A Dream Comes True

The EURUSD traded south yesterday, as the European Central Bank (ECB) Chief Christine Lagarde reckoned that growth and inflation are slowing, while insisting that the rate cut decision will be data dependent. The pair cleared the 200-DMA support, fell to 1.0820, it’s a little higher this morning, but we are now below the 200-DMA and the ECB rate cut bets on falling inflation and slowing European economies remain the major driver of the euro weakness, with many investors now thinking that June could be a good time to start cutting the rates. Three more rates could follow this year.

Across the Atlantic, the US released its latest GDP update and the data was as good as it could possibly get. The US economy grew 3.3% in Q4 versus 2% expected by analysts. It grew 2.5% for all of last year –quite FAR from a recession. The consumer spending growth slowed to 2.8%, but remained strong on healthy jobs market and wages growth, business investment and housing were supportive and… the cherry on top: the GDP price index, a gauge of inflation fell to 1.5%. Plus, data from rent.com showed that the median rent rate declined in December, and that’s good news when considering that rents have been one of the major drivers of inflation lately, and they look like they are cooling down. In summary, yesterday’s US GDP data was the definition of goldilocks in numbers: good growth, slowing inflation. A dream comes true.

As reaction, the US 2-year yield fell below 4.30% and the 10-year yield fell below 4.10%. The strong numbers didn’t necessarily hammer the Federal Reserve (Fed) cut expectations given that inflation slowed! Investors are not sure that March would bring the first rate cut from the Fed – as the probability of a March cut is around 50%, but a May cut is almost fully priced in. Today, all eyes are on the Fed’s favorite gauge of inflation: core PCE – expected to have retreated to 3% in December. A number in line with expectations, or ideally softer than expected could further boost risk appetite.

What could go wrong?

Energy prices could go wrong.

Oil bulls finally got the positive breakout that they were looking for in oil prices. The barrel of American crude cleared the $75pb resistance and extended gains past $77pb on muddy geopolitical picture in the Middle East and on the back of a 9-mio barrel slump in US weekly oil inventories. The American crude tested the 200-DMA, near $77.50pb, to the upside but has so far been unable to take it out.

Moving forward: Positive momentum is building, the ample supply story has been broadly priced in and if Mid East tensions take over the market narrative, there is no reason to keep the oil bulls contained. The next natural target is the 200-DMA. If broken, oil bulls will challenge the $78.60, the major 38.2% Fibonacci retracement on September to December selloff and a breakout above this level will point at a medium term bullish reversal, and could pave the way for a further rise to the $80pb.

Market echoes

The US dollar index ticked higher yesterday, as the euro fell across board during ECB Lagarde’s presser. But any further weakness in today’s PCE numbers could limit the upside move in the dollar index and throw a floor under the EURUSD’s weakness around the 200-DMA.

It would sure be absurd if the Fed started cutting the rates with such a strong underlying US economy before the ECB, which, in opposition, deals with a serious economic slowdown across the euro area. But the Fed doesn’t (need to) decide based on other central banks’ actions. As such, a possible earlier Fed cut could slow down the euro depreciation but should not stop it.

In equities, the good data gave a positive spin to the S&P500 and Nasdaq 100, but Tesla’s 10% slump limited gains. Intel tumbled 10% in the afterhours trading following a disappointing forecast as it has hard time fighting back the all-strong Nvidia and AMD which are catapulted to the moon on the AI craze. The good news is, Nvidia and AMD lovers will barely react to Intel news.