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Daily Pivots: (S1) 0.8763; (P) 0.8788; (R1) 0.8820; More...

EUR/GBP's rebound from 0.8753 accelerated higher today. The strong break of 0.8834 resistance argues that fall from 0.8977 has completed with three waves down to 0.8753, ahead of 0.8720 support. The development in turn suggests that rise from 0.8545 is not over. Intraday bias is back on the upside for 0.8927 first. Decisive break there will bring retest of 0.8977 next.

In the bigger picture, outlook is rather mixed for now, except that price actions from 0.9267 (2022 high) are part of the long term range pattern from 0.9499 (2020 high). With 0.8720 support intact, rise from 0.8545 is in favor to continue through 0.8977. However, firm break of 0.8720 will argue that such rebound has completed, and open up deeper fall through this support level.

Two major themes are vying for attention today. Euro has seen broad gains following hawkish comments from Bundesbank President Joachim Nagel. In contrast, the remarks of BoE Governor Andrew Bailey have left Sterling struggling to keep pace. As these European majors trade blows, the Swiss Franc has been pushed higher too.

Meanwhile, both Australian and New Zealand Dollars have received a boost from China's recent economic data. However, the Kiwi has outshone the Aussie, as the latter currency has been weighed down by weaker than expected GDP and CPI figures.

Overall, Dollar is the worst performer for the day so far. However, it is worth keeping an eye on risk sentiment in the upcoming US session, which could provide a potential opportunity for the greenback to recover some lost ground, is investors' mood turn around.

Technically, AUD/NZD's extended decline from 1.1085 argues that whole rebound from 1.0469 has completed with three waves up to 1.1085. Deeper fall is now in favor as long as 1.0946 resistance holds, towards 1.0735 support first. Firm break there would set the stage to retest 1.0469 low.

In Europe, at the time of writing, FTSE is up 0.49%. DAX is up 0.02%. CAC is up 0.05%. Germany 10-year yield is up 0.071 at 2.720. Earlier in Asia, Nikkei rose 0.26%. Hong Kong HSI rose 4.21%. China Shanghai SSE rose 1.00%. Singapore Strait Times dropped -0.23%. Japan 10-year JGB yield rose 0.005 to 0.508.

Bundesbank Nagel: Further significant rate steps after Mar, steeper balance sheet reduction in Jul

Bundesbank President Joachim Nagel said in a speech today, "the interest rate step announced (by ECB) for March will not be the last."

"Further significant interest rate steps might even be necessary afterwards, too," he added.

Regarding the timing of a rate cut, Nagel said, the impact of tightening has to be reflected in underlying inflation. Until that is the case, interest rate cuts are a non-starter."

Nagel also said with the current pace of balance sheet reduction at EUR 15B a month, it will take too long to make a significant reduction. "I am therefore in favour of taking a steeper path of reduction starting in July in light of experience gained up to that point," he said.

Regarding the economy, "although there could be a gradual pick-up in the second quarter, there is still no sign of any major improvement for now," Nagel said. "Our experts are not expecting there to be a visible economic recovery until the second half of the year."

Eurozone PMI manufacturing finalized at 48.5, output at 50.1

Eurozone PMI Manufacturing was finalized at 48.5 in February, down from January's 48.8. Manufacturing output was finalized at 50.1, up from 48.9, a 9-month high.

Looking a some member states, readings for Italy (52.0, 10-mont high), Greece (51.7, 9-month high), Ireland (51.3, 4-month high), and Spain (50.7, 8-month high) improved. The Netherlands (48.7, 2-month low), France (47.4, 4-month low), Austria (47.1, 3-month low), and Germany (46.3, 3-month low) deteriorated.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

"A marginal expansion of output reported by Eurozone manufacturers in February is welcome news in representing the first increase since last May... Unfortunately, inflows of new orders continued to fall at a marked rate, reflecting persistent weak demand... In the meantime, the combination of improved supply and sustained weak demand – as well as lower energy prices – is helping bring inflationary pressures down sharply".

BoE Bailey: Some further hike may be appropriate, but nothing is decided

BoE Governor Andrew Bailey said in a speech, "I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more".

"Some further increase in Bank Rate may turn out to be appropriate, but nothing is decided. The incoming data will add to the overall picture of the economy and the outlook for inflation, and that will inform our policy decisions.," he added.

Regarding the economy, he said that data since February meeting, is that the economy is "evolving much as we expected it to".

"Inflation has been slightly weaker, and activity and wages slightly stronger, though I would emphasise 'slightly' in both cases," he said. "A further set of data will be coming in before our next monetary policy decision later this month."

UK PMI manufacturing finalized at 49.3 in Feb, showed encouraging signs of resilience

UK PMI Manufacturing was finalized at 49.3 in February, up from January's 47.0. That's the highest level in 7 months even though it's stuck in contraction territory. New orders fell but showed signs of stabilizing. Input cost and output price inflation eased.

Rob Dobson, Director at S&P Global Market Intelligence, said:

"UK manufacturing showed encouraging signs of resilience in February. Output rose for the first time in eight months, boosted by weaker cost inflation and reduced supply chain disruptions. Input prices increased at the slowest pace since July 2020 and supplier performance improved for the first time in three-and-a-half years. This offset some of the ongoing negative impacts from strikes, the cost of living crisis and lower order intakes.

"Manufacturers' confidence also strengthened, with 60% of companies forecasting production will expand during the coming year. Part of the reason for renewed optimism was a near-stabilisation of new order inflows in February, with total new orders and new export business both falling only slightly and to much lesser extents than in recent months. Manufacturers benefited from growing signs of a global economic recovery and the easing of COVID restrictions by China. This process of economic revival, alongside signs of inflation peaking and reduced recession fears, should hopefully help UK manufacturers eke out further growth in the coming months."

China PMI manufacturing rose to 52.6, highest since 2012

China official PMI Manufacturing rose from 50.1 to 52.6, above expectation of 50.7. That's also the highest reading since April 2012. PMI Non-Manufacturing rose from 54.4 to 56.3, highest since March 2021. PMI Composite rose from 52.9 to 56.4.

"In February, the economic stabilisation policy measures further took effect, coupled with the epidemic's impact receding and other favourable factors, the speed of enterprises to resume production accelerated, meaning China's economic prosperity level continued to rebound," said senior NBS statistician Zhao Qinghe.

Also released, Caixin PMI Manufacturing rose from 49.2 to 51.6 in February, slightly above expectation of 51.3. That the first expansion reading in 7 months, and the second-highest since May 2021. Caixin added there were renewed increases in output, new orders and employment. Suppliers' delivery times improved at the quickest rate for eight years. Business confidence also strengthened to near two-year high.

Japan PMI manufacturing finalized at 47.7 in Feb, continually deteriorating activity

Japan PMI Manufacturing was finalized at 47.7 in February, down from January's 48.9. That's also the worst reading since September 2020. S&P Global also noted that backlogs of work decreased at quickest pace for 29 months. Input prices had the slowest rise for a year-and-a-half.

Usamah Bhatti, Economist at S&P Global Market Intelligence, said: "Latest data pointed to continually deteriorating activity in the Japanese manufacturing sector midway through the first quarter of 2023. Both new orders and production levels, which make up 55% of the headline PMI figure, fell at the fastest pace since July 2020 as weak domestic demand and a global economic slowdown hindered sales and output volumes.

"Moreover, the dip is likely to be sustained in the near-term as the absence of new orders amid dampened client confidence lifted capacity pressure on manufacturers further and led to the sharpest reduction in outstanding business in nearly two-and- a-half years."

Australia CPI slowed to 7.4% yoy in Jan, ex-volatile items down to 7.2% yoy

Australia monthly CPI indicator slowed from 8.4% yoy to 7.4% yoy in January, below expectation of 8.1% yoy. CPI excluding volatile items (i.e. excludes Fruit and vegetables and Automotive fuel) slowed from 8.1% yoy to 7.2% yoy.

The most significant contributors to the annual increase in the January monthly CPI indicator were Housing (9.8%), Food and non-alcoholic beverages (8.2%) and recreation and culture (10.2%).

Australia GDP grew 0.5% qoq in Q4, domestic prices grew fastest since 1990

Australia GDP grew 0.5% qoq in Q4, below expectation of 0.8% qoq. Through the year, GDP grew 2.7% yoy. GDP Implicit price deflator (IPD) rose 1.6% qoq and 9.1% yoy. Domestic prices grew 1.4% qoq and 6.6 yoy, highest annual growth since 1990.

Katherine Keenan, ABS head of National Accounts, said, "the 0.4 per cent rise in total consumption and 1.1 per cent rise in exports were the primary contributors to GDP growth in the December quarter...

"Continued growth in household and government spending drove the rise in consumption, while increased exports of travel services and continued overseas demand for coal and mineral ores drove exports."

EUR/GBP Mid-Day Outlook

Daily Pivots: (S1) 0.8763; (P) 0.8788; (R1) 0.8820; More...

EUR/GBP's rebound from 0.8753 accelerated higher today. The strong break of 0.8834 resistance argues that fall from 0.8977 has completed with three waves down to 0.8753, ahead of 0.8720 support. The development in turn suggests that rise from 0.8545 is not over. Intraday bias is back on the upside for 0.8927 first. Decisive break there will bring retest of 0.8977 next.

In the bigger picture, outlook is rather mixed for now, except that price actions from 0.9267 (2022 high) are part of the long term range pattern from 0.9499 (2020 high). With 0.8720 support intact, rise from 0.8545 is in favor to continue through 0.8977. However, firm break of 0.8720 will argue that such rebound has completed, and open up deeper fall through this support level.

Economic Indicators Update

The US 100 cash index continues to trade sideways, just above the busy 11,900-11,926 area populated by the 23.6% Fibonacci retracement level of the November 22, 2021 – October 13 downtrend and the 200-day simple moving average (SMA) respectively. This is the first decent correction following the 21% rally that was recorded during the January 6 – February 2 period, as the market is trying to find its next direction.

The Average Directional Movement Index (ADX) is pointing to a developing bearish trend while the RSI appears to be undecided at this juncture. The burden once again falls on the stochastic oscillator, which is showing early signs of stabilization above its oversold territory. Interestingly, a double top pattern has formed with the neckline at the 12,202 level and the primary target set at 11,500 area. The US 100 has broken through the neckline, confirming this pattern, but has moved modestly below it.

Should the bulls take the market reins, the first target would be at the 12,083-12,226 range set by multiple highs during 2020. Higher, the September 2, 2020 high of 12,465 could trouble the bulls before they potentially set their eyes on the 38.2% Fibonacci retracement of 12,852.

On the other hand, the primary goal for the bears remains the 11,900-11,926 area populated by the 23.6% Fibonacci retracement and the 200-day SMA. If successful in breaking this area, they could have a look at the 11,597-11,770 range where the 50- and 100-day SMAs reside.

To sum up, the US 100 cash index is moving sideways as the bears are testing the support set by the 11,900-11,926 range. A break below could potentially morph into a significant bearish move.  

EUR/GBP rebounds strongly on a contrasting comments from Bundesbank President Joachim Nagel and BoE Governor Andrew Bailey.

In short, Nagel said "further significant interest rate steps" might be necessary for ECB after March, and a "steeper path of reduction" of balance sheet is favored in July.

On the other hand, Bailey said more interest rate hike is not inevitable and "nothing is decided" for March.

EUR/GBP's strong rebound and break of 0.8834 resistance argues that fall from 0.8977 has completed with three waves down to 0.8753, ahead of 0.8720 structural support. The development in turn suggests that rise from 0.8545 is not over. Near term focus is back on 0.8927 resistance and firm break there will solidify the revived near term bullishness.

BoE Governor Andrew Bailey said in a speech, "I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more".

"Some further increase in Bank Rate may turn out to be appropriate, but nothing is decided. The incoming data will add to the overall picture of the economy and the outlook for inflation, and that will inform our policy decisions.," he added.

Regarding the economy, he said that data since February meeting, is that the economy is "evolving much as we expected it to".

"Inflation has been slightly weaker, and activity and wages slightly stronger, though I would emphasise 'slightly' in both cases," he said. "A further set of data will be coming in before our next monetary policy decision later this month."

Bundesbank President Joachim Nagel said in a speech today, "the interest rate step announced (by ECB) for March will not be the last."

"Further significant interest rate steps might even be necessary afterwards, too," he added.

Regarding the timing of a rate cut, Nagel said, the impact of tightening has to be reflected in underlying inflation. Until that is the case, interest rate cuts are a non-starter."

Nagel also said with the current pace of balance sheet reduction at EUR 15B a month, it will take too long to make a significant reduction. "I am therefore in favour of taking a steeper path of reduction starting in July in light of experience gained up to that point," he said.

Regarding the economy, "although there could be a gradual pick-up in the second quarter, there is still no sign of any major improvement for now," Nagel said. "Our experts are not expecting there to be a visible economic recovery until the second half of the year."

With economic data suggesting that the Euro area may have dodged a severe recession and underlying inflation not showing any signs of slowing yet, investors have dramatically raised their ECB hike bets. Ergo, this week, they may be sitting on the edge of their seats in anticipation of Thursday’s preliminary CPI data as they try to figure out whether the ECB will proceed with the telegraphed 50bps hike or a bigger increment at the upcoming meeting. The data comes out at 10:00 GMT and the enigma is how will the numbers affect the euro.

Outlook warrants more sizable hikes

At its last meeting, the ECB raised interest rates by 50bps as was widely expected, with President Lagarde explicitly saying that they intend to raise them by another 50bps in March and then evaluate the future path on a meeting-by-meeting basis based on the data. She also added that supply bottlenecks are gradually easing, but the delayed effects are still pushing up goods price inflation.

Indeed, headline inflation has slowed notably after peaking at 10.6% in October and could slow even further in the months to come as the war-related rally in energy prices drops out of the year-over-year calculation. However, underlying inflation is proving stubborn, not showing signs of a slowdown yet. On top of that, just last week, Eurozone’s preliminary PMIs for February were largely better than expected, with the composite PMI rising to 52.3 from 50.3 and adding to hopes that a previously feared recession may be sidestepped.

The blend of such economic figures allowed ECB policymakers to become more vocal about the need for more double hikes. The only policymaker sounding a bit cautious lately was Chief Economist Philip Lane, who noted that the Governing Council may not need to proceed as forcefully as previously planned.

Investors see decent chance for a triple hike in March

With all that information in hand, market participants are now assigning a nearly 40% probability for a 75bps hike at the upcoming gathering, with the remaining 60% pointing to the telegraphed 50bps increment. Moreover, they are projecting a total of 155bps worth of additional hikes until the end of the year, while just a couple of weeks ago, they were seeing only 100bps.

And yet the euro has been on the back foot against its US counterpart, and that’s because investors have been lifting their Fed implied rate path as well. So, will this week’s inflation data wake up the euro bulls? The headline rate is forecast to slide further to 8.2% y/y from 8.6%, while the core rate is anticipated to just pull back to 6.9% y/y from 7.1%. The euro could retreat somewhat on cooling inflation rates, but with the core one staying near 7%, ECB hike bets are unlikely to be altered much.

Euro may perform better against the loonie

This could keep some euro bulls in the game and thereby complicate things for euro/dollar sellers. Nonetheless, it could also increase the downside risk in the case of an upcoming economic data point disappointing. The same goes for the dollar. Therefore, the outlook for euro/dollar seems somewhat blurry for now. Maybe both currencies will perform better against the risk-linked ones as increasing hike expectations have been weighing on risk sentiment lately. With the slowdown in Canada’s inflation for January and the nation’s disappointing GDP data for Q4 congealing expectations that the BoC may refrain from hiking rates further, the loonie may be the best choice.

Euro/loonie has been trading higher recently, but still within the sideways range between the 1.4235 support and the strong resistance of 1.4535, which acted as a ceiling, not only recently, but also back in December 2021 and January 2022. In the bigger picture, the pair is still lying above both the 50- and 200-day EMAs, as well as above the uptrend line drawn from the low of August 25. This keeps the door for further advances wide open.

If underlying inflation in the Euro area remains at elevated levels, the bulls may be tempted to challenge the 14635 zone in the foreseeable future, the break of which would confirm a higher high and may set the stage for a gradual advance towards the 1.51 territory, which acted as a solid wall against the bulls between July and September 2021.

Alternatively, if Thursday’s inflation rates miss their forecasts, the euro is likely to lose ground, with euro/loonie perhaps coming back down to the 1.4235 barrier. That said, even if that zone gets broken, the pair would still be trading above the aforementioned uptrend line, something that might keep the bigger outlook cautiously positive.

Gold is overperforming the last couple of sessions on the 4-hour chart, advancing above the short-term downward sloping channel and the 20- and the 50-period simple moving averages (SMAs). The RSI is moving higher above the 50 level, while the stochastic remains in the overbought territory, indicating a possible overstretched market.

Should the metal manage to gather more upside momentum, the next resistance could come around 1,847. A break above this level would shift the bias to a more bullish one and open the way towards the 1,870 barrier and the 200-period SMA at 1,882.

However, if the price is unable to remain above the descending channel, the risk would shift back to the downside, with the next support coming from the 1,820 barrier, which coincides with the 20-period SMA. A drop lower would signal a resumption of the downtrend, meeting 1,804 and 1,795.

In a nutshell, the yellow metal is showing some strength after the bounce off 1,804 and any moves above the 200-period SMA could confirm the bullish correction. 

The Australian dollar is showing strong gains for the first time in a week. AUD/USD is trading at 0.6764 in Europe, up 0.53%.

Australia’s inflation eases

Australia’s inflation fell to 7.4% in January, down from 8.4% in December and below the estimate of 8.0%. Australian Treasurer Jim Chalmers said that he was “cautiously hopeful” that inflation has peaked, but inflation still remained the economy’s biggest challenge. The GDP report was not as positive, with a gain of 0.5% q/q in Q4, below the Q3 gain of 0.7% and the forecast of 0.8%. On an annualized basis, GDP slowed to 2.7% in Q4, down sharply from 5.9% in the third quarter.

The RBA’s rate-hike cycle has slowed economic activity and is responsible for the drop in inflation as well as the soft GDP. The central bank will have to consider how aggressive it should be with regard to future rate increases. Inflation needs to come down much further, but further rate hikes raise the risk of the economy tipping into a recession. The RBA is expected to raise rates by 25 basis points next week but may pause at the April meeting if the data, particularly inflation, allows the Bank to take to a breather.

The Aussie received a boost today from strong Chinese PMIs. Manufacturing and Non-manufacturing PMIs improved in February and beat expectations, with readings of 52.6 and 56.3, respectively. A reading above 50.0 indicates expansion. China is Australia’s largest trading partner and a stronger Chinese economy means greater demand for Australian exports, which is bullish for the Australian dollar. China’s transition from zero-Covid to reopening the economy has gone well so far and a rebound in China is important not just for China and the region but for the global economy as well.

AUD/USD Technical

• AUD/USD has support at 0.6656 and 0.6586
• There is resistance at 0.6788 and 0.6858

The Euro accelerated higher on Wednesday, lifted by stronger than expected growth in China’s manufacturing sector, which pressured dollar, while German regional inflation data added to price growth worries and boost expectations of ECB’s further rate hikes.

Fresh advance emerges after larger bear-leg faced strong headwinds from the base of rising daily Ichimoku cloud, which repeatedly limited attacks and proved to be solid support.

Improving conditions on daily chart (14-d momentum is heading north and approaching the border line of positive territory, stochastic / RSI are in steep ascend and price action broke above initial Fibo barrier at 1.0650 – 23.6% of 1.1032/1.0532)) generate initial positive signal, which looks for verification on extension above falling 20DMA (1.0685) and will be confirmed on break and close above pivotal Fibo barrier at 1.0723 (Fibo 38.2%).

Broken daily Tenkan-sen (1.0627) now offers initial support, guarding more significand cloud base (1.0574).

Res: 1.0704; 1.0723; 1.0782; 1.0803.
Sup: 1.0627; 1.0574; 1.0520; 1.0483.