The Swing Overview - Week 6

The record inflation rate in the US over the past 40 years sparked another wave of volatility in the markets on fears of more aggressive Fed action against an overheated economy. Unexpectedly strong US labour market data also came as a shock to markets. As a consequence, yields in the US 10-year bonds rose and broke the 2% mark. Equity indices, on the other hand, weakened towards the end of the week and we will see whether strong supports will be tested again under the influence of these fundamentals. Rising bond yields are not good news for gold either, which has so far responded to the strengthening dollar and rising yields by weakening.

The macroeconomic data from the US

Inflation and labour market data were clearly among the most anticipated macroeconomic events last week.
Year-on-year inflation in the US rose to 7.5% in January 2022. This is the highest reading since February 1982 and is also higher than analysts' estimates, that had expected inflation to be around 7.3%. The reasons for the higher inflation are rising energy costs, a tight labor market and disruptions in supply chains, which are multiplied by strong demand in a recovering economy. The biggest contributors to rising inflation were energy prices, which rose by 27%, and fuel prices, which rose by 40%.

Figure 1: The inflation in the US

In terms of the labour market, the US economy created 467,000 new jobs in January. This was much more than the analysts' forecast, who estimated that, given the spread of the Omicron variant, only 150 thousand new jobs would be created in the US in January.

Figure 2: The US jobs growth (NFP)

This very strong data means one thing. The Fed will tighten the economy and probably at a much faster pace than the market expects. And this is also the reason for the further rise in the US 10-year bond yields, which have surpassed the 2% mark and reached their highest level since August 2019. Along with this, the dollar index, which had made a correction last week, has also started to strengthen.
 

Figure 3: 10-year government bond yield on the 4H chart and the USD index on the daily chart

A strong dollar, rising yields and the economy tightening at a faster pace than the market expects are clearly negative news for equity indices and also gold.
 

The NASDAQ and the SP500

Earnings season continues in the US. Of the well-known companies, Pfizer (NYSE:PFE) reported results last week. While the company's earnings were higher than expectations, the pharmaceutical
giant also reported that it expects revenue for 2022 to be USD 32 billion, below analysts' expectations, who were hoping for growth of around USD 33.8 billion. 
Facebook continues to lose ground after last week's washout, causing the share price to drop from USD 320 to USD 220 in one week.

 

Figure 4: The NASDAQ index on H4 and D1 chart

The NASDAQ started last week with a rise and the price approached the resistance according to the H4 chart. The information about record inflation had a strong negative impact on technology stocks and the price was moving near the support at the end of the week, which is in the range near 14,392 - 14,530 according to the H4 chart. Significant support is in the area at 13,750-13,950 according to the daily chart. The nearest resistance according to the H4 chart is at 15,050 - 15,080.
 

There has been a very similar pattern on the SP 500 index to the NASDAQ. The price got to the resistance which is defined by the horizontal resistance area at 4,580 - 4,600. At the same time, there is a confluence with the broken trend line of the rising channel below which the index is moving.
Support according to the H4 chart is at 4440 - 4454. According to the daily chart, significant support is at 4,225 - 4,300.
 

German DAX index

Figure 6: The DAX on H4 and daily chart

There is no clear direction on this index recently. We can probably say that the index is moving in a sideways trend which according to the daily chart is defined by the strong resistance at 16,300 (all-time high) and the support which has already been tested several times in the area between 14,850 - 15,000.
The current move shows that the rising channel has been broken to the downside and also that the moving averages on the H4 chart EMA 50 and SMA 100 are in a bearish constellation. This together with the higher inflation data and also the recently announced hawkish ECB policy would suggest more of a move down to the aforementioned support. The nearest horizontal resistance according to the H4 chart is at 15,532 - 15,620. The next resistance according to the H4 chart is at 15,727 - 15,757.
 

The EUR/USD near strong resistance

The EURUSD approached the strong 1.15 level but after the US inflation data was announced, the pair started to fall strongly. Thus, according to the H4 chart, a false break of the resistance arose, which is in the band around 1.1480 which tends to be a strong signal for further weakening.

Figure 7: EURUSD on H4 and daily chart

The possibility of a weakening is also indicated by the development of the interest rate differential that is present in the yields between the 10-year bonds of Germany and the US. This has recently been very strongly correlated with developments on the EURUSD.

Figure 8: Correlation of the interest rate differential between German and US 10-year bonds with the EURUSD currency pair on H4
 

The interest rate differential is starting to decline and this should suggest that the EURUSD might weaken.
The nearest resistance is at the 1.1460 - 1.1480 band. The nearest support according to the H4 chart is at 1.1360 - 1.1370. The next one is at 1.1270 - 1.1280.
 

Gold

Gold is taken by many investors as a hedge against inflation. But lately, gold seems to be losing in the battle for inflation protection to US Treasuries, which carry some yield, while gold does not deliver any yield.
Gold is most responsive to the value of the US dollar. If the dollar rises, gold tends to depreciate and vice versa. Recent developments in the USD index suggest that the dollar could strengthen again this week, which should mean a test of support for gold.

Figure 9: Gold on H4 and D1 charts
 

The nearest resistance according to the H4 chart is in the area of 1,835 - 1,841. Then the next resistance according to the daily chart is at 1,847 - 1,852.
The nearest support is at 1 788 - 1 795 and then 1 780 - 1 784 USD per troy ounce of gold.