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EUR/GBP stayed in consolidation above 0.8512 last week and outlook is unchanged. Initial bias remains neutral this week first. While another recovery cannot be ruled out, outlook will stay bearish as long as 0.8591 resistance holds. On the downside, break of 0.8512 will resume the decline from 0.8713 to 0.8491, and then 0.8464 projection level. However, firm break of 0.8591 will turn bias back to the upside for stronger rebound.

In the bigger picture, fall from 0.8764 is seen as another leg in the whole down trend from 0.9267 (2022 high). Outlook will stay bearish as long as 0.8713 resistance holds. Break of 0.8491 will target 61.8% projection of 0.8977 to 0.8491 from 0.8764 at 0.8464.

In the long term picture, price action from 0.9499 (2020 high) is seen as part of the long term range pattern from 0.9799 (2008 high). Fall from 0.9267 is the third leg of the pattern from 0.9499. Break of 0.8201 (2022 low) will target 100% projection of 0.9499 to 0.8201 from 0.9267 at 0.7969.

EUR/AUD stayed in consolidation in range of 1.6348/6671 last week and outlook is unchanged. Initial bias stays neutral this week first. On the upside, decisive break of 1.6671 will revive the case that whole correction from 1.7062 has completed with three waves down to 1.6127. Further rally should then be seen to 1.6844 resistance for confirmation. Nevertheless, break of 1.6438 will bring deeper fall back to 1.6127 support instead.

In the bigger picture, fall from 1.7062 medium term top is seen as a correction to the up trend from 1.4281 (2022 low). Break of 1.6844 resistance will argue that this up trend is ready to resume through 1.7062 high. In case of another fall, strong support should be seen around 1.5846 and 38.2% retracement of 1.4281 to 1.7062 at 1.6000 to bring rebound.

In the longer term picture, price actions from 1.9799 (2020 high) are seen as a long term decline at the same scale as the rise from 1.1602 (2012 low). Rebound from 1.4281 is seen as the second leg. As long as 55 M EMA (now at 1.5905) holds, this second leg could still extend higher. However, sustained trading below 55 M EMA will open up the bearish case for extending the decline through 1.4281 low.

EUR/CHF's rebound last week suggests that pull back from 0.9471 has completed at 0.9304 already. Initial bias remains on the upside this week for 0.9471. Firm break there will resume whole rebound from 0.9252 to 100% projection of 0.9252 to 0.9471 from 0.9304 at 0.9523. On the downside, below 0.9395 minor support will turn intraday bias neutral first.

In the bigger picture, price actions from 0.9252 are tentatively seen as a correction to the five-wave down trend from 1.0095 (2023 high). Further rise would be seen to 38.2% retracement of 1.0095 to 0.9252 at 0.9574. But overall medium term outlook will remain bearish as long as 0.9683 resistance holds.

In the long term picture, fall from 1.2004 (2018 high) is part of the multi-decade down trend. Firm break of 1.0095 resistance is needed to be the first sign of long term bottoming. Otherwise, outlook will remain bearish.

Monday, Feb 12, 2024

Tuesday, Feb 13, 2024

Wednesday, Feb 14, 2024

Thursday, Feb 15, 2024

Friday, Feb 16, 2024

U.S. Highlights

• The ISM Services index, which was on the cusp of falling into contractionary territory in December, improved notably in January, rising 2.9 points to 53.4. The one blemish to the report was a sharp move up in the prices index.
• With little on the data front, a series of Fed speeches took center stage this week. The key message was that with the economy remaining on decent footing, the Fed could afford to show patience on rate cuts. This didn’t interrupt the uptrend in equity markets, with the S&P 500 reaching a new milestone – the 500 mark.

Canadian Highlights

• January’s job gains came in stronger than expected, and the unemployment rate ticked down. However, the details under the hood painted a much more mixed picture of Canada’s labour market.
• December’s merchandise trade balance flipped to a modest deficit as imports rose, supported by strong domestic demand.
• This week’s messages from the Bank of Canada were hawkish, on balance. Without further progress in inflation, the BoC has little desire to start cutting rates. Given the current economic backdrop, markets price their expectations for the first rate cut to June or July of this year.

U.S. – Fed Officials Continue to Signal Patience on Rate Cuts

Recent economic reports focusing on GDP and employment growth have driven home the point that the U.S. economy remains on solid footing. This week’s limited data provided further support to this view. In this vein, several Fed officials this week reiterated their message that there’s no rush to cut interest rates, with bond yields trending moderately higher as a result. In what appeared to be a return of ‘good news being good news again’, stock markets shrugged off the prospect of interest rates remaining higher for longer and continued to trek higher, with the S&P 500 reaching another milestone by hitting the 5000 mark.

The ISM Services index, which was on the cusp of falling into contractionary territory in December, moved up notably in January, rising close to three points to 53.4. Looking under the hood, gains in three of the four main subcomponents helped lift the index higher. Of note, the employment sub-component flipped to signaling growth, as it jumped 6.7 points to 50.5. The one blemish to the report, was the fact that the prices index shot higher in January (Chart 1). A month of data does not make a trend, but the increase could signal additional inflationary pressure ahead.

Weekly jobless claims data were consistent with a healthy labor market. Initial and continuing jobless claims continued to head lower (Chart 2). While several companies have announced plans to trim headcount this year, this is not yet being reflected in labor market data, suggesting that other businesses are growing.

With very little in the way of primary data releases, speeches from several Fed presidents and other Fed officials took center stage this week. Overall, the messaging was similar: the Fed needs to see further improvement on inflation, and with the economy on solid footing it can afford to be patient about the timing of rate cuts. Their remarks largely echoed those made by Fed Chair Powell on Sunday. Besides reiterating his message that the Fed is wary of cutting rates too soon, Powell covered a lot of ground in the ‘60 Minutes’ interview. Two comments a bit peripheral to monetary policy stood out. The first was on commercial real estate (CRE), where Powell characterized the risks as a ‘manageable’ problem for larger banks, and alluded to the low probability of a repeat of the events that unfolded during the Global Financial Crisis. However, he did note that some smaller banks that have large exposures to CRE may ‘close or be merged out’.

The other comment from Powell that stood out was his assertion that the U.S. is on an “unsustainable” fiscal path, with debt growing faster than the economy in the long run. To this end, the Congressional Budget Office (CBO) released new 10-year projections this week, which showed that the ratio of federal publicly held debt to GDP will rise from 97.3% last year to record high of 116% by 2034.

Looking ahead to next week, January’s inflation report will take center stage. The BLS released revisions to CPI data this morning, which were relatively minor and left the year-on-year path for inflation broadly unchanged. As for January, the market consensus expects a further moderation in the core measure.

Canada – The BoC to Remain Inflation-Focused

As the Lunar New Year approaches, the Canadian economy strides into the celebration with an upbeat tempo. Employment - the focal point of this week's economic calendar - came in stronger than anticipated at 37K new jobs in January, and the unemployment rate moved down a tick. This helped lift the equity market for the day, but not enough to push the benchmark index into the positive territory for the week (at least at time of writing). The Government of Canada 5-year bond yield, which got pulled up last week after strong U.S. employment report, gained another 10 basis points.

Delving into the particulars of January's labour force survey paints a far more complex picture. Signs of softening demand included job gains being largely in part-time positions, while full-time employment edged lower (Chart 1). Furthermore, private sector hiring, which is more sensitive to economic cycles, contributed only 7k positions – one fifth of today's gain. However, for now, the labour market remains fairly tight. The unemployment rate edged down, and remains low on a historic basis, and average hourly wage growth of 5.3% year-on-year is still too discomforting for the Bank of Canada.

In other economic news, December's merchandise trade balance flipped to a modest deficit after four consecutive months of surplus. The pull-back in exports was broad-based with the biggest drag coming from motor vehicles and parts exports. Total imports rose for a second month, primarily supported by the rise in consumer goods, indicative of strength in consumer spending, also evident in the latest spend data.

With economic data still showing some resilience, it's no surprise that this week's messaging from the Bank of Canada was more hawkish. Both Macklem's speech in Montreal and January's summary of deliberations emphasized a pivot in communication. The narrative has shifted from rate levels to the duration of restrictive policies required to tame inflation back to the 2% target. Central to this challenge is persistent shelter price inflation, which risks accelerating amidst relatively buoyant housing market activity. Higher home prices would result in direct implications on 'owned accommodation' inflation, but would also increase the cost of renting, amid higher borrowing cost and stretched affordability.

On this point, Macklem cautioned that the Bank has little power to influence house price dynamics, as housing remains chronically undersupplied. This underscores the complexity of addressing inflation as more than half of CPI components are growing at a rate higher than 3%, suggesting that it remains broad-based and stubbornly above the desired threshold. To get these components to decelerate faster requires a stronger pull-back in other parts of the economy. Without this progress, the Bank may be cautious about starting to cut rates. Market reactions have been telling, with the likelihood of a March-April rate cut receding below 30%, and expectations for 2024’s rate reductions adjusting downward (Chart 2).

Summary

United States: Growth Still Solid, but Slowdown on the Horizon

• The ISM services index shot higher into expansion territory during January, which is the latest piece of evidence that economic growth is still firmly in positive territory. A sharp rise in the prices paid subindex, however, shows that inflation pressures have yet to be fully extinguished. Meanwhile, higher interest rates continue to weigh on consumer borrowing. Total consumer credit rose by $1.6 billion in December, a smaller-than-expected gain.
• Next week: CPI (Tuesday), Retail Sales (Thursday), Industrial Production (Thursday)

International: Central Banks Still in the Spotlight

• This week, the Reserve Bank of Australia held its policy rate steady at 4.35% and offered policy guidance that was more hawkish than expected. In Japan, the underlying details of the December wage data, as well as encouraging signs surrounding the ongoing spring wage negotiations, keep the central bank on course for an April rate hike, in our view. Mexico's central bank held rates steady, but less hawkish language in its statement suggests it could cut rates in March.
• Next week: U.K. CPI (Wednesday), Japan GDP (Thursday), Australia Employment (Thursday)

Credit Market Insights: Credit Conditions Are Coming into Balance

• The Senior Loan Officer Opinion Survey (SLOOS) for Q4-2023 saw a moderation in tight credit conditions. Most banks reported tightening lending standards for business commercial and investment (C&I), consumer and commercial real estate (CRE) loans, but the proportion tightening was significantly lower from the elevated levels seen throughout 2023.

Topic of the Week: Oh, Mexico It Sounds So Simple I Just Got to Go

• The U.S. international trade deficit has been volatile in the wake of the pandemic. After widening for three straight years, the trade deficit shrank by $178 billion last year, which more than reversed the 2022 widening. The headline that many glommed onto this week was that Mexico displaced China as the top import partner for the United States.

Full report here.

U.S. retail sales and consumer price index reports for January will be closely watched for whether strong consumer spending and slowing inflation continue to unexpectedly coexist. The U.S. Federal Reserve remains wary that strong demand could reignite price growth, but to date, inflation has continued to edge broadly lower. Strong consumer spending and resilient labour markets mean there is little pressure for the central bank to shift to interest rate cuts quickly. But, slower price growth is increasing confidence that the amount of economic pain feared when the Fed started aggressively hiking rates almost two years ago won’t necessarily materialize.

We expect January’s U.S. retail sales report to show a 0.5% decline from December led by a 7% drop in auto sales and a 2% fall in gasoline prices month-over-month. That marks the largest decline since March last year. Another surge in jobs in January (353,000) and acceleration in wage growth means household incomes are still strong but the household saving rate continues to run below pre-pandemic levels.

Consumer price growth is also expected to slow. We look for headline CPI growth (year-over-year) to fall below 3% for the first time in almost three years (since March 2021.) Most of that slowing is expected to come from a pullback in energy prices and another drop in food price growth. Core price growth, which excludes food and energy products, should ease less—we expect to 3.8% year-over-year in January from December’s 3.9%. But a disproportionate share of that increase still comes from higher home rents. The growth in shelter costs will continue to slow as lower market rents gradually feed through to leases. Price growth of goods has slowed back to around zero as the impact of acute global supply chain disruptions earlier ease.

Week ahead data watch

StatsCan's advance results indicated manufacturing sales declined 0.6% in December. And we expect the volumes to be little changed given a similar decline in the industrial product price index for the manufacturing sector in the month.

The early indicator for 'Core' wholesale sales (ex. Petroleum, Petrol Prod & Other Hydrocarbons) pointed to a 0.8% growth in December, mainly driven by higher sales in motor vehicle and parts subsector.

U.S. industrial production likely grew by 0.5% in January, hours worked for manufacturing sector were little changed, but a rise in electricity output is flagging an increase in the utility sector.

• US inflation and retail sales among the highlights
• Tier three Canada data only after employment update

Could a March rate cut still be on the table?

US economic data since the turn of the year has been far from ideal considering traders had priced in up to 175 basis points of rate cuts at one stage.

Expectations have since been pared back with markets only pricing in 125 but some think that may even be too optimistic, particularly following the January jobs report.

The US inflation revisions on Friday helped to settle the nerves but now it’s over to the scattering of January data we get next week. CPI inflation is once again front and center as we look for further signs that near-term inflationary pressures have significantly abated which could improve the chances of a March cut.

But there are plenty of other releases too that traders will be watching closely for. Retail sales, jobless claims, and consumer sentiment to name a few. Inflation may be the most important but the combination helps to build a fuller picture for the central bank. And it is determined to only cut when its convinced inflation will fall sustainably back to target.

A quiet week for Canada after the unemployment release

January saw unemployment fall in Canada for the first time in more than a year which would be good news in normal times.

Unfortunately, at a time when the Bank of Canada is trying to create some slack in the labor market to achieve its inflation target, it’s far from ideal. A summer rate cut is still expected but we’ll need to see more improvements in the data between now and then.

Next week doesn’t offer much, with tier-three data the only releases on the calendar.

USDCAD Daily

Source – OANDA

USDCAD tested the 50% Fibonacci retracement level once again earlier this week and just like on the previous occasions, the level offered significant resistance.

This now makes the recent low on 31 January all the more interesting as it would represent the neckline of a double-top formation.

• Will ECB policymakers leave the door open to a March rate cut?
• UK data eyed amid division at the BoE

Eurozone GDP may leave bloc on the brink of recession

The eurozone appears to have avoided a recession at the end of last year but it may have simply been delayed.

GDP data for the fourth quarter will be released on Wednesday and is expected to show the bloc didn’t grow again in the final months of the year. It will only take a slight miss to leave the euro area at risk of being in recession in the current quarter.

That said, ECB policymakers probably won’t be particularly swayed by whether the eurozone is just in technical recession or not. That it’s happening while inflation is falling – and is expected to fall much further in the coming months – may do though. And we’ll hear from a number of them next week.

EURUSD Daily

Source – OANDA

EURUSD has trended higher for most of the week after a bad start to it and an end to last. It’s run into support around the 61.8% Fibonacci retracement level which should be an interesting test going forward.

Can the BoE be convinced to cut rates in May?

The Bank of England may not be ready to cut interest rates yet but we should have a better idea next week just how close they are.

The standout release is naturally the CPI data on Wednesday as the BoE mandate is inflation at 2% – half the level it stood at in December. Inflation is expected to fall over the coming months but a greater decline in January could help the case of cutting rates sooner. Equally, a higher number could be a massive setback and suggest progress has stalled which could see rate expectations pared back again.

The jobs report on Monday is also key, most notably the average earnings component, as this is a major contributor to price pressures. Particularly in the services sector, an area central banks are most concerned about when it comes to getting inflation sustainably back to 2%. Average earnings growth both including and excluding bonuses were above 6% in the three months to December, a level far too high to be consistent with 2% inflation.

GBPUSD Daily

Source – OANDA

The pound has rebounded against the dollar this week but that’s occurred after it broke below the neckline of a topping formation between 1.26 and 1.28. It’s retraced back to the 50% Fibonacci retracement level but has failed to break above there so far.

• Forecasts point to stable inflation, weaker core CPI
• Upside surprise is likely, as business indicators point to higher prices

US economy has a blockbuster performance

The US economy has left analysts speechless. Although the Fed has raised interest rates to the highest in four decades, the economy kept growing at a healthy pace in the last quarter of 2023 and six months after the central bank paused its tightening cycle.

The first data releases of the new year pointed to a soft landing or no landing at all. Nonfarm payrolls increased by 353k in January, and December’s reading was revised upwards by more than 100k. On the negative side, part-time jobs were mainly responsible for the increase in new job positions, but overall, the unemployment rate remained around record lows. On top of that, average hourly earnings continued to gain momentum for the third consecutive month and comfortably above the diminishing inflation rate, suggesting that consumers have enough purchasing power to fuel more demand for goods and services.

Retail sales for January could reflect the latest changes in spending habits on Thursday at 13:30 GMT. Analysts expect a monthly slowdown to 0.1% from 0.6% previously. The retail sales control group data, which excludes volatile items, could ease from 0.8% m/m to 0.5%.

Developments on the business front were encouraging, too. The ISM and S&P global business PMI readings expanded faster than analysts expected in January, reporting a notable increase in new orders and hiring. However, what caused a stir was a significant pickup in cost pressures in the services sector. The price index jumped by 7.3 points to 64.00 to the highest since March 2023, reminding investors that the fight against inflation is far from over.

How could CPI inflation data affect sentiment?

On Tuesday, investors will search for more clues on recent price tendencies when January’s CPI inflation data come into the public eye. Forecasts point to a stable headline CPI inflation of 3.4% y/y and a weaker core CPI of 3.7% y/y compared to 3.9% previously.

If forecasts materialize, investors may defend the May rate cut scenario. Note that the probability of a late spring rate cut declined to a toss-up following last week’s upbeat data. Hence, any surprise in the data could be a game changer for rate prospects, but perhaps a tweak in the total number of projected rate cuts could cause more volatility since investors remain confident that the Fed will deliver more than four 25 bps rate cuts despite the central bank projecting only three.

USD/JPY

In FX markets, weaker-than-expected CPI data could oppose the Fed’s wait-and-see stance over rate cuts, putting USDJPY under pressure. Still, from a technical perspective, only a clear close back below the 147.00-147.40 zone, where its 20-day simple moving average (SMA) is positioned, could raise new selling interest.

In the opposite scenario where inflation extends December’s upturn and, more importantly, the core CPI drifts higher too, investors might move the case of a rate cut from May to the summer. There are multiple risk events, from a potential wage-price spiral to rising geopolitical tensions affecting global trade routes, which could still lift business costs and therefore send positive price shockwaves to consumers throughout the year.

At the same time, the more persistent inflation is, the more fragile the economy can become to a potential downturn as households’ savings ratio is currently at the lowest since the 2007-2009 financial crisis. Moreover, the latest bank episode with the regional New York Community Bancorp revealed that the drop in commercial property values - partially on the back of remote jobs - could raise risks in the financial system. The Fed chief admitted that smaller banks could close or merge, but he added that the issue should be manageable, with the Treasury secretary Jannet Yellen backing that narrative too.

Nevertheless, talks of economic struggles could be a topic for another day. In the meantime, an upside surprise in CPI figures would justify the Fed’s guidance and bode well for the greenback, sending USDJPY above the 149.70 barrier and towards 151.00.