Sample Category Title

• ETHUSD extends structure of higher highs
• Posts 21-month peak a tad below 3,000 psychological mark
• Momentum indicators point to overbought conditions

ETHUSD (Ethereum) has been developing within a bullish channel since late October, surging to consecutive higher highs. On Tuesday, the price leaped to a fresh 21-month peak of 2,984, but traders should be cautious as the momentum indicators are hinting at overbought conditions .

If buying pressures persist and the price storms to fresh highs, the bulls might attack the 2022 hurdle of 3,050. A break above that zone could open the door for the February 2022 peak of 3,250. Failing to halt there, Ethereum may advance towards the April high of 3,580.

Alternatively, in case of a pullback, the price may slide towards the January peak of 2,720, which could serve as support in the future. Further declines might cease at 2,450, a region that acted as support in March 2022 and coincides with the 50-day simple moving average (SMA). Even lower, the January bottom of 2,170 could provide downside protection.

In brief, ETHUSD’s rally has accelerated after the profound break above the 50-day SMA, with the price jumping to its highest since April 2022. However, the risk of a pullback is increasing as the short-term oscillators are starting to warn of an overstretched advance.

Markets

This morning, the PBOC surprised markets with a much bigger than expected 25 bps cut of the 5-year prime loan rate (3.95%) aiming to support the real estate market and hopefully also helping to provide some oxygen (and confidence) for broader economic activity. However, the market reaction in China and abroad was lukewarm. For now, markets clearly maintain their doubts on a sustained recovery of the Chinese economy. European equities mostly didn’t go anywhere (Eurostoxx currently -0.2%). US indices open in red, suggesting some tentative risk-off sentiment (S&P 500 -0.6%). In the absence of other high profile data, European markets today kept a closer eye on the ECB quarterly indicator of negotiated wages. The Q4 2023 figured eased from 4.7% to 4.5%. This should give the ECB some comfort. In its December staff projections the ECB still upwardly revised its 2024 forecast for compensation per employee to 4.6% from 4.3%. ECB policy makers recently pinpointed too high wage growth as a major risk for a smooth continuation of the disinflationary process. However, as many of the key collative wage negotiations are taking place in the first quarter, it probably will take until the May report for the ECB to get some real clarity in this topic. For 2023 as a whole, the ECB saw 4.5% of negotiated wage growth compared to 2022. The impact of the release on European interest rate markets remains modest. German yields are easing between 3.5 bps (5-y) and 2.0 bps (30-y). US yields change between -5.5 bps (2-y) and +1.0 bps (30-y).

On FX markets, the dollar still can’t find its composure, even as last week’s inflation data postponed markets’ expectations for a first Fed rate cut to June. DXY slips below the 104 big figure. EUR/USD ‘easily’ cleared the early February ST top at 1.0806 (currently 1.082) breaking out of a ST downtrend chancel. The yen underperforms the global USD decline, but the USD/JPY also struggles to hold the 150 barrier. EUR/GBP initially extended its return higher in the 0.85 big figure, but ceded most of the initial gains in afternoon trading. Still, the EUR/GBP 0.8493 support looks ever more solid. In a hearing before the UK Treasury committee, BoE governor Bailey sounded rather dovish as he said that market expectations on a BOE pivot to rate cuts are ‘not unreasonable’. He also signaled that inflation doesn’t have to fall to the 2.0% target before the BOE can start cutting rates. UK gilts outperform Bunds today, easing between 6 bps (5-y) and 4 bps (30y).

News & Views

The Belgian debt agency announced that it will open two retail issues on Thursday with the subscription period running from February 22 to March 01. The retail notes are one with a 1y maturity (3% Mar2025) and one with a 3y maturity (2.5% Mar2027). It will only be tomorrow clear whether the 1y note will enjoy a preferential withholding tax regime (15% instead of 30%) like the stellar retail note launched in August of last year (€21.9bn raised). If granted the exemption, the 1y Note will yield 2.55% instead of 2.10% after withholding tax. This compares with a net yield of 2.81% for the August retail note. The 3y issue will have a 1.75% yield after taxes. The combined issue size is this time capped, at €6bn.

Canadian inflation was flat in January whereas markets feared a new acceleration to 0.4% M/M. Y/Y-inflation slowed more than hoped, from 3.4% to 2.9%. The largest contributor to headline deceleration was lower Y/Y-prices for gasoline in January (-4%) compared with December (+1.4%). Prices growth for food purchased from stores and lower prices for airfares and travel fares also contributed to the deceleration. Mortgage interest costs (27.4% Y/Y) and rent (7.9% Y/Y) remained the biggest positive contributors. Since Q1 2022, headline inflation was only lower in June of last year (2.8% Y/Y). Underlying price gauges improved more than expected as well with the trimmed mean core CPI – the Bank of Canada’s preferred measure - slowing from 3.7% Y/Y to 3.4%, matching the lowest level since August 2021. Excluding shelter costs, CPI rose 1.5% from a year ago. At its January policy meeting, the BoC switched a tightening bias to a neutral approach, with the key question being how long the policy rate must be kept at the current level (5%). Money markets discount a first rate cut in June, in line with the Fed. The Canadian dollar loses out again USD after today’s CPI print (USD/CAD>1.35). CAD swap rates drop up to 13 bps at the front end of the curve.

CPI growth decelerated to 2.9% year-over-year from 3.4% in December – back under the top end of the Bank of Canada’s (BoC) 1% to 3% target range for the first time since June 2023.

Energy and food price growth continued to slow, but the Bank of Canada’s preferred ‘core’ measures of broader inflation pressures also unexpectedly slowed.

Energy prices fell 2.7% from a year ago on lower gasoline prices (1.0% lower than in December, and 4.0% lower than they were a year ago) and a drop in residential natural gas prices in Alberta and Saskatchewan (the latter due to the provincial government dropping the carbon tax from natural gas billing).

Food inflation also slowed on ‘base-effects’, from 5.0% to 3.9% (year-over-year). Much of that slowdown came from food purchased in stores, where price growth slowed to 3.4% from 4.7% in December. Price growth for dining out also dipped to 5.1% in January.

Excluding food and energy components, inflation slowed to 3.1%. The Bank of Canada’s preferred core median and trim measures also slowed, to 3.3% and 3.4% above year-ago levels, respectively. The more recent (and closely watched by the BoC) 3-month annualized growth rates for both also decelerated.

Airfare prices declined by -14.3% from the prior year. That also marked the tenth consecutive decline. Prices for clothing and footwear were 1.3% lower than levels from a year ago, potentially reflecting discounting of winter clothing after a milder than usual winter in much of the country.

The scope of inflationary pressures was little changed on a monthly basis, but still much narrower than peak pandemic levels. The share of CPI basket growing at more than 5% has declined from the peak of 68% in May 2022 to 28% in January 2024.

The effect of past rate hikes feed into consumer prices persistently with a lag. Year-over-year growth in mortgage interest costs edged lower in January were still up 27.4% from a year ago, and account for about a quarter of total price growth. Home rent prices continue to rise but another component under shelter – homeowners’ replacement costs inched lower on slower house price growth.

Bottom Line: The first CPI report in 2024 came in softer than expected with the breadth of inflation still showing signs of gradual easing, but also still wider than would be consistent with the Bank of Canada’s 2% inflation target. Shelter inflation will remain sticky as higher interest rates feed through to mortgage interest costs with a lag and undersupply of housing continues to boost rent prices. The most likely path for inflation going forward is still lower with per-capita GDP and consumer spending continuing to decline. But a strong start to 2024 for labour markets gives the BoC more leeway to wait for firmer signs that inflation is getting back under control before pivoting to interest rate cuts. As of now, our base case assumes the BoC starts to lower interest rates around mid-year.

Daily Pivots: (S1) 149.93; (P) 150.09; (R1) 150.30; More...

USD/JPY is still bounded in consolidation from 150.87 and intraday bias stays neutral. In case of another retreat, downside should be contained by 148.79 resistance turned support to bring another rally. Above 150.87 will resume the rise from 140.25 to 151.89/93 key resistance zone. Decisive break there will confirm larger up trend resumption of 155.50 projection level next. However, firm break of 148.79 will turn bias to the downside for 145.88 support.

In the bigger picture, fall from 151.89 is seen as a correction to the rally from 127.20, which might have completed at 140.25 already. Firm break of 151.89/93 resistance zone will confirm up trend resumption, and next target will be 61.8% projection of 127.20 to 151.89 from 140.25 at 155.50. This will now remain the favored case as long as 140.25 support holds.

Daily Pivots: (S1) 0.8802; (P) 0.8819; (R1) 0.8841; More....

USD/CHF is staying in consolidation from 0.8884 and intraday bias stays neutral. Further rally is expected as long as 0.8727 resistance turned support holds. On the upside, break of 0.8885 will resume the rise from 0.8332 and target and 100% projection of 0.8332 to 0.8727 from 0.8550 at 0.8954. However, sustained break of 0.8727 will dampen this bullish view, and turn bias back to the downside for 0.8550 support instead.

In the bigger picture, a medium term bottom should be formed at 0.8332, on bullish convergence condition in W MACD, just ahead of 0.8317 long term fibonacci support. It's still early to decide if the larger down trend from 1.0146 (2022 high) is reversing. But further rise should be seen to 0.9243 resistance even as a correction.

Daily Pivots: (S1) 1.2577; (P) 1.2604; (R1) 1.2623; More...

Despite today's rebound, GBP/USD is staying below 1.2691 resistance and intraday bias remains neutral first. On the upside, break of 1.2691 resistance will indicate that correction from 1.2826 has completed. Intraday bias will be back on the upside for retesting 1.2826. Nevertheless, decisive break of 1.2499 will argue that whole rise from 1.2036 has completed and turn near term outlook bearish.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to up trend from 1.0351 (2022 low). Rise from 1.2036 is seen as the second leg, which could be still in progress. But upside should be limited by 1.3141 to bring the third leg of the pattern. Meanwhile, break of 1.2499 support will argue that the third leg has already started for 38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075 again.

Headline CPI inflation cooled more than expected in January, stepping down half a point to 2.9% year-on-year (y/y).

Energy prices, and more specifically gasoline prices, were a key part of lower inflation, with gasoline prices down 4% versus a year ago. But even ex-gasoline headline CPI inflation slowed from 3.5% y/y in December to 3.2% y/y in January.

Grocery inflation also cooled in January, with prices up 3.4% y/y compared to 4.7% in December. Other good news for consumers came from airfares (-14.3% y/y) and travel tours.

However, consumer's biggest ticket item, shelter, saw steeper price increases in January, up 6.2% y/y from 6.0% in December. Rent inflation ticked up to 7.8% y/y in January, up from 7.5% in December. Owned accommodation inflation remained steady at 6.7%. This kept overall services inflation elevated at 4.2% y/y.

In contrast, goods inflation showed signs of cooling. Core goods prices were up only 1.5% y/y in January, down from 2.2% in December. Clothing and footwear prices were down 1.3% y/y in January, helping to reduce core goods inflation.

The Bank of Canada's preferred "core" inflation measures also cooled a bit in January with CPI trim up 3.4% y/y and CPI median up 3.3% y/y, versus 3.7% and 3.5% in December.

Key Implications

Canadians got a bit better news on the inflation front in January, with headline inflation dipping a toe below 3%, and the Bank of Canada's (BoC) preferred core measures also making progress. With various discretionary items showing signs of larger-than normal seasonal discounting, the weak consumer demand that has prevailed in Canada for some time may finally be starting to show up in prices. Shelter inflation remains a thorn in the BoC's side. As discussed in a report out soon, shelter inflation has become the biggest hurdle preventing the Bank from cutting interest rates.

The BoC is likely to be pleased with the progress on inflation to start the year, but inflation remains too far above target to start cutting rates. We expect that price pressures will continue to come off the boil in the coming months, and that the Bank will be ready to cut rates come the spring.

Daily Pivots: (S1) 1.0765; (P) 1.0777; (R1) 1.0792; More...

EUR/USD's break of 1.0804 resistance suggests short term bottoming at 1.0694, on bullish convergence condition in 4H MACD. Intraday bias is back on the upside for stronger rebound. Sustained above 55 D EMA (now at 1.0833) will argue that fall from 1.1138 has completed and target this resistance. Meanwhile, rejection by 55 D EMA, followed by break of 1.0694, will resume the fall from 1.1138 to 1.0447 support.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is seen as the second leg. While further rally could cannot be ruled out, upside should be limited by 1.1274 to bring the third leg of the pattern. Meanwhile, sustained break of 1.0722 support will argue that the third leg has already started for 1.0447 and possibly below.

Canadian Dollar weakens broadly in early US session, sparked by data indicating a stronger-than-anticipated progress in disinflation. Headline CPI fell below the 3% mark, accompanied by significant easing in core inflation measures. This development potentially opens the door for BoC to consider an interest rate cut sooner than anticipated, with the second quarter now appearing as a viable window for such a policy adjustment.

Conversely, Euro surges earlier today, buoyed by data from ECB's wage tracker that reported only a marginal decrease in wage growth. Although this slight dip may be viewed as a positive sign, it does not sufficiently alleviate pressures to prompt an immediate rate cut in March. With wage pressures remaining on the higher side, a rate cut by ECB is more feasibly expected around June rather than April.

Despite Euro's jump, it currently finds itself outperformed by both Australian and New Zealand Dollars in terms of currency strength. Dollar trails behind Canadian as the second weakest, followed by Japanese Yen, while Swiss Franc and Sterling are mixed.

Technically, EUR/CAD breaks through 55 D EMA with today's strong rise. Focus is now back on 1.4733 resistance in the near term. Firm break there will argue that fall from 1.5041 has completed as a correction, with three waves down to 1.4457. That would revive the case that medium term consolidation from 1.5111 has completed at 1,.4155. In other words, if this bullish development realizes, EUR/CAD could then be ready to break through 1.5111 to resume the larger up trend.

In Europe, at the time of writing, FTSE is up 0.13%. DAX is don -0.13%. CAC is up 0.24%. UK 10-year yield is down -0.0376 at 4.072. Germany 10-year yield is down -0.017 at 2.397. Earlier in Asia, Nikkei fell -0.28%. Hong Kong HSI rose 0.57%. China Shanghai SSE rose 0.42%. Singapore Strait Times rose 0.56%. Japan 10-year JGB yield rose 0.0030 at 0.733.

Canada's CPI slows to 2.9% yoy in Jan, ex-gasoline down to 3.2%

Canada's CPI slowed from 3.4% yoy to 2.9% yoy in January, much lower than expectation of 3.3% yoy. The largest contributor to headline deceleration was lower year-over-year prices for gasoline (-4.0%). Excluding gasoline, CPI also fell from 3.5% yoy to 3.2% yoy. Food prices growth also fell from 4.7% yoy to 3.4% yoy. On a monthly basis, the CPI was unchanged, following a -0.3% mom decline in December.

Looking at the core measures, CPI median fell from 3.5% yoy to 3.3% yoy, below expectation of 3.6% yoy. CPI trimmed fell from 3.7% yoy to 3.4% yoy, below expectation of 3.6% yoy. CPI common fell from 3.9% yoy to 3.4% yoy, below expectation of 3.8% yoy.

BoE Bailey: Market's rate cut outlook not unreasonable, yet unendorsed

In a session with the Treasury Select Committee today, BoE Governor Andrew Bailey acknowledged that It's "not unreasonable" for the market to think about reductions in interest rates this year

However, he was quick to qualify this by stating that MPC "do not endorse the market curve" forecasting such cuts, adding that "we are not making a prediction of when or by how much" BoE cuts interest rates.

Bailey pointed to "encouraging signs" in key economic indicators, but stressed the importance of "sustained progress" in tackling inflation.

Addressing recent data indicating the UK's entry into a technical recession in the latter half of the previous year, Bailey downplayed its impact, describing the downturn as "very weak" and pointing to "distinct signs of an upturn."

ECB wage growth data: A glimpse of hope but no trigger for immediate rate cuts

ECB released data today indicating a slight decrease in negotiated wage growth to 4.46% in Q4, marking a downturn from the previous quarter's record high of 4.69%. This development, though modest, is likely to be greeted positively by ECB policymakers, signaling a potential onset of wage growth deceleration anticipated throughout the year.

Despite the reduction, the magnitude of the drop is not substantial enough to prompt ECB to consider an immediate rate cut in March. The data presents a cautious optimism rather than a clear-cut rationale for policy easing. If ECB's more hawkish members advocate for further evidence of wage growth deceleration, preferring to wait for the next wage data release in May, the likelihood shifts towards a rate cut in June, rather than April, as the more plausible timeline for monetary policy adjustment.

RBA minutes: High costs of persistent inflation may necessitate additional rate hike

RBA minutes from the February 5-6 meeting revealed that the Board considered both an 25bps rate hike and maintaining the current rate. The choice to hold rates was influenced by a perceived reduction in the risk that inflation would fail to revert to the target range "within a reasonable timeframe." However, the potential repercussions of inflation not normalizing as anticipated were deemed "potentially very high," leaving the door open for future rate increases.

Central to the decision was the observation that moderation in inflation over preceding months had been "slightly larger than previously expected". Global experiences had also provided "additional confidence" on the disinflation trend. Additionally, incoming data suggested "weaker than previously expected" labor market conditions and consumer spending.

The assessment of risks surrounding the economic outlook as "broadly balanced". RBA emphasized the importance of remaining vigilant, opting to monitor evolving risks closely before making further policy adjustments. The acknowledgment of the high "costs" associated with inflation remaining above target for too long underscores the cautious stance, with members unanimously agreeing on the necessity to "not to rule out a further increase" in the cash rate target.

China announces historic reduction in benchmark mortgage rates

In an effort to revitalize its beleaguered property sector and inject vitality into the broader national economy, China has taken larger than expected action by reducing a crucial reference rate for mortgage loans.

PBoC announced a significant cut in five-year loan prime rate to 3.95% from 4.20%. This move surpassed market expectations of a more modest reduction of 5 to 15 basis points. Notably, this adjustment also represents the largest cut in the five-year LPR since its inception in 2019 .

Conversely, one-year LPR, which serves as a barometer for market lending rates, was left unchanged at 3.45%.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0765; (P) 1.0777; (R1) 1.0792; More...

EUR/USD's break of 1.0804 resistance suggests short term bottoming at 1.0694, on bullish convergence condition in 4H MACD. Intraday bias is back on the upside for stronger rebound. Sustained above 55 D EMA (now at 1.0833) will argue that fall from 1.1138 has completed and target this resistance. Meanwhile, rejection by 55 D EMA, followed by break of 1.0694, will resume the fall from 1.1138 to 1.0447 support.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is seen as the second leg. While further rally could cannot be ruled out, upside should be limited by 1.1274 to bring the third leg of the pattern. Meanwhile, sustained break of 1.0722 support will argue that the third leg has already started for 1.0447 and possibly below.

Economic Indicators Update

Canada's CPI slowed from 3.4% yoy to 2.9% yoy in January, much lower than expectation of 3.3% yoy. The largest contributor to headline deceleration was lower year-over-year prices for gasoline (-4.0%). Excluding gasoline, CPI also fell from 3.5% yoy to 3.2% yoy. Food prices growth also fell from 4.7% yoy to 3.4% yoy. On a monthly basis, the CPI was unchanged, following a -0.3% mom decline in December.

Looking at the core measures, CPI median fell from 3.5% yoy to 3.3% yoy, below expectation of 3.6% yoy. CPI trimmed fell from 3.7% yoy to 3.4% yoy, below expectation of 3.6% yoy. CPI common fell from 3.9% yoy to 3.4% yoy, below expectation of 3.8% yoy.

Full Canada CPI release here.