USD on the rise on hawkish Fed

The USD was on the rise across the board yesterday, as market expectations for a hawkish Fed were maintained and at the same time resilient inflation data underscored such a scenario. We make a start though with the number of house starts and building permits, both for January, which tended to drop implying a contraction of economic activity in the US construction sector. In the employment market, the weekly initial jobless claims figure dropped instead of rising implying that the tightness of the US employment market is still present. On the flip side, the Philly Fed Business index dropped heavily into the negatives, implying a contraction of economic activity in the wider Philly area. As for inflation, we must note that the PPI rate accelerated beyond expectations for January on a month-on-month basis, highlighting that inflationary pressures are still present in the US economy. On the monetary front, we note that a number of Fed officials such as Cleveland Fed President Mester and St. Louis Fed President Bullard maintained their hawkish tone which intensified market expectations for more rate hikes. North of the US border we note that the CAD weakened against the USD, worried possibly for the Fed’s intentions and widening monetary policy outlook deviations with BoC, but also the drop of oil prices for a fifth consecutive day pushed the Loonie lower.

It should be noted that WTI’s price have been driven lower also due to market worries that the Fed’s hawkishness is to curtail economic activity further and may have an adverse effect on oil demand. Across the Atlantic, we note that UK’s retail sales growth rate accelerated more than expected, which was a positive for the UK on a macroeconomic level, yet failed to excite pound traders. On a monetary level, we note that BoE’s chief economist Huw Pill stated that the bank is to raise rates at a slower pace this year yet has to remain vigilant not to end its rate hiking cycle too soon. The pound’s drop though is unlikely to be halted easily as market worries for a possible recession in the UK economy are still intense. Finally, we note RBA Governor Lowe despite the political pressure being exercised on the Bank, due to the continuous rate hikes, defended to bank’s hawkish stance and expressed the hope that rates may start coming down in 2024.

GBP/USD dropped yesterday and is now reaching the 1.1925 (S1) support line. Given the downward trendline guiding the pair and the RSI indicator being at the reading of 30, we maintain a bearish outlook for cable. Should the bears remain in charge, we may see the pair breaking the 1.1925 (S1) support line with the 1.1740 (S2) support level, being the next possible target for the bears. Should the bulls take over, we may see cable reversing course, breaking the prementioned downward trendline in a first sign of a changing trend and aim if not breach the 1.2115 (R1) resistance line.

USD/CAD was on the rise yesterday breaking the 1.3465 (S1) resistance line, now turned to support. Given that the RSI indicator has reached the reading of 70 and an upward trendline is supporting the pair, we tend to maintain a bullish outlook for the pair. Should the ascent higher be maintained we may see USD/CAD breaking the 1.3570 (R1) resistance line and aim for the 1.3685 (R2) level. Should a selling interest be expressed we may see USD/CAD, reversing course and breaking the 1.3465 (S1) support line, the upward trendline and aim for the 1.3335 (S2) support level.

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In an easy Friday, we note during the European session the release of UK’s retail sales growth rate for January as well as the France’s final HICP rates for the same month. On the monetary front ECB policymaker De Galhau speaks. In the American session, we note the release of Canada’s producer prices for January while Richmond Fed President Barkin and Fed Board Governor Bowman are scheduled to speak.