December inflation numbers are optimistic!
While in the week ahead we will have amazing data to watch including economic data and earnings reports, and Friday's employment numbers, last week also we had an important point to watch.
According to the published data from the US Bureau of Economic Analysis, FED preferred inflation metric, the core PCE price index in December hit a new high in nearly 40 years, recording 4.9% annually, up from 4.7%. However, on the monthly scale, it was recorded to 0.5%, in line with market expectations and November numbers. In addition, the PCE price index also at 0.4% in December, decreased from 0.6% in November. Even if in the annual scale, the PCE increased 5.8%, up from 5.7%, still both PCE and Core PCE decreased in December.
That's not all, personal income also slipped to 0.3% in December, much lower than the market expectations and the prior number of 0.5%. Less income caused Personal spending also to fall by -0.6%, well below the previous reading of 0.4% (0.6% before revision) to test the lowest level since February last year. And finally, the consumer confidence index of the University of Michigan in the United States also fell to its lowest level since November 2011, at 67.2.
What these data tell us, is that we have to worry about inflation on an annual scale. However, the latest data from December NFP, CPI, and PCE, all tell us that we should not worry too much, as all signals tell us that we have started to see the inflation in the lower level, or at least lower increasing speed. And this slower inflation must continue in the following months with more economic developments.
Today and tomorrow most Asian markets will be closed due to the Chinese New Year. In the European season, we have to follow up the CPI data from European countries, while Eurozone GDP also must be watched closely. In the North American season, Canadian RMPI, and the US FOMC Member George Speech will be the most important data to watch.
Considering the mentioned date and numbers, with lower expected inflation, the pressure on FED also must be less to increase the inflation by any numbers more than 0.25% in March, which is already priced in. Therefore, we can see the US futures increasing well above Friday's higher closed levels, by 0.2% on average.
US dollar index on the other hand, in the short term with lower income and inflation, must be a bit softer. If ongoing tensions between Russia and Ukraine continues, the US ten-year treasury Yields which increased 27 basis points in January at above the current level of 1.79%, can decrease, and increase the US Dollar index rate, otherwise for at least short term, we can see softer USD.
In January, so far USD index increased by 1.7% against a basket of its main rivals at the current level above 97.15. From the technical point of view and as we can see in the bellow Daily figure, the US Dollar Index is in a clear uptrend. However, trading volume is decreasing to signal that the uptrend is losing steam. In the H1 and 30M charts, this signal is confirmed with price lowering under the 20 MA line easing the MACD histograms under its signal line. 96.45 is the next target and the first support for the DXY bears. On the flip side, not falling under the 97 mark, can put the 97.40 and above that in the spotlight.