Thu, Jan 27, 2022 @ 14:30 GMT
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ECB Refine Message But Markets Focus on Tightening

Senior ECB officials tried to play down Draghi’s hawkish speech, yet the break higher of yields, Euro and GBP crosses suggests traders expect tightening of some sort over the coming months.

It’s not often a Central Bank directly tells markets how a speech or statement was meant to be deciphered. This now leaves the question as to whether Draghi was merely testing the waters and was not happy with yesterday’s reaction on the Euro as it was bid aggressively higher. Overall data from Europe is strong, continues to outperform the US, China and Japan and likely supportive of sustained growth and inflation. The only ingredient lacking for a tightening is a central bank committed to doing it.

Despite the correction, it wasn’t enough to stop the Euro hurtling higher and the Greenback extending losses. He US Dollar Index is within a cats-whisker from the low seen moments before Trump’s election speech. The Republicans inability to get the healthcare bill through before 4th July adds another reason to sell the Greenback, and the 95.88 low of election day can be seen as confirmation that Trump’s reflationary policies are indeed deemed as dead.

95.885 marks the election day low and momentum which has led us so close to it suggests it wants to break to the downside sooner than later. Unless it can form a basing pattern of some sort then 95.07 is likely the next stop.

Stronger oil prices only added to the downside momentum on USDCAD, which came close to testing 1.30. This is its most bearish session in 3 months and lowest level since Feb – momentum only points down from here as the Greenback is clearly unloved and oil prices still have room to bounce further.

The prior swing high is all the way up at 1.3345, so the bearish trend is under no immediate pressure to be tested. After coming close to, yet failing to break 1.30 then there is potential for stability over the Asia session whilst oil trading also goes quiet. Yet momentum here is also pointing firmly lower. At -1.19% open to open, it went beyond a -1 standard deviation day – an area it spends 75% of trading days within. On a weekly basis, the cross in on track for a 2nd consecutive -2 standard deviation week.

We believe mean reversion is at play with oil prices and further upside could see it travel towards $47. The rally has already made it to the 20-day MA, after reverting from the lower bollinger band. The DPO (detrended price oscillator) provided a bullish divergence after price retraced from both lower bollinger bands. We are using a 20 and 20 day bollinger band to help filter out more meaningful reversal, and the 40-day MA is currently at $47. Upon prior occasions, we have seen price reverse higher from the 20 and 40 day bollinger bands, it has travelled beyond the 20 and 40-day MA. The weaker Greenback us also helping oil prices move higher and technically, we see further upside potential on WTI.

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