The Friday close could tell us a lot about how people feel about holding on to risk assets.

• The S&P 500 index rallied a bit during the trading session on Thursday but gave back gains rather quickly.
• This is a market that looks like it is running into a bit of overextension, and the fact that we did up forming a bit of a shooting star should not be a huge surprise considering that the market shot straight up in the air after the “surprise” CPI number.
• Now that the children are out of the way, cooler heads have prevailed, which is quite often the case during these announcements.

Ultimately, the CPI numbers coming out the way they did were cooler than anticipated, but the reality is that the inflation numbers in the United States are far too high to think that the Federal Reserve is going to slow down. In fact, they have been telling anybody that will listen to them that they are in fact going to continue to see reasons to hike rates. Because of this, it’s very unlikely that the stock market can simply go straight up in the air from here. Furthermore, we are heading toward the weekend, so the Friday close could tell us a lot about how people feel about holding on to risk assets.

With that being said, would not surprise me at all to see a little bit of a pullback at this point, perhaps reaching toward the bottom of the candle from the Thursday session. If we blow through that, then it’s likely that the market goes much lower, perhaps reaching down to the 4000 level. I do not think this market simply melts down, but the reality is that the economic situation has not changed whatsoever, so I’m not overly concerned about trying to get long at this point.

If we do break to the upside, then we would need to deal with the 200 Day EMA, which has a lot of psychology attached to it. We also have the 4300 level, which is a major resistance barrier, so that would take quite a bit of effort to get through. If we do that, then I think we have a longer-term “buy-and-hold” type of situation ahead of us. That seems to be very unlikely at this point though, simply due to the fact that we have so many crosscurrents out there.

Ready to trade our S&P 500 daily forecast? Here are the best CFD brokers to choose from.

The USD/MXN surged higher yesterday with a rapid movement that likely took many speculators by surprise and may have proven expensive.

Yesterday’s trading in the USD/MXN is a stark reminder for speculators that risk management is essential. Traders who were calmly seeking downside momentum on Tuesday on slight reversals higher after Monday’s lows traversing near 20.24000, may have suffered a death blow if they were not using stop losses yesterday and were over leveraged.

At one point yesterday the USD/MXN was tranquilly trading near the 20.51000 vicinity and may have looked like a good place to launch a short position. Short term day traders looking at technical charts may have viewed this juncture as a solid place to ignite a selling position. However, with a few lightning bolts, the USD/MXN was suddenly trading near a high of 20.83200. As of this writing the USD/MXN has come off of its highs and is traversing near 20.71000 with rather fast conditions still being demonstrated.

USD/MXN Express Train Upwards is a reason to be Suspicious and Extremely Careful

The move in the USD/MXN the past few days serves as a friendly reminder that Forex is not for the weak of heart. The vicious move higher can be explained by pundits by saying that growth forecasts in Mexico came in better than expected, but frankly it does not make sense – the Mexican peso should logically get stronger because of this result. Some may point to the lack of clarity regarding U.S Federal Reserve policy however that is suspicious thinking too, because clarity has been in short supply for a while.

• Traders should brace for the potential of further whipsaw results in the USD/MXN and use risk taking tactics with sincere care today.
• Yesterday’s massive buying spree will likely produce additional volatility as financial houses try to find equilibrium with the USD/MXN currency pair, which may cause further pain for day traders.

Support Levels need to be monitored and Speculators may Find Selling Tempting

Speculators who survived yesterday’s price action may be tempted to sell the USD/MXN if support levels start to look vulnerable.  Because of the elevator like ride upwards yesterday, support near the 20.69000 level should be watched carefully. This price which is very close to actual trading as of this writing could prove crucial. If it is broken lower and the 20.68000 to 20.65000 vicinities again are flirted with, it could mean selling pressure will reignite.

Yesterday’s buying surge after lows were tested on Friday and Monday which tested values not seen since early July, is a warning sign for traders that volatility is always possible in the USD/MXN. It could also mean there are speculative opportunities to sell and look for downside action, but risk management is crucial. Stay alert.

USD/MXN Short-Term Outlook

Current Resistance: 20.75800

Current Support: 20.68300

High Target: 20.82890

Low Target: 20.55900

Ready to trade our Forex daily analysis and predictions? Here are the best Forex brokers to choose from.

I believe we will continue to see more of a “fade the rally” type situation in this pair.

The British pound initially tried to rally on Monday, but could not hang on to the gains. Because of this, it looks as if the British pound is ready to go lower, which does make sense considering just how hawkish the Federal Reserve is as of late. The Fed has already promised to raise interest rates another 100 basis points, and some are even thinking it may be closer to 150 basis points.

On the other hand, the Bank of England, although sounding more hawkish, is nowhere near raising rates to that effect. Because of this, the interest rate differential alone will continue to drive the US dollar higher. Furthermore, there are concerns about recession around the world, and that typically causes a shortage in US dollars. There are trillions of dollars worth of debt around the world right now that need to be repaid in greenbacks, so the demand is extraordinary.

When I look at this chart, the most interesting trait for me will be to fade rallies as they occur and show signs of hesitation. Monday was another example of such potential trading, albeit on a short timeframe and during a holiday schedule. Speaking of the holiday, it was Independence Day in the United States, and with none of the banks in New York putting a lot of money to work, the US dollar still managed to fight off an attempt to sell it off by the Europeans. This says quite a bit about the future direction of this market, and I believe we will continue to see more of a “fade the rally” type situation in this pair.

We would have to break above the 50-day EMA at the 1.24 level to begin to think about going higher, and even then I would not be convinced until we broke above the 1.26 level. I suspect that it is much more likely that we go to the 1.18 level before all of that happens, as it looks like we are going to do everything we can to break this market back down. The 1.20 level of course has attracted a lot of psychological support, but whether or not it holds is a completely different argument altogether. I do think that eventually it gets broken through and we drop further.

I think a pullback is imminent, and probably healthy if you are bullish longer-term.

The DAX fell a bit on Tuesday to break down below the €14,400 level, giving back some of the gains from the recent surge higher. The DAX I had gotten rather close to the 200-day EMA, which has a major influence on longer-term traders. Furthermore, there was quite a bit of horizontal resistance in this area, so it’s not a huge surprise to see that we gave up some gains. Furthermore, a lot of the fundamental situation has not changed so one has to wonder whether or not this was a “bear market rally” to begin with.

Looking at the candlestick for the day does suggest that we could get a little bit further weakness, but I would anticipate that there should be interest in the DAX near the 50-day EMA underneath, which is currently higher. In other words, I think the downside is certainly possible, but it may be a bit limited. As long as that’s the case, then I think we will continue to see more chop than anything else. It’s probably worth noting that we did break above a significant downtrend line recently, so it is possible that we will continue to try to recover. However, the fundamental situation is so tenuous around the world that it’s a bit of a reach to get overly excited at this point.

The market has been very noisy as of late, and by the market, I don’t necessarily mean just the DAX, but stocks in general. There are a lot of concerns when it comes to inflation and global growth. Germany is a major exporter to not only the rest of the European Union, but the rest of the world for that matter, so how things behave in other parts of the globe will have a major influence on what we see here in German equities. As long as there are concerns about export economies not being able to purchase goods, it’s difficult to see how the DAX has true traction. If we break above the €15,000 level, then we can revisit a longer-term trade, but in the meantime, I think a pullback is imminent, and probably healthy if you are bullish longer-term. Underneath, see the €13,600 level as a potential support level that traders will focus on.

Previously, Lagarde said that the ECB is ready to deploy more monetary stimulus to aid the Eurozone’s economic recovery. 

This week the Euro has recovered, gaining 0.90 percent, and breaking a two-week losing streak.

Recently, the European Central Bank President, Christine Lagarde hinted at a possible change in the bank’s inflation target, commenting that given the current low inflation the concerns policymakers are facing are different. This calls for a change in the bank’s current monetary policy strategy, which would strengthen the bank’s capacity of monetary policy to stabilize the economy when facing the lower bound.

Previously, Lagarde said that the ECB is ready to deploy more monetary stimulus to aid the Eurozone’s economic recovery. 

“ECB stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry,” she said.

Lagarde also linked the deflationary forces with the late appreciation of the Euro, which has appreciated since May, despite losing some ground last month. She said that the bank would continue monitoring the euro’s strength, though didn’t hint any possible intervention in the foreign exchange market.

Coronavirus cases are currently surging in Europe, with 5,042,794 reported cases (including Russia) as well as 222,765 total deaths. In the Eurozone, Spain leads in the number of infections, with 769,188 total cases as well as a death toll of 31,791, followed by France, the UK, and Italy.

Fears for a second wave are increasing, given the surge of cases in countries like Spain, Germany, and France. Governments are already announcing measures to curb the advance of the virus, for example, the German Chancellor Angela Merkel announced the government’s plan to act regionally this time, with the purpose of avoiding another national lockdown, while the United Kingdom government made the decision to impose a curfew on pubs, bars, and restaurants, a move that has been heavily criticized by the leisure sector representatives.

On Monday, the markets learned that services sentiment stood at -11.1 in September, improving from the previous month’s -17.2 and way better than what the analysts expected, as they foresaw it to be at -15.3. In line with the analysts’ expectations, consumer confidence stood at -13.9, improving from August’s -14.7, while Industrial Confidence stood at -11.1, below the analysts’ expectations who foresaw it to be at -9.5, but better than August’s figure, which stood at -12.8. Business Climate was at -1.19, improving from August’s -1.34 and better than the -1.38 that the analysts expected.

On Thursday Markit Economics published the Manufacturing PMI for September, which was at 53.7, signaling an expansion of the manufacturing sector and remaining unchanged from the previous month’s report.

Eurostat confirmed Europe is now facing deflationary pressures, as the producer price index managed to contract by 2.5 percent in August (year-to-year) after going down by 3.1 percent in the previous month. Surveyed analysts expected it to contract by 2.7 percent. In monthly terms, the producer price index climbed by 0.1 percent in August, remaining in line with the analysts’ expectations and below the previous month’s figure, which stood at 0.7 percent.

The unemployment level slightly rose in August, at 8.1 percent, in line with the expectations of the surveyed analysts and over the previous month’s 8 percent.

The bank of Canada Tiff Macklem said on Thursday that it’s certain that the Canadian government will exit the pandemic with higher public debt levels. 

Last week, the Canadian Dollar gained 1.45 percent against the greenback, advancing for the second consecutive week.

So far, 180,179 coronavirus cases have been reported in Canada, while the death toll is at 9,608. Given the recent rise in the number of COVID-19 cases in certain zones, new restrictions have been imposed by the Ontario government, like limiting indoor dining at restaurants and bars, as well as closing movie theatres, gyms, and casinos.

On Tuesday, Canada’s national statistical agency reported that imports amounted to 47.38 million in August, after being at 47.93 billion in the previous month. Exports amounted to 44.93 million in the same month, after being at 45.4 billion in July. International Merchandise Trade, which registers the difference in the value of imports and exports of Canadian goods (excluding services), stood at -2.45 billion, way below the analysts’ expectations, who foresaw it to be at -0.29 billion and after being -2.53 billion in the previous month.

On Wednesday, the Richard Ivey School of Business published the Ivey Purchasing Managers Index for September, which signaled a slower expansion of the business sector in four months, at 61.1 after being at 64.6 in the previous month. The seasonally adjusted PMI was at 54.3, signaling a slower expansion, as the previous month’s PMI stood at 67.8.

On Thursday, the Canadian Mortgage and Housing Corporation reported that new residential construction projects dropped to 209.000 (year-to-year), fewer than what the surveyed analysts expected, as they foresaw it to be at 240.000, and after being at 261.500 in august.

The bank of Canada Tiff Macklem said on Thursday that it’s certain that the Canadian government will exit the pandemic with higher public debt levels. He highlighted that without the fiscal and monetary policy actions that have been taken since the beginning of the pandemic the economic devastation would have been higher.

“As much as a bold policy response was needed, it will inevitably make the economy and financial system more vulnerable to economic shocks down the road,” he said during a video conference with a financial risk management group, “Without the fiscal and monetary policy actions, the economic devastation of the pandemic could have been much, much worse,” he added.

Macklem also commented that full economic recovery will take a long time while asking the public to practice physical distancing in order the avoid the uncontrollable spread of the virus and a second lockdown.

On Friday, Canada’s national statistical agency reported that the Unemployment Rate fell to 9 percent in September, lower from what the analysts expected as they expected it to fall to 9.7  percent, and below the previous month’s figure which stood at 10.2 percent in the previous month. The Participation Rate stood at 65 percent, after being at 64.6 percent in the previous month and over the analysts’ expectations, who foresaw it to be at 64.8 percent.

Average hourly wages went up by 5.43 percent, after being at 6 percent in the previous month, while Net Change in Employment was at 378.200, higher than the previous month’s figure, which stood at 245.800 and over the analysts’ expectations, who foresaw it to be at 156.600.

So far this week, the Japanese yen has advanced 0.64 percent against the US dollar, continuing with a three-week gaining streak.

The demand for safe-haven currencies has increased lately as coronavirus cases continue increasing in places like Europe and the United States. In Japan, the total number of reported coronavirus cases topped 100,000, as cases continue surging on the island and amid the reopening of the economic activity.  More than  1,700 deaths have been linked to the virus. Globally, 44,878,011coronavirus cases have been reported as well as 1,180,914 total deaths.

On Sunday, the Bank of Japan published the corporate Service Price Index, which measures the prices of services that are traded by companies. The index stood at 1.3 percent in September (year-to-year), after climbing by 1.1 percent in the previous month. On Monday, the Cabinet office reported that the Coincident Index stood at 79.2 after being at 78.3 in July. August’s Leading Economic Index stood at 88.4 after being at 86.7 in the previous month.

On Wednesday,  the Ministry of Economy, Trade, and Industry reported that retail trade dropped by 8.7 percent (year-to-year), after going down by 1.9 percent in August, and worse than what the analysts expected, as they foresaw it to go down by 7.7 percent. Large Retailers’ Sales dropped by 13.9 percent in September, after decreasing by 3.2 percent in August.

On Thursday, the Bank of Japan announced its decision to leave the cash rates unchanged, remaining in line with the analysts’ expectations. In its report, the bank downgraded its economic growth and inflation forecasts.

The outlook, according to the report, remains uncertain. The GDP is expected to contract by 5.5 percent by the end of the current fiscal year, higher than the previously estimated. Next year, the economy is expected to go up by 3.6 percent, better than previously expected. The bank foresees consumer prices to fall by 0.6 percent, a higher contraction than previously expected, which will probably feed the concerns for too low inflation levels.

“Japan’s economy will likely improve as a trend as the impact of the coronavirus pandemic gradually subsides, though the pace of recovery will be moderate,” stated the bank in its report.

The Japanese economy could contract by 5.5 percent by the end of the current fiscal year, which is higher than previously expected. Nevertheless, next year’s recovery is expected to be more pronounced, as the Gross Domestic Product could increase by 3.6 percent.

The Prime Minister, Yoshihide Suga said that he would push for “budgetary steps” to aid Japan’s economic performance. This boosted the expectations for a third budget, which could be announced by next week.

The third budget is very needed, at least according to the surveyed analysts, given the enormous impact of the pandemic on the Japanese economic performance. The Japanese government already pledged to spend around 2.2 trillion dollars on fiscal aid. If approved, an additional $95.51 billion package could be implemented, though the amount is yet to be decided.

The US faces the risk of longer-run damage to the productive capacity of the economy as well as to the lives of those that have been affected by the spread of the coronavirus pandemic. 

The US dollar dropped by 0.39 percent last week against a bundle of its main competitors, giving up last week’s gains and closing the week at the 92.32 level.

The US Census Bureau also reported last week that retail sales went up by 0.3 percent in October (month-to-month), lower than analysts’ expectations of 0.5 percent, and after advancing by 1.6 percent in the previous month. The retail sales control group went up by 0.1 percent in October, lower than analysts’ expectations of 0.5 percent and after being at 0.9 percent in the previous month. Excluding the automobile sector, retail sales advanced by 0.2 percent in October, lower than analysts’ forecast of 0.6 percent, and after being at 1.2 percent the previous month.

In monthly terms, industrial production went up by 1.1 percent in October, higher than the forecasted 1 percent and after shrinking by 0.4 percent in the previous month. The Import Price Index shrank by 0.1 percent in October, after going up by 0.2 percent in the previous month and lower than the forecasted 0.2 percent. The Export Price Index went up less than expected, gaining 0.2 percent and after going up by 0.6 percent in September.

Federal Reserve Chairman Jerome Powell commented that the economy we knew is probably a thing of the past, despite beginning the path towards economic recovery.

“We’re recovering, but to a different economy,” he said. “It will be one that is more leveraged to technology, and I worry that it’s going to make it even more difficult than it was for many workers.”

Powell highlighted the fact that the US faces the risk of longer-run damage to the productive capacity of the economy as well as to the lives of those that have been affected by the spread of the coronavirus pandemic. So far, 12,589,088 COVID-19 cases have been reported in the United States, as well as 262,701 total deaths. Since the beginning of the month, around 3 million new cases have been reported.

On Wednesday, building permits went up by 1.545 million, remaining unchanged from the previous month’s figure and lower than expectations of 1.56 million. In monthly terms, housing starts stood at 1.53 million, higher than the previous month’s 1.459 million and higher than the forecasted 1.46 million.

On Thursday, the US Department of Labor reported that initial jobless claims were at 742,000 in the week ending November 13, after being at 711,000 in the previous reporting period. The figure was higher than analysts’ expectation of 707.000.

Joe Biden was declared the winner of the presidential election by the media networks, though President Donald Trump’s legal team is claiming widespread election fraud. Georgia, one of the disputed states, already certified its election results though Trump’s team has asked for a second recount, while Pennsylvania and Michigan are expected to certify their results this week.

Germany, UK considering further lockdowns; Eurozone economy improving, though worse than expected.

According to Germany’s Federal Statistical Office, retail sales rose by 5.6% (annually) in November, higher than expectations of 3.9% but lower than the previous month’s 8.6% rise. In monthly terms, retail sales rose 1.9% in November, lower than October’s 2.6% rise but significantly higher than forecasts of a 2% decline.

The Federal Statistical Office linked the expansion with a surge in online sales and home improvement spending.

Retail sales are set to grow by 4% this year, despite the disastrous effects of the pandemic on economic activity. This is good news for Germany, which currently struggles with the spread of the virus.

In order to curb the spread of the virus, the German government has been considering extending the national lockdown by three weeks. The majority of Germany’s states already agreed to impose this measure, which is set to be announced on Tuesday after a meeting with Chancellor Angela Merkel.

Since mid-December, schools, stores and services have been closed due to COVID-19, which has infected 1,796,216 individuals and killed 35,632. With the new measures, restrictions would end on January 31^st instead of January 10^th.

According to recently released data, employment ended a 14-year gaining streak as it fell by 1.1% year-on-year, the sharpest decline since 1993. Markit Economics reported a slower expansion in the manufacturing sector in December, as the Manufacturing PMI stood at 58.3 after being at 58.6 in the previous month.

German Chancellor Angela Merkel recently concluded the Comprehensive Agreement on Investment with China, which would further improve the economic relationship between both countries. The decision was made despite President-Elect Joe Biden’s requests, as the agreement would make it harder to align the European Union’s policies with those of the United States.

Economic Calendar

With the New Year holiday last week, there were no data regarding the European economy.

This week, Markit Economics reported that the European Union’s manufacturing sector expanded less than expected, with a Manufacturing PMI reading of 55.2, less than the previous month’s 55.5. Predictions were that it would remain unchanged.

Euro Recovers

So far this week, the euro has gained 1.21% against the US dollar, breaking a two-week losing streak. It also managed to recover against the pound sterling, advancing by 1.88 percent and breaking a three-week losing streak.

The euro’s recent gains can be linked to the UK’s decision to impose another lockdown due to the uncontrolled spread of a recently identified strain of COVID-19. This fall offset sterling’s gains from a post-Brexit trade deal.

“Sterling lost ground against the euro yesterday as the market reacted poorly to the prospect of a third national lockdown in England,” explained an analyst at Caxton FX. “With Brexit now out of the way, the economic backdrop will be a more significant driver of the pound both today and in the coming months.”

The European Central Bank, which is now amid an ongoing policy review, provided additional stimulus in December, expanding its emergency bond purchases program by 500 billion euro. ECB Governing Council member Pablo Hernandez de Cos called the Bank’s governing board to explore other options that could help reduce the volume of bond purchases.

“I think yield curve control is an option worth exploring,” de Cos commented. “The experience of these central banks suggests that, if sufficiently credible, yield curve control allows the central bank to achieve a yield curve configuration with a lower amount of actual purchases, hence enhancing efficiency.”

Eurozone Economy Worse Than Expected, Though Improving

Since our last report, the Eurozone growth data has remained unchanged. Inflation remained in line with analysts’ expectations, though way below the ECB’s target. The latest unemployment level signals a slight decline in the labor market at 8.4% after being at 8.3% in September.

According to a poll of economists led by the Financial Times, analysts expect the Eurozone economy to rebound by 4.3% this year. This figure heavily contrasts with the International Monetary Fund’s projection, which stood at 5.2%.

In terms of unemployment, analysts are more pessimistic with predictions of over 10%, significantly higher than the last reading.

Upcoming Events

• Tomorrow, IHS Markit will release both the Composite and Service PMIs for the Eurozone.
• On Thursday, retail sales data is expected to be published.
• Also on Thursday, the Consumer Price Index, business climate and industrial confidence data will be released.
• On Friday, November’s unemployment data will be released.