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The USD/JPY exchange rate fell slightly on the Federal Budget Balance report, as the data provoked almost no reaction in the market.

The US government posted a $49B budget surplus in the month of January, the Treasury Department stated on Monday. The report also showed that the US fiscal gap rose 11% to $175.7B in the four month period to January, compared to the same period a year ago. The gap is anticipated to widen further as an aging population increases spending on retirement programs and healthcare. The proposed budget released on Monday revealed the deficit widening to $984B in 2019, assuming that Congress would adopt all of the President Trump's proposals, including cuts of spending.

The AUD/USD currency pair rose just 6 base points or 0.08% to 0.7857, following the NAB business confidence figures.

The National Australia Bank report showed that the index of business confidence jumped to the nine-month high of 12 points in January. Meanwhile, an increase in business conditions index confirmed that business was booming in Australia in the beginning of the year, reflecting the enhanced global economic background. Moreover, the survey suggested that the country's economy is set to reveal stronger expansion pace in the coming quarters amid strong labour market. Therefore, the RBA is expected to raise interest rates in the first half of 2018, if pay growth strengthens and unemployment decreases further.

The DAX index has posted losses in the Tuesday session. Currently, the index is trading at 12,230.44, down 0.44% on the day. On the release front, there are no German or Eurozone indicators on the schedule for a second straight day.

US stock markets posted gains on Monday, raising hopes that last week’s correction is over. However, European investors appear to be more skeptical, as European markets are in red territory. The DAX has dropped 0.40% on Tuesday, erasing the gains from Monday. It’s been a rough February for investors, as the DAX has shed 7.6% since the start of the month. Investors will likely remain on the sidelines until there is stronger optimism that the massive sell-off is over.

German President Angela Merkel has reached an agreement with the socialist SDP to form a new government, but the price was steep, as the SDP extracted major concessions from Merkel, notably control of the powerful finance ministry. This will likely mark a shift in Germany’s eurozone policy, which had been marked by a conservative stance under former finance minister Wolfgang Schaeuble. The weaker members of the eurozone, such as Greece, will likely find a more sympathetic ear for financial help from the SDP than they did from Schauble. Many conservatives fear that the Olaf Scholz, who is expected to become finance minster, will not be as fiscally responsible as Schaeuble. On the weekend Scholz said that Germany should not dictate economic policies to other eurozone members. The coalition agreement still requires the consent of a majority of the 464,000 members of the SDP, and if the deal is rejected, Germany will likely be headed to new elections.

The euro has posted gains in the Tuesday session, after posting small gains on Monday. Currently, the pair is trading at 1.2342, up 0.42% on the day. It's another light day on the release front, with no major indicators. French Preliminary Payrolls edged up to 0.3%, beating the forecast of 0.2%. Wednesday will be busy on both sides of the pond. Germany and the eurozone will release GDP reports, and Germany will also publish Final CPI. The US will release CPI and retail sales indicators. Traders should be prepared for movement from EUR/USD during the Wednesday session.

ECB President Mario Draghi said last week that he is more confident that eurozone inflation is moving closer to the ECB target of just below 2 percent, due to improving economic growth. However, Draghi listed currency market volatility as an obstacle to the inflation target, and added that the ECB would carefully monitor the euro's exchange rates. Draghi's concerns about the exchange rate have been underscored by last week's stock market turbulence, which boosted the dollar and sent the euro lower by 1.6 percent. The ECB tapered its massive stimulus program from EUR 60 billion to 30 billion/mth in January, and the markets are looking for hints as to whether the ECB will normalize policy and wind up stimulus in September.

It's a quiet start to the week in the US, and the US dollar has been generally subdued. That will likely change on Wednesday, with the release of inflation and retail sales reports. The markets will be glued to the inflation indicators, as one of the catalysts for last week's stock market slide was triggered by concern that higher inflation would lead to additional rate hikes from the Federal Reserve and other central banks. If inflation numbers are higher than expected, we could see some volatility in gold prices and further sell-offs in the stock markets.

Spot Gold stands at the front foot on Tuesday and extends recovery rally from $1307 (08 Feb correction low) to crack strong barriers at $1330 zone (Fibo 38.2% of $1366/$1307 bear-leg / converged 10/30 SMA’s).

Weaker dollar on signs of global stocks recovery and expectations of stronger demand ahead of Chinese New Year, keep the price inflated.

Improving daily techs are supportive, with close above $1330 needed to generate fresh bullish signal for extension through $1334 (20SMA / 4-hr cloud base) towards next pivot at $1343 (Fibo 61.8% of $1366/$1307 / 4-hr cloud top).

Corrective dips on overbought hourly studies should be contained at $1320 zone to keep near-term bulls intact.

Res: 1331, 1334, 1337, 1343
Sup: 1326, 1320, 1314, 1307

Notes/Observations

UK Jan CPI of 3.0% was slightly above forecasts and above the BOE inflation target for the 14th straight month but off the six-year highs registered in the Nov data

Asia:

Japan PM Abe: Undecided on next appointment of the next BoJ Governor (Kuroda's first term is set to end on April 8, 2018)

Bank of Japan (BOJ) Gov Kuroda reiterated in parliament that must maintain 'powerful' easing for economy as was still distant to price target

Europe:

BOE’s McCafferty reiterated MPC view that interest rates will likely have rise earlier and gradually. Need to bring inflation back to target in the next 2 or 3 years

ECB's Stournaras (Greece) reiterated view that Greece economy forecast to grow 2.4% in 2018 and 2.5% in 2019

PM May stated that she asked political parties in Northern Ireland to make final push to restore devolved government. Possible to see devolved government in N. Ireland very soon

Ireland PM Varadkar: Irish and UK govt’s agreed the December Brexit deal on the Irish border still stood; wanted comprehensive free trade agreement with the UK post Brexit. Hopeful that N Irish parties Sinn Fein and the DUP could agree on the resumption of a power sharing govt this week

Americas:

President Trump proposed a $4.4T federal budget for 2019. White House 2019 budget plan sought $1.7T of cuts to mandatory spending and receipts. Raises GDP growth forecasts for 2018 thru 2020 period while trimming its inflation forecast for 2018 and 2019

Economic Data:

(NO) Norway Q1 Consumer Confidence: 20.3 v 18.3 prior

(NL) Netherlands Dec Retail Sales Y/Y: 1.5 v 6.1% prior

(JP) Japan Jan Preliminary Machine Tool Orders Y/Y: 48.8% v 48.3% prior

(FR) France Q4 Preliminary Private Sector Payrolls Q/Q: 0.3% v 0.3%e; Wages Q/Q: 0.1% v 0.2%e

(HU) Hungary Jan CPI M/M: 0.3% v 0.4%e; Y/Y: 2.1% v 2.0%e

(CH) Swiss Jan Producer & Import Prices M/M: 0.3% v 0.2% prior; Y/Y: 1.8% v 1.8% prior

(UK) Jan CPI M/M: -0.5% v -0.6%e; Y/Y: 3.0% v 2.9%e; CPI Core Y/Y: 2.7% v 2.6%e; CPIH Y/Y: 2.7% v 2.8%e

(UK) Jan RPI M/M: -0.8% v -0.7%e; Y/Y: 4.0% v 4.1%e, RPI-X (ex-mortgage interest payment) Y/Y: 4.0% v 4.1%e, Retail Price Index: 276.0 v 276.2e

(UK) Jan PPI Input M/M: 0.7% v 0.6%e; Y/Y: 4.7% v 4.1%e

(UK) Jan PPI Output M/M: 0.1% v 0.2%e; Y/Y: 2.8% v 3.0%e

(UK) Jan PPI Output Core M/M: 0.3% v 0.2%e; Y/Y: 2.2% v 2.3%e

(UK) Jan ONS House Price Index Y/Y: 5.2% v 4.9%e

(ZA) South Africa Q4 Unemployment Rate: 26.7% v 27.2%e (moves off 15 year high)

Fixed Income Issuance:

(ID) Indonesia sold total IDR20T vs. IDR8T target in 3-month and 12-month, 10-year,15-year and 20-year bonds

(ZA) South Africa sold total ZAR3.3B vs. ZAR3.3B indicated in 2037, 2040, 2044 and 2048 bonds

(ES) Spain Debt Agency (Tesoro) sold total €4.005B vs. €3.5-4.5B indicated range in 6-month and 12-month Bills

(CH) Switzerland sold CHF523.5 in 6-month Bills; Yield: -0.851% v -0.929% prior

(IT) Italy Debt Agency (Tesoro) sold total €7.677B vs. €6.25-7.75B indicated range in 2020, 2024 and 2048 BTP Bonds

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx600 -0.1% at 372.7, FTSE flat at 7173, DAX -0.1% at 12266, CAC-40 -0.1% at 5133 , IBEX-35 -0.6% at 9708, FTSE MIB -0.5% at 22215 , SMI -0.3% at 8799, S&P 500 Futures -0.6%]

Market Focal Points/Key Themes:

European Indices trade mostly lower taking the lead from weaker US futures. The FTSE trades little changed following a slightly hotter CPI reading, as Gilt Yields pare declines.

Earnings picked up this morning with weakness in shares of Michelin and Kering following results, while TUI, Randstad and Pendragon outperform.

Elsewhere Bourbon trades lower after announcing a new strategic plan, while Cegedim trades sharply lower after BPO France sells stake in the company.

Looking ahead notable earners include PepsiCo, Under Armour, HCA and Tower International.

Movers

Consumer Discretionary [Kering [KER.FR] -2.3% (Earnings), TUI [TUI.UK] +4.4% (Earnings), Pendragon [PDG.UK] +15% (Earnings), RWS Holding [RWS.UK]

1.3% (AGM Statement), Metro [B4B.DE] +1.6% (Earnings)]

Industrials [ Michelin [ML.FR] -1.2% (Earnings)]

Telecom [Telenet [TNET.BE] -7% (Earnings)]

Financials [Randstad [RAND.NL] +2.3% (Earnings)]

Energy [Bourbon [GBB.FR] -4% (new strategic plan)]

Speakers

Ireland Min D'Arcy: March Brexit deadline might not be met

South Africa govt said to have declared a nation disaster on drought

Japan Currency Head Asakawa: Watching to see if speculation was behind the recent JPY currency (Yen) price movements

China FX Regulator SAFE: reiterated its stance to prevent forex risks and to deepen the market opening

China PBoC Gov Zhou reiterated policy stance to maintain prudent monetary policy and appropriate growth in credit and social financing

IEA Monthly Report raised its 2018 global oil demand growth forecast from 1.3M bpd to 1.4M bpd. OPEC had almost cleared oil glut but faces shale danger. Saw US oil production overtaking Saudi soon and top Russia by end-2018

Currencies

USD was modestly lower as the Trump budget brings into focus the US twin deficits

GBP/USD was little fazed by the slight beat of the Jan CPI data to 3.0%. The BOE was more hawkish in its commentary last week and Carney noted that inflation could climb back to 3% in the short-term. Brexit concerns continued to be a headwind as an Irish minister express some doubt of deadlines being met by next month on negotiations.

EUR/USD was higher by 0.2% just ahead of the NY morning at 1.2315 area.

USD/JPY was lower by 0.9% to test under 107.70 area as dealers pondered the limits of an expansionary policy. Japan PM Abe noted that he was still undecided on next appointment of the next BoJ Governor (**Note: News reports over the possible reappointment of BOJ Gov Kuroda came out late last Friday , but USD/JPY did not recover to above 109). Japan Currency Head Asakawa noted that they were watching to see if speculation was behind the recent JPY currency (Yen) price movements

Fixed Income

Bund Futures trades up 37 ticks at 158.35 as futures maintain defensive conditions. Upside targets 158.85, while a continued move lower targets the157.25 level.

Gilt futures trade at 121.05 up 9 ticks, following mixed UK CPI data. Support continues to stand at 120.75 then 120.15, with upside resistance at 122.75 then 123.25.

Tuesday's liquidity report showed Monday's excess liquidity fell to €1.891T from €1.899T prior. Use of the marginal lending facility falls to €M from €3M prior.

Corporate issuance saw 2 issuers raise $2.4B in the primary market

Looking Ahead

05.30 (UK) Weekly John Lewis LFL sales data

05:30 (HU) Hungary Debt Agency (AKK) to sell in 3-month Bills

05:30 (EU) ECB allotment in 7-day Main Financing Tender (MRO) tender

06:00 (US) Jan NFIB Small Business Optimism: 105.7e v 104.9 prior

06:00 (IL) Israel Jan Trade Balance: No est v -$1.8B prior

06:00 (TR) Turkey to sell 2019 and 2027 bonds

To sell Zero Coupon 2019 Bonds; Yield: % v 13.53% prior, bid-to-cover: x v 6.66x prior

To sell 2027 Bonds; Avg Yield: % v 12.19% prior; Bid-to-cover: x v 2.76x prior

06:45 (US) Daily Libor Fixing

07:00 (RU) Russia announces weekly OFZ bond auction

07:00 (IS) Iceland Jan Unemployment Rate: No est v 2.2% prior

07:45 (US) Weekly Goldman Economist Chain Store Sales

08:00 (PL) Poland Dec Current Account: -€0.4Be v +€0.2B prior; Trade Balance: -€0.4Be v +€0.1B prior

08:00 (US) Fed’s Mester (voter, hawk) on monetary policy and economic outlook

08:05 (UK) Baltic Dry Bulk Index

08:55 (US) Weekly Redbook Sales

09:00 (EU) Weekly ECB Forex Reserves: € v € prior

11:30 (US) Treasury to sell 4-Week Bills

16:30 (US) Weekly API Oil Inventories

Is the sharp increase in put prices a sign of EUR/USD correction?

EUR/USD has been trading within a wide range since mid-January, as investors remain sceptical about further gains. After hitting 1.2537 on January 25th, the single currency has been grinding lower and moved as low as 1.2206 before stabilising at around 1.2320.

Looking at the option market, one can notice that the price of put options have increase steadily since January 2nd, especially for shortest term maturities, which tends to suggest that market participants are bracing for a correction in EUR/USD. The 1-week 25-delta risk-reversal measure hit -0.6375% yesterday, while the 1-month one stood at -0.7725%, compared to 0.22% and 0.2625% on February 2nd, respectively. For now, the sharp increase of put prices has not affected the spot market. However, this price divergence tends to suggest that investors are positioning themselves for a stronger US dollar. Indeed, the next couple of months will be key as the Fed, which has a new boss, Jerome Powell, is expected to lift interest rate in March. In addition. Rising inflation pressure in the US has forced investors to revise their rate hike expectations to the upside.

World markets recover after big drop

Following recent market drop, we see extended improvement on markets for the current week. MSCI World Index increased by 1.22%, closing at 2’076 points, its highest rate hike since April 24th 2017, supported by Materials (+1.79%), IT (+1.67%), Energy (1.64%) and Industrials (1.20%) sectors. US markets extended Friday’s gains, with the Dow Jones Industrial Average surging at 24’601 (up 410 points or +1.70%), heading toward hourly resistance at 25’293 (February 7th 2018 high) while S&P500 2’656 (+1.39%) and Nasdaq 6’981 (+1.56%) have similar rising momentums. On European side, Euro Stoxx 50 surged at 3’368 points (+1.27%), slowly recovering from last week’s selling pressures (last week performance at -5.60%). German DAX and French CAC40 increased by +1.45% and 1.20% respectively. Asian markets follow the same path for the most part, Hong Kong Hang Seng currently quotes at 29’878 (+1.35%) while Korean Kospi and Australian S&P/ASX200 both increase at 2’395 (+0.41%) and 5’856 (+0.60%). Japanese markets remain lagers, as Nikkei 225 is down at 21’245 (-0.65%) following Shinzo Abe announcement on Friday to reappoint Kuroda for a second term as chief of the Bank of Japan, whose monetary policy consists of maintaining monetary policy loose for the time being, thus as a consequence reducing pressures on Japanese yen (USD/YEN at 108 or -0.62%).

US 10 years Treasury yields currently react inversely as they increased by +0.25% during yesterday’s closing and decreased by -0.32% this morning, currently valued at 2.8494 (US 2 years treasury up 0.40% since yesterday, estimated at 2.0815). 10 years US – German Bund spread remains at 1.32% (0.91% 6 months ago).

Bloomberg commodity index surged at 86.33 (+0.80%) and is currently given at 86.67 (+0.40%).

Looking forward to tomorrow’s January Consumer Price Index (expected at 2%) and Japan 4Q GDP, we believe these data are core as to determine how markets will react in the coming days

WTI oil is holding within tight range on Tuesday, extending consolidation above new five-week low at $58.06, posted after steep fall last week.

The price remains within daily cloud following Monday’s recovery attempt which spiked to $60.81 (rally was capped by 55SMA), but subsequent fall signaled strong upside rejection, leaving daily candle with very long upper shadow.

Limited prospect for stronger recovery could be expected while the price stays in the cloud, as daily techs are firmly bearish and building bearish momentum. In addition, overall sentiment remains negative on rising concerns about growing US oil production which has already dented efforts by OPEC-led bloc to tighten oil market by reducing global output.

Negative near-term outlook could be expected while recovery is limited and signaling extended consolidation before fresh weakness.

Initial upper pivots lay at $59.63/60.00 (daily cloud top / Fibo 23.6% of $66.28/$58.06 fall), followed by 55SMA / Monday’s spike high at $60.81 and Fibo 38.2% of $66.28/$58.06 at $61.20, break of which would generate stronger bullish signal.

Session low at $58.93 marks initial support ahead of Monday’s low at $58.06 and lower pivots at $57.69/62 9daily cloud base / 100SMA) loss of which will be bearish.

Res: 60.91, 61.20, 62.07, 62.35
Sup: 58.93, 58.06, 57.69, 56.80

EUR/USD

Current level - 1.2313

The pair is currently testing 1.2330 resistance and an eventual violation of that zone could challenge 1.2430 resistance area. On the downside, a break through 1.2235 will trigger a sell-off towards 1.2090.

Resistance		Support
intraday	intraweek	intraday	intraweek
1.2330	1.2540	1.2235	1.2160
1.2430	1.2870	1.2160	1.2090

USD/JPY

Current level - 107.69

The bias is bearish, for a tight test of 107.30 support. Initial resistance lies at 108.30 and crucial on the upside is already 108.80.

Resistance		Support
intraday	intraweek	intraday	intraweek
108.30	111.90	107.30	107.30
109.70	113.40	107.30	105.90

GBP/USD

Current level - 1.3840

The rebound after 1.3760 low is still corrective in nature, thus preceding another leg downwards, to 1.3620. Trigger on the downside is 1.3800 low.

Resistance		Support
intraday	intraweek	intraday	intraweek
1.3900	1.4090	1.3800	1.3730
1.3985	1.4174	1.3620	1.3620

Crude oil slowly continues its fall, trading below 60. Hourly resistance at 64.77 (11/01/2017) is distanced while supports stand at 55.82 (07/12/2017 low) and 53.89 (01/11/2017). Expected to keep increasing as demand remains strong.

In the long-term, crude oil has recovered after its sharp decline last year. However, we consider that further weakness is very likely. For the time being the pair lies in an upside trend since June 2017. Support lies at 42.20 (16/11/2016) while resistance is located at 77.83 (20/11/2014). Crude oil is trading largely above its 200 DMA.