bias outlined in the AUD/USD weekly outlook report. Given the fact it fell ~1% between Monday’s high to Tuesday’s low and erased most of the prior six days gains, perhaps there’s more downside ahead.

Support was found at the May low, although 67c and the highs around 0.6690 area also potential support levels for bulls to consider dips upon a deeper retracement or bears target over the interim.

The 1-hour chart shows a bearish trend has been developing, and whilst prices recovered from Tuesday’s low resistance looms around 0.6740, near the weekly S1 pivot point and 38.2% Fibonacci level. Bears could seek to fade into moves towards that resistance zone for a retest of the May high, a break beneath which brings 67c into focus. A break above 0.6750 invalidates the near-term bearish bias on the 1-hour chart. And brings the next resistance zone around 0.6760 into focus.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge