There's been a noticeable change in inflation tendencies since Covid hit. The key question is whether this represents another regime change. CPI and PCE inflation data from the BLS, chart by Mish.  Chart Notes The CPI is a measure of prices directly paid by consumers.  The PCE price index includes expenses paid on behalf of consumers, notably corporate-paid health insurance and Medicare.  Core inflation measures exclude food and energy. The PCE numbers are seasonally adjusted. The CPI numbers are unadjusted. The Great Moderation The great moderation is the term economists use for the regime change starting in 1983 after Fed chairman Paul Volcker allegedly broke the back of inflation by spiking interest rates to 20 percent.  Will High Inflation Persist? Autocorrelation Chart Pre-Great Moderation by St. Louis Fed Credit for this post idea goes to the St. Louis Fed writers Michael McCracken and Trần Khánh Ngân for their article Will High Inflation Persist? Even though inflation started to cool toward the end of 2022, it is still unclear how long it will take to return to its long-run average—that is, if currently high inflation will persist.  Each of the two figures plots the autocorrelation coefficients between year-over-year inflation (measured as the percent change from a year ago of a given index) and inflation at horizons of one month up to 24 months (two years) ahead. The first figure plots autocorrelations before the Great Moderation, which we define as before 1983, while the second figure plots Great Moderation autocorrelations (1983 to present). Pre-Great Moderation, there are some modest differences in the persistence profiles of the headline and core measures of inflation, but overall, inflation is quite persistent even at longer horizons like one and two years into the future. In fact, autocorrelation for each lies above 0.5 two years out, suggesting it could take quite some time before these measures of inflation revert to the mean prior to the Great Moderation. Although all four measures of inflation persistence move closely with one another pre-Great Moderation, there is a clear delineation between the persistence profiles of core versus headline measures during the Great Moderation. As the next figure illustrates, the correlation between future and current inflation in this period declines at a much faster pace for headline CPI and PCE than for core CPI and PCE. Starting at nearly 1 at the one-month-ahead horizon, correlation coefficients remain above 0.7 at the one-year-ahead horizon for both core measures, while they had already dropped well below 0.5 for both headline measures. Autocorrelation of inflation Great Moderation Autocorrelation Chart During Great Moderation by St. Louis Fed What Regime Are We In? Inflation has been less volatile from 1983 to 2020.  Looking ahead, whether inflation persists may depend on which of the two regimes that we are in. In the economic literature, a regime switch occurs when there are significant breaks in the patterns of key macroeconomic variables from one period to the next. "What now?" is the key question. The St. Louis Fed did not offer an opinion but I will.  The regime has changed again. Inflation will be more persistent than most think. Ten Reasons For Persistent Inflation From 1983 on, the Fed had the wind of outsourcing and globalization at its back. Global wage arbitrage kept prices in check.  From 2020 on, the winds of de-globalization started blowing briskly in the Fed's face. President Trump started trade wars that Biden escalated. Trade wars increase prices. Contrary to Trump's claim, trade wars are neither good nor easy to win. Biden is more polite than Trump but is worse in practice. The war in Ukraine further disrupted supply chains. For example, the EU got most of its natural gas from Russia. Now the EU gets Liquid Natural Gas (LNG) from the US. That gas has to be compressed (liquified) then shipped across the ocean via diesel freight liners. This makes no economic sense but is set to continue. Biden's Inflation Reduction Act (IRA) is an illegal (by WTO rules) trade war in disguise. It's an "America First" plan that Trump would have been proud of. It's also in violation of WTO rules. Expect the EU to counter with an "EU First" plan.  The IRA's "America First" idea cannot possibly work given the minerals and materials needed have no trade-friendly source. Decarbonization is highly inflationary. We have neither the natural resources nor the infrastructure to make decarbonization work.  The US seeks to neutralize both Russia and China. But the attempt to neutralize Russia over the war in Ukraine drove Russia into China arms and increased energy costs across the board.  White House policy is effectively set by Progressives. Elizabeth Warren may as well be president given she is setting energy policy and student debt cancellation policy along with other inflationary giveaways.  Boomer retirements are wreaking havoc on...

EUR/USD climbs to a fresh multi-month top and draws support from a combination of factors. The recent hawkish ECB rhetoric underpins the Euro and remains supportive amid a weaker USD. Bets for smaller Fed rate hikes continue to weigh on the buck ahead of the US CPI on Thursday. The EUR/USD pair remains well supported by a combination of factors and holds steady near its highest level since late May through the Asian session on Thursday. The recent hawkish rhetoric from several European Central Bank (ECB) policymakers continues to benefit the shared currency. This, along with the prevalent US Dollar selling bias, acts as a tailwind for the major. French central bank governor Francois Villeroy de Galhau said on Wednesday that interest rate hikes would need to be pragmatic in the coming months. Furthermore, ECB Governing Council member Olli Rehn said that several more significant rate hikes are required to restrict growth and dampen inflation. Separately, ECB policymaker Robert Holzmann noted that policy rates would have to rise significantly further to reach sufficiently restrictive levels to ensure a timely return of inflation to the 2% target. The Federal Reserve, on the other hand, is expected to soften its hawkish stance amid signs of easing inflation. The bets were lifted by last week's US monthly jobs report (NFP), which showed a slowdown in wage growth during December. Furthermore, business activity in the US services sector hit the worst level since 2009 and suggested that the effects of the Fed's significant rate hikes in 2022 are being felt in the economy. This fueled speculations that the Fed will slow the pace of its policy tightening and weigh on the US Treasury bond yields. The yield on the benchmark 10-year US Treasury note drops to a nearly four-week low and continues to undermine the buck. The prevalent risk-on environment, fueled by the latest optimism over China's pivot away from its zero-COVID policy, further dents the greenback's relatively safe-haven status. Traders, however, seem reluctant to place aggressive bets and prefer to move to the sidelines ahead of the release of the US consumer inflation figure, due later during the early North American session. The crucial US CPI report will play a key role in influencing the Fed's rate-hike path and driving the USD demand in the near term. The Fed policymakers have indicated that they remain committed to combat high inflation and that rates could stay elevated for longer or until there is clear evidence that consumer prices are falling. Hence, a more robust US CPI print will lift bets for a more hawkish Fed and push the USD higher. That said, narrowing the Fed-ECB rate differential should help limit any deeper losses for the EUR/USD pair. Technical Outlook From a technical perspective, the occurrence of the golden cross (50-day SMA moving above 200-day SMA) also favours bullish traders. Moreover, positive oscillators on the daily chart, which are still far from being in the overbought territory, support prospects for a further near-term appreciating move. Hence, some follow-through strength beyond the 1.0800 mark, towards testing the next relevant hurdle near the 1.0855 region, looks like a distinct possibility. The momentum could extend further and allow the EUR/USD pair to reclaim the 1.0900 round figure for the first time since April 2022. On the flip side, the 1.0730 horizontal zone now protects the immediate downside ahead of the 1.0700 mark. Any further decline will attract fresh buyers and remain limited near the 1.0650-1.0645 support zone. That said, failure to defend the said support levels might prompt some technical selling and make the EUR/USD pair vulnerable to weakening further below the 1.0600 mark. Spor prices could then slide to test the 1.0540-1.0535 support zone en route to the 1.0500 psychological mark and the monthly low, around the 1.0480 region. The latter should act as a pivotal point, which, if broken decisively, will shift the near-term bias in favour of bearish traders.

In his first public appearance of 2023, US Federal Reserve Chair Jerome Powell participated in a panel discussion (Central bank independence and the mandate – evolving views) on Tuesday and reiterated the Fed’s commitment to contain inflation. Powell added that ‘restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy’. However, comments on upcoming policy moves were minimal. Early trading on Wednesday saw Aussie retail sales jump in November as inflation surprised markets to the upside, climbing to 7.3% in the 12 months to November, up from 6.9%. The Reserve Bank of Australia will meet for the first time this year on 7 February, projected to increase the Cash Rate by 25 basis points. Today’s inflation data out of the US serves as the macro highlight for the week. The consensus heading into the event forecasts a 6th deceleration to 6.5% in the 12 months to December, with a forecast range spanning between a 6.8% high and a 6.3% low, down from 7.1% in November. Technical View for Key Markets EUR/USD Resistance in View As seen from the weekly timeframe, the late pullback from the $0.9536 low at support from $0.9606 has seen the currency pair come within striking distance of Quasimodo support-turned resistance at $1.0778 this week. This represents healthy resistance, though a break higher could clear the path for a test of weekly resistance from $1.1174. Meanwhile on the daily timeframe, price action eventually discovered a floor around the support level at $1.0602, aided by the relative strength index (RSI) rebounding from the 50.00 centreline support. The unit is now poised to shake hands with prime resistance coming in from $1.0954-1.0864, arranged above the noted weekly resistance level. Across the page, the H1 timeframe shows price connected with a Quasimodo resistance at $1.0764 in recent hours, sheltered just beneath the $1.08 psychological handle. To the downside, $1.07 calls for attention, followed by Quasimodo resistance-turned support at $1.0691. Thus, between the two aforementioned resistance levels is an area sellers could welcome, considering the connection this zone has with weekly resistance noted above at $1.0778. Amazon Breakaway Gap North Daily Timeframe: Following a 50.0% slump last year, could things be on the up for Amazon? After price bottoming at a weekly Quasimodo support from $83.60, just ahead of a daily AB=CD bullish pattern (the 100% projection at $77.21), Wednesday witnessed a breakaway gap higher, one that forged a breakout above trendline resistance, taken from the high $146.57. Up 4.5% as of current trading, the share price has scope to extend recovery gains until meeting with resistance priced in at $101.44. Technicians may acknowledge a breakout above a falling wedge also occurred, drawn from between $103.79 and $85.87. This is a reversal structure, with many traders often taking the base value and adding this to the breakout point (orange rectangles) to calculate a profit objective, which, in this case, is set at $106.97, fixed just north of the resistance noted above at $101.44. Interesting Technical Structure on Ripple (XRP/USD) Kicking off with the H4 timeframe, it is clear to see the altcoin has run into familiar resistance in recent trading at $0.3722. To reach this level, you will see that a descending resistance was consumed, drawn from the high $0.4183. On the M15 timeframe, we have a potential AB=CD bullish structure forming off the H4 resistance which could draw price movement to retest the breached descending resistance-turned support mentioned above. Assuming bulls remain in control, further buying in this market could pull the action beyond $0.3722 to a H4 Quasimodo resistance at $0.3900. Copper Futures Tearing Higher Daily Timeframe: Trading higher for a 5th consecutive daily session, copper futures recently broke to the upside in dominant fashion. Given the base metal’s ability to forecast economic health (Doctor Copper), a rise in copper prices is generally viewed as a positive for the economy. Technically, however, trouble could be overhead. A Fibonacci cluster is positioned between $4.31 and $4.26, which happens to share space with a channel resistance, taken from the high $3.96. The relative strength index (RSI) also displays overbought conditions, testing indicator resistance at 73.68 (its highest level since March 2022). Therefore, given the position of price on the daily scale, buyers could remain at the wheel for the time being, at least until the noted Fibonacci cluster.

Annual CPI in the US is forecast to decline to 6.5% in December. Markets remain optimistic about a policy pivot despite hawkish Fed commentary. EUR/USD and USD/JPY are likely to react significantly to inflation data.  The US Dollar Index has been moving in a downtrend since early October with investors anticipating a less aggressive policy tightening by the Fed in light of soft inflation readings. On Thursday, January 12, the US Bureau of Labor Statistics will release the Consumer Price Index (CPI) data for December. Investors expect the annual CPI to decline to 6.5% from 7.1% in November and see the Core CPI, which excludes volatile food and energy prices, edging lower to 5.7% from 6%. On a monthly basis, the CPI is forecast to stay unchanged while the Core CPI is projected to rise 0.3%. Following the December policy meeting, the US Federal Reserve’s revised Summary of Projections (SEP) showed that policymakers’ median view of the policy rate at end-2023 rose to 5.1% from 4.6% in September’s SEP. Currently, the CME Group FedWatch Tool shows that markets are pricing in a nearly 80% probability of the Fed raising its policy rate by 25 basis points to the range of 4.5-4.75% in February.  Although Fed policymakers have been pushing back against the market expectation for a policy pivot in late 2023, the recent action in the US Treasury bond yields and the US Dollar Index suggests that investors are not convinced. The yield on the benchmark 10-year US Treasury bond is already down nearly 8% in January. Market implications The initial market reaction to inflation figures should be straightforward with a smaller-than-expected increase in monthly Core CPI weighing on the US Dollar and vice versa. Underlying details of the report will help investors figure out whether the impact on the US Dollar can be long-lasting.  While responding to questions at the post-meeting press conference in December, FOMC Chairman Jerome Powell noted that they will be keeping a close eye on non-housing core services inflation moving forward. Hence, the “Services less energy services” item of the CPI will be key, which rose 0.4% in November and stood at 6.8% on a yearly basis. In case the monthly Core CPI comes in lower than expected but this component rises at a strengthening pace, the US Dollar’s losses could remain limited following the immediate reaction. On the flip side, a hot Core CPI reading combined with a strong increase in the “Services less energy services” item should cause investors to reassess the possibility of a Fed policy pivot and trigger a steady recovery in the US Dollar. Assets to watch If the US Dollar sell-off picks up steam after the inflation report, USD/JPY and EUR/USD pairs are likely to offer better trading opportunities than GBP/USD. The European Central Bank adopted a surprisingly hawkish stance after the December meeting and markets anticipate the Bank of Japan (BoJ) to take a tightening step following its decision to tweak the yield curve control strategy heading into 2023. On the other hand, the Bank of England made it clear that it’s nearing the end of its tightening cycle. Market participants will also keep a close eye on Gold price. XAU/USD benefited from retreating US T-bond yield and started the new year on a firm footing. A strong rebound in yields could weigh heavily on the inversely-correlated pair. In case the 10-year US T-bond yield drops below 3.5% after the data, Gold price could target new multi-month highs near $1,900.

Join Senior Market Strategist & Trading Mentor Duncan Cooper as he watches price levels on the EURUSD weekly and daily charts.

Gold price replicates Tuesday’s Asian trading move so far this Wednesday. Fed Chair Jerome Powell offers relief to markets, keeps US Dollar on the back foot. US Treasury bond yields ease as Gold price awaits the United States Consumer Price Index data. Gold price confirms Golden Cross, a test of the $1,900 mark remains on the cards. Gold price is trading listlessly, consolidating below the eight-month high of $1,881 amid quiet trading this Wednesday. Gold price replicates the move seen during Tuesday’s Asian session amid a pause in the United States Dollar (USD) downside momentum. Federal Reserve Chair Jerome Powell fails to lift US Dollar The United States Dollar is extending its downside consolidative mode into the second day on Wednesday. Risk flows remain in vogue and weigh negatively on the safe-haven US Dollar as investors breathe a sigh of relief after US Federal Reserve President Jerome Powell refrained from touching upon monetary policy outlook while participating in a panel discussion at a Riksbank event on Tuesday. Markets expected Federal Reserve Chair Powell to maintain its hawkish stance, pushing for higher rates for longer to battle inflation. Investors anticipated Powell to join the chorus of his colleagues, especially after San Fransisco Fed President Mary Daly and Atlanta Federal Reserve President Raphael Bostic boosted expectations of a peak rate above 5.0% later this year. Meanwhile, Federal Reserve Governor Michelle Bowman said on Tuesday that the United States central bank would have to raise interest rates further to combat high inflation, likely leading rates further to combat high inflation and that would lead to softer job market conditions. His comments did little to alleviate the bearish pressure on the US Dollar, which allowed the Gold price to hold the higher ground. However, the downside in the US Dollar remained cushioned, courtesy of a recovery in the United States Treasury bond yields across the curve. The risk rally on global markets drained flows from the US government bonds, spiking up the US Treasury bond yields. The benchmark 10-year US Treasury bond yields rebounded after testing the key 3.50% level. Gold price awaits United States Consumer Price Index data With Federal Reserve Chair Jerome Powell’s appearance out of the way, all eyes remain on the critical United States Consumer Price Index (CPI) data due to be published on Thursday. The US calendar lacks any high-impact economic release on Wednesday; therefore, Gold traders will refrain from placing any big directional bets ahead of the key US data. The US Consumer Price Index is seen easing to 6.5% YoY and 0% MoM in December, while the Core figures are seen at 5.7% and 0.3%, respectively, in the reported period. The continued softening of the US Consumer Price Index (CPI) could allow the Federal Reserve to slow down its tightening pace. The US Consumer Price Index holds the key to determining the Federal Reserve’s policy move as soon as the start of next month. At the moment, markets are pricing roughly 80% odds of a 25 basis points (bps) rate hike by the Federal Reserve at its February policy meeting, the CME FedWatch Tool showed. Gold price technical analysis: Daily chart Nothing has changed technically for the Gold price, as bulls keep looking out for acceptance above the multi-month peak at $1,881. The $1,900 threshold will be next in sight of Gold buyers, above which doors will open toward May 2022 high at $1,910. The 14-day Relative Strength Index (RSI) is seen lurking beneath the overbought territory, keeping bulls hopeful. Adding credence to the bullish potential, the upward-sloping 50-Daily Moving Average (DMA) managed to close Tuesday above the mildly bearish 200DMA, confirming a Golden Cross.    On the flip side, failure to yield a daily closing above the $1,880 level could offer much-needed respite to Gold sellers. Friday’s low at $1,865 will be the immediate support thereon.   Further down, the $1,850 psychological level will be a tough nut to crack for Gold bears.