The markets focus this week is upon us and so far, the mood is risk-off. The flows into the US dollar despite weakening fundamentals ahead of expectations of a policy shift could mean the risk is to the downside for the dollar if the Fed doesn’t come out as Hawkish as expected.
The US dollar index continues to push higher as traders’ expectations of rate hikes in 2022 are moving short term yields higher today. The EURUSD below 1.12800 is also helping the greenback rise above yesterday’s high and for a second day, trade outside of the recent consolidation pattern. Today’s high in the DXY also cleared the big trading range high formed at the very end of November, adding to the significance of today's highs.
The FOMC statement, FFR decision and the press conference that follows will no doubt move the market a lot more today. Expectations are for an acceleration in the tapering today with March looking like the final monetary policy target for possible Fed balance sheet reductions, before hiking rates in the first half of 2022. Whether or not the equities markets will hold these levels we see them at today or not is to be seen as there is a chance, we could get a ‘Taper Tantrum’ 2.0, I have my fingers crossed that the market has discounted these new measures and we return to new all-time highs based on the increased fiscal flows into the markets now that the debt ceiling has been agreed upon.
S&P500 is currently within the range printed yesterday and there is a chance that the target today may be a test of the daily 50 EMA, which has in the past served as solid dynamic support. Traders' expectations of a tightening of monetary policy caused short selling in the 4700-4750 region at the recent highs. As long as price action is above the significant swing low, the long-term momentum is likely to resume to the upside.
The US retail sales data out today also came in under market expectations and shows a rapid decline from the previous month. At the end of the stimulus cheques, the high inflation rates and higher prices are starting to cut into the expendable cash flows of the average household. Priorities will be paying for heating and petrol which are currently the main drivers of food price increases etc. Sales in retail sales gained 0.2% in comparison to the month before and 16.1% in contrast with November 2020. Meanwhile, gasoline stations observed a rise of 52.3% and food services and drinking places of 37.4% year-on-year.
UK Prime Minister Boris Johnson led another daily briefing today where he attempted to gain favour with some voters by thanking them for their efforts in the battle against the Omicron variant. The UK is pushing on with getting people their 3rd shot of vaccine and have already completed more than 20 million shots with a further 500k today. Hospitalisations are currently showing a small decrease, but Professor Whitty was clear to point out that Omicron is too new to be included in the data for deaths and hospitalisations. The United Kingdom posted another record number in daily registered COVID-19 cases, with health authorities reporting 78,610 new infections and 165 coronavirus-related deaths in the last 24 hours.
The FTSE100 has found support around the 50% retracement level and the previous intraday resistance level around 7170. If the market doesn’t sell off further due to what the Fed says tonight, there may be a glimmer of hope for the UK with the unprecedented speed at which the people are getting boosted. PM Johnson was clear to point out that the government is doing anything it can to avoid a Pingdemic 2.0 and keep the supply chains moving.
The US Energy Information Administration (EIA) reported that commercial crude oil inventories in the United States fell by 4.6 million barrels to 428.3 million barrels for the week ending December 10. This figure does not include inventories in the Strategic Petroleum Reserve. The US imported 6.5 million barrels of crude oil per day, 28,000 barrels per day less than the previous week. Total commercial petroleum inventories decreased by 15.9 million barrels.
Following the EIA report, the price of Brent rose and now we are testing the breakout levels. There is a case for oversupply in the first quarter of 2022 and a possibility of an Omicron market disruption to demand, so if traders are worried about either of those things we should get a rejection of $73.50. If they push through this level, we may be on our way to testing $80 to squeeze the short-sellers.