US inflation slows and financial markets react; DOW and AUD/USD in the eyes

Charts: TradingView

Latest US Inflation Data: Meaning and Implications

It was quite a day in financial markets on Thursday as the highly anticipated US inflation data was released at 13:30 GMT.

Consumer prices, as measured by the Consumer Price Index (CPI), rose less than expected. According to the Bureau of Labor Statistics (BLS), consumer prices rose 7.7% on an annual basis, following September’s reading of 8.2%, the fourth decline since the 9-year high. 1% in June (its biggest increase since the early 1980s). Interestingly, this is the first time since February this year that headline year-over-year inflation has been below the 8.0% mark.

Core annual inflation in October, excluding food and energy price volatility, rose to 6.3% from 6.6% in September. In terms of month-on-month data, the CPI rose 0.4% in October, which is the same as September. Monthly core inflation rose 0.3%, however, after rising 0.6% in September.

The BLS pointed out the following:

The energy index increased by 17.6% for the 12 months ending in October and the food index increased by 10.9% over the last year; all of these increases were lower than those in the period ending in September.

This suggests that the US Federal Reserve may ease rate hikes, after the central bank made a fourth consecutive hike of 75 basis points on 2n/a November. Fed funds futures show the target rate probability for a 50 basis point hike at the mid-December Fed meeting has risen to 80.6%, according to the CME’s FedWatch tool. , with a 19.4% chance of a 75 basis point hike. This expectation was clearly felt in the markets on Thursday.

US stocks: a long-term bull flag in the eyes

Major US stock indices have been rising lately, seeing the Nasdaq 100 jump 6.0% at one point; the S&P 500 was not far behind at 4.6% with the Dow Jones up 3.0%. The Dow (see chart below) on the monthly scale is technically relevant, showing interest above the upper boundary of a bullish flag pattern, taken from the 36,952 high and a 32,272. Note that this market has been anchored in a dominant upward trend since the beginning of 2009.

The strength of pro-cyclical currencies on Thursday should come as no surprise. Against an overall weaker dollar (Dollar Index down nearly 2.0%), the Australian dollar, New Zealand dollar and Canadian dollar all outperformed strongly, up 2.5%, 2 .1% and 1.2%, respectively.

AUD/USD: head and shoulders, anyone?

AUD/USD (see daily chart below) is a market I’ve been watching for some time. Through a technician’s lens, attention was drawn to the potential reverse head and shoulders pattern in the daily timeframe ($0.6363; $0.6170; $0.6272).

Although the currency pair has been emphasizing a clear downtrend since the start of 2021, the price has pulled back from daily support at $0.6212 and just north of weekly demand at 0.5975 -$0.6166 (see weekly chart). The strength behind Thursday’s rise triggered a decisive close not only above the daily resistance at $0.6536, but also past the inverted head and shoulders neckline drawn from the high of $0.6547.

With the aforementioned resistance cleared, daily resistance calls attention at $0.6678, followed by the pattern’s profit target set at $0.6875. Adding to the current bullish mood, the Relative Strength Index (RSI) retested the upper edge of the 50.00 midline and touched the vicinity of 60.00, with indicator resistance visible at 61, 29.

Therefore, heading into Friday’s sessions, traders could pursue bullish scenarios above $0.6536 on the lower frames.

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