Caution lingers ahead of US CPI data this week: US dollar, Straits Times Index, EUR/USD

Market Recap

Major US indices ended last week mixed, with outperformance in defensive sectors revealing a cautious lean among market participants ahead of the upcoming US Consumer Price Index (CPI) release. On the other hand, further rise in Treasury yields continued to drive rate-sensitive growth sectors lower, leading to a divergence of the Nasdaq with the DJIA and S&P 500. Since the start of February, the US 10-year yields have moved 35 basis-point higher while two-year yields are up 41 basis-point, which saw the US dollar firming while gold prices weighed. On the economic data front, the preliminary reading for University of Michigan’s consumer sentiment data last Friday did not provide much to cheer. While consumer sentiment has improved to a 13-month high, one-year inflation expectations have increased to 4.2% from previous 3.9%, overturning the past three months of decline. Persistence in pricing pressures remain the key risks for higher-for-longer rates, with any higher-than-expected read for the US CPI likely to lead markets to revisit the possibility of an additional 25 basis-point rate hike in June.

The US dollar index has been holding up in a ranging pattern recently, as previous dovish expectations are being challenged with fears of a short-lived disinflation story. Having traded in a near-term descending channel pattern since November 2022, the US dollar index has overcome the channel pattern last week but is hovering just below its 50-day moving average (MA). Overcoming its 50-day MA will be key in paving the way towards the 105.00 level next. Recent bullish pin bar formation suggests some dip-buying activities, with the US inflation data on watch to provide further validation.

Asia Open

Asian stocks look set for a negative open, with Nikkei -0.74%, ASX -0.22% and KOSPI -0.55% at the time of writing. A lingering tone of caution is likely to persist in the lead-up to the key US inflation data, as US equity futures revealed further de-risking this morning. Economic data this morning revealed the final estimate for Singapore’s quarter four (Q4) 2022 GDP, which came in at 2.1% year-on-year, underperforming the 2.3% forecast. Month-on-month, a flat 0.1% growth is delivered. Muted growth momentum may seem likely to persist in 2023, as China’s demand recovery is pitted against weaker global trade activities. The government has kept its forecast for annual growth at 0.5%-2.5% this year.

On another note, DBS Q4 net profit has beaten estimates, rising 68% year-on-year to a record S$2.34 billion. Rising interest rates have provided a boost to its net interest margin (2.05% versus 1.43% a year ago), while outlook suggests interest rate increases to moderate, but no rate cut this year. A special dividend of 50 Singapore cents per share was announced, on top of a 42 Singapore cents final dividend, which is 6 cents higher than previous payout. Resilience seems to be the takeaway, along with a positive takeaway on outlook from the management. Robust asset quality and increased market confidence on China’s reopening provide some sources of optimism.

After briefly falling below the 3,370 level of support, the Straits Times Index was met with a bullish rejection last Friday as the index attempted to defend its 76.4% Fibonacci retracement level. Having traded in a range over the past two weeks, a break above the 3,400 level may be warranted to provide greater conviction for the bulls. Overcoming the 3,400 level could place the 3,500 level on watch next.

On the watchlist: EUR/USD failed to reclaim channel pattern thus far

The EUR/USD continues to trade below its ascending channel pattern, which has been guiding the pair since November 2022. An attempt to reclaim the lower channel trendline at the end of last week failed to materialise, providing some validation for sellers in control. On the weekly chart, a bearish pin bar has been confirmed last week, along with a breakdown of its 50-day MA for the first time in three months. Further retracement may leave the 1.036 level in sight, where a previous resistance-turned-support coincides with its 100-day MA. Much to revolve around the US dollar strength, where upside risks to inflation will be a catalyst. IG client sentiment suggests that traders are further net-long than last week, and the combination of current traders’ net-long sentiment and recent changes points to a stronger EUR/USD-bearish contrarian trading bias.

Friday: DJIA +0.50%; S&P 500 +0.22%; Nasdaq -0.61%, DAX -1.39%, FTSE -0.36%