Firmer US dollar as dovish rate bets were challenged, China’s PMI stable

[MongiIG]

A blowout US jobs report continues to keep rate cut bets in check, with robust labour conditions validating Fed Chair Jerome Powell’s recent discussion to keep rates high for slightly longer.

Source: Bloomberg

 

Forex Indices Federal Reserve United States United States dollar China

Written by: Yeap Jun Rong | Market Strategist, Singapore

 

Publication date: Monday 05 February 2024 04:50

Market Recap

A blowout US jobs report last Friday continues to keep rate cut bets in check, with robust labour conditions validating Federal Reserve (Fed) Chair Jerome Powell’s recent discussion to keep rates high for slightly longer. The US job market has shown renewed signs of acceleration, with a recent gain of 353,000 jobs in January almost double the 180,000 consensus, while earlier numbers were revised higher as well. Along with a 0.6% month-on-month gain in hourly wages (versus 0.3% consensus), this will likely call for more patience in the unwinding of tight Fed policies and as the Fed Chair said, policymakers will likely wait beyond March.

The paring of dovish bets saw US Treasury yields higher, with the two-year yields up 16 basis point (bp) while the 10-year yields rose 14 bp, providing the catalyst for the US dollar to push to a near one-month high. That failed to dent the mood for equities however. Sentiments continued to bask in optimism around big tech earnings last Friday, but may have to take its cue from Fed’s policy outlook eventually once earnings are behind us.

The US dollar has seen some resilience lately, reclaiming its 200-day moving average (MA) last week while its relative strength index (RSI) on the daily chart defended the key 50 level to keep the near-term upward bias intact. A further move above the 103.80 level of resistance may set its sight to retest the 105.30 level next. On the downside, the 200-day MA will serve as immediate support to hold for buyers.

 

Source: IG charts

 

Ahead this week, attention will be on the US Institute for Supply Management (ISM) services purchasing managers index (PMI) out tomorrow, where a slight bounce to 52.5 from previous 50.4 is expected, which should further validate more wait-and-see from US policymakers in terms of rate cut timeline. In addition, the earnings season will see notable releases from McDonalds, Caterpillar, Alibaba, Walt Disney.

Asia Open

Asian stocks look set for a mixed open, with Nikkei +0.43%, ASX -0.93% and KOSPI -1.60% at the time of writing. Chinese equities continue to struggle, with China regulators’ pledge to stabilise markets over the weekend failing to impress. A lack of details over how they plan to “guide more medium- and long-term funds into the market” may drive some reservations, although the tone suggests that authorities are keeping a closer look at the lacklustre market performance thus far.

Today’s economic calendar saw more of the same out of China’s Caixin PMI, in which subdued growth conditions are presented. Its composite PMI edged slightly lower to 52.5 from previous 52.6, while the services component underperformed (52.7 versus 53.0 consensus). The data shows some signs of stabilisation for now, but whether this will lead to a firmer recovery ahead remains to be seen.

The China A50 index continues to trade within a descending channel pattern on the daily chart, which keeps the overall downward trend intact. But at least for now, higher lows on its daily RSI could point to abating downside momentum and drive some attempt to stabilise in the near term. The 11,200 level remains a crucial immediate resistance to overcome, where the upper channel trendline stands alongside the lower edge of its daily Ichimoku cloud.

 

Source: IG charts

 

On the watchlist: Near-term head-and-shoulder formation keeps AUD/USD bulls in check

Renewed strength in the US dollar on a blowout US job report, alongside a quicker moderation in Australia’s inflation seen last week, has kept the AUD/USD under pressure lately. The pair has reverted to its two-month low, with a breakdown of a near-term head-and-shoulder formation keeping the bias to the downside.

To add to the caution, its 100-day and 200-day MAs have given way for now, along with a move back below its Ichimoku cloud on the daily chart. Its daily RSI has also failed to reclaim its 50 level after a retest last week. Ahead, the 0.652 level may serve as immediate resistance to overcome, where its 200-day MA coincides with the head-and-shoulder neckline. On the downside, the 0.635 level may be on watch.

 

Source: IG charts

 

Friday: DJIA +0.35%; S&P 500 +1.07%; Nasdaq +1.74%, DAX +0.35%, FTSE -0.09%

 

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