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Will the FTSE give up its weekly gains as commodity prices collapse?

I am more than half expecting the US PCE data to come in higher than expected today but for the overall picture to look like a peak in inflation. The increased bank lending has shown that companies are tapping credit to buy up inventory to sell on. This is a sign that the supply chain bottlenecks have diminished. Tom Cook CEO of Apple came out and even said, that the supply chain pressures are expected to ease in the coming months during his delivery of the Apple earnings. The rate hikes, fiscal surplus in spending, and geopolitics are muddying the economics but clearly, the US dollar is the main beneficiary currently.

Market Brief

The Australian Bureau of Statistics reported the latest PPI data in the overnight session. The 3.7% increase in final demand to December 2021 marks the strongest increase since March 2009. In terms of final demand, quarterly growth was primarily driven by the output of building construction (+2.9%) due to continued strong housing demand and builders passing on increasing labour and material costs. There was also a rise in steel, oil, and labour costs, supported by increased investment, which helped the heavy and civil engineering construction sector rise by +1.4%. Costs of manufacturing of motor vehicles and motor vehicle parts grew by +4.4%, due to ongoing shortages of semi-conductors and other components, limiting production, preventing supply, and resulting in higher prices while demand for new cars remains strong.

The AUDUSD is traveling lower within a descending channel, and I have marked up a double bottom level below the 0.7000 big figure which will be a draw for traders searching sell stops.

Bruno Le Maire, the French Economy Minister, described France's economic recovery as "spectacular." INSEE data show France's GDP rose by 7% in 2021, compared to a decline of 8% a year earlier. The expansion marked the fastest yearly growth in 52 years.

The German preliminary GDP data will be released during the London session, and it is forecast to come in lower than previously expected. There will also be news from the ECB regarding the EU consumer confidence and sentiment indicators which are due in lower too.

Despite the good French data today, the latter will keep the EURUSD lower.

The EURUSD price action is now trading within the volume void I had drawn out with the purple box. If there is a lack of buying here the short sellers will remain in control until we get into the lower balance areas from May to June 2020.

The decline in the euro is helping to push the DXY higher and later in the US session the Fed’s preferred inflation data could add fuel to this rally. US Core PCE is expected to increase year-on-year, but for December’s month-on-month reading the market is expecting no change. This means if the MoM is different we could get some US dollar moves.

The UK FTSE100 is currently up for the week by 1.19% and 2.28% this last month which is the best of all the major markets I follow. My worry is that with the US fiscal spending now in surplus this will continue to push the US dollar higher and then have a detrimental effect on the commodities markets. The FTSE100 is heavily influenced by the commodity miners and this potential; scenario will adversely affect their balance sheets in the coming months.

Within the forex market, the risk-on/risk-off situation has already changed. Despite flows out of the yen, which generally indicate a risk-on sentiment and is good for commodities, the higher US dollar is removing the positive effects of these flows towards the commodity pairs.

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