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The January read on US income & spending point to rising rates. The news comes in the midst of newly appointed Fed chief Jerome Powell’s first testimony before congress and echoes his stance; a gradual pace of rate hikes is appropriate. What this means for traders is this, the FOMC is going to raise interest rates this year. Probably three times and the next increase is likely to happen at the next meeting. This outlook has shifted the balance of power in favor of the dollar but don’t expect a quick reversal.

Personal income rose at a rate of 0.4% in January as labor markets tighten, and wage inflation picks up. The gain is a tenth better than expected and expansionary from the previous month in evidence of growing momentum within the economy. Disposable personal income, a measure of free cash flow, rose by 0.9%. On the spending front the numbers are a little tamer but still positive and still expansionary at 0.2% MoM.

The PCE Price Index, the Fed’s favored tool for measuring consumer level inflation, also rose by 0.4% and a tenth hotter than expected. At the core level gains were smaller at 0.3% but still expanding and leading to overall YoY increases that are approaching the Fed’s 2% target. Headline inflation is running at 1.7%, core at 1.5%, both unchanged from last month but both expected to rise in the coming months. The Fed’s target is for inflation to hit the target medium term, in a year or two, I think we might see that reached by the end of the year.

The EUR/USD broke through the 1.21825 level in early Thursday trading. This is the first move in a break of support that will confirm a reversal in the pair. This reversal is driven by shifting central bank sentiment, sentiment that is getting more hawkish related to the FOMC and less hawkish related to the ECB. The pair rallied on the US news, but the rebound was short-lived. Price action confirmed resistance at the now-broken support line and is heading lower to my first target of 1.2100.

EUR/USD broke through the 1.21825 level

The British pound was able to hold steady versus the dollar although the pair is showing signs of weakness. Thursday’s early action set a new 6 week low on news the UK’s HPI index fell unexpectedly. The index is a measure of housing prices and a sign of activity within the sector. The January data showed a -0.3% decline versus expectations for a small increase. Mitigating this news was a stronger than expected read on manufacturing PMI which helped to support the pound.

The GBP/USD is now in danger of moving to new lows and the indicators are in favor of that outlook. Both MACD and stochastic are moving lower and suggest a fall to 1.3600 is coming.

GBP/USD is now in danger

The greenback was able to make gains versus the Swiss franc on weakness in the Swiss retail sector. The retail sales figures for January show a surprise -1.4% decline that shocked economists who were expecting a consensus 1.1%.

The USD/CHF gained a quarter percent on the news and moved up to a new 6 week high. The move breaks resistance at the 0.9450 level and has set the pair up for a big move higher.

 USD/CHF gained a quarter percent

The indicators are consistent with a reversal, the first target for resistance is 0.9600.

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