COVID-19 restrictions to be lifted, as FTSE approaches all-time highs

Once again we arrive at the inflection point the market has been waiting for all week. The question is how much higher will the US CPI inflation data be? If there is a drop in the rate of change this would be market moving as the consensus is for a continuation in the rise in inflation, especially as the energy markets have been pushing higher.

Market Brief

The main focus of today's trading session will be the US CPI inflation data. However, before we get to that data point, there are seven ECB speeches coming up, which should give euro traders some insight into how the ECB will tinker with monetary policy. The majority of the speakers are between 9 am GMT and 1 pm GMT, but there are two more after the US futures open. If you are planning to trade EURUSD today, you may want to wait until after 3 pm GMT. The euro won't be the only thing affected by central bankers, as Bank of England governor Bailey is scheduled to speak at 5 pm GMT.

Today, the main concern for the markets is the US CPI with further inflation increases being anticipated, but at a slightly moderate pace. In the event that the headline CPI comes in above 0.7% higher today, there will be a surge in US Treasury yields and possibly a significant increase in the value of the US dollar.

Given the growing US trade deficit and yesterday's auction of 10-year notes, Treasury bonds are in high demand since the US sends dollars abroad. Countries that receive US dollars for their goods convert them to UST so that they can receive interest. Since the yield is currently rising, there may be greater demand for US dollars in the future, especially for countries with debt denominated in US dollars.

The forex heatmap is showing that the US dollar at the London open is actually one of the weakest currencies along with the Canadian dollar and Japanese yen. The Antipodean currencies once again start the day on a positive note and this should be supportive for equities.

The ActivTrades sentiment indicator is showing that 60% of traders are remaining bearish on the EURUSD as the price action is trading within an 80-pip range.

On the hourly chart, there was a bullish shift and now I am expecting the double top resistance of 1.1480 to get swept for liquidity. This should go some way to stopping out the short retail cohort and if they switch to buying the breakouts, I’ll be looking for them to get trapped above the 1.14900 for a sharp reversal lower. If that doesn’t occur soon after the sweep of the highs, the next levels I am concentrating on will be the 1.15600 to 1.15800 zone which was the significant breakdown point in mid-November 2021.

The retail sentiment is also extremely bearish on the UK FTSE100 with 88% shorting the index.

The weekly chart shows that momentum has been bullish the last 3 weeks and that price action is approaching relative equal highs around 7700. A push higher than these levels and we would have finally undone all of the COVID-19 bear market moves, just as the UK is about to drop all COVID-19 related restrictions at the end of February, a month earlier than planned.