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DAX is showing bullish impulsive Elliott wave sequence started from September-2022 low. It placed (1) at 14584.6 high and (2) at 13791.5 low on 12/20/2022. Above there, it favors higher in wave (3) and favors higher. It already showing higher high sequence favors short term strength to continue, while dips remain above 1/30/2023 low of ((ii)). In wave (1), it placed 1 at 12669.5 high and 2 at 12000.4 low on 10/13/2022. Above there, it favored ended extended wave 3 at 14571.66 high and 4 at 14327.05 low as shallow correction. Finally, it ended 5 at 14584.6 as minor high as in wave (1) started from September-2022 low. Wave (2) was expanded flat correction ended at 13791.5 low. Above there, it favors higher in (3) of ((1)).

It placed 1 of (3) at 14160.87 high and 2 at 13871.32 low as 0.764 Fibonacci retracement against wave 1. Above there, it favored higher in extended wave 3, which ended at 15269.71 high. Below there, it placed wave 4 at 14906.27 low in 3 swing pullback. It was retraced 0.236 Fibonacci levels against wave 3 on 1/19/2023 low. Finally, it confirms higher high sequence in wave 5 in (3). It placed ((i)) of 5 at 15486.49 high and ((ii)) at 14988.98 low. Currently, it favors higher in ((iii)) of 5. It placed (i) at 15161.07 high and (ii) at 14993.59 low. Above there, it favors higher in (iii) of ((iii)), where it placed wave iv at 15403.22 low. It expect new high to be wave v of (iii) in ((iii)) before pullback in (iv) correction. Alternatively, it still can be iii of (iii) before pullback in wave iv later. In either the case, it expect few more highs in wave 5 to finish (3) sequence before next pullback starts in (4) of ((1)). Above 12/20/2022 low, it expect to remain supported in 3, 7 or 11 swings in wave (4) for further upside in (5). In higher degree sequence, the move higher from 2/20/2022 low can even nest and see more upside within wave (3) before pulling back in wave (4) later.

DAX 1-Hour Elliott Wave Chart

ECB Review - Markets Conclude ECB is Close to Being Done

• The ECB hiked policy rates by 50bp, as expected, and said it 'intends' to hike another 50bp at the March meeting, after at which point it will 'evaluate' the subsequent path of its monetary policy rate.
• Markets took the ECB's communication as a sign that the ECB is close to ending its hiking cycle, as bond yields rallied strongly. We judge that today's communication reflects a very split governing council. We still expect the ECB to hike its policy rates by 50bp in March and 25bp in May.
• QT details were uneventful, as expected.

Resilient economy is a double-edged sword for the ECB

President Lagarde acknowledged that the economy proved more resilient than expected and the ECB expects the recovery to continue in the coming quarters. Although recession risks have abated, the economy has also yet to feel the full impact of the ECB's monetary tightening (see also Euro macro notes - From recession to stagnation, 2 February 2023).

For the ECB, the brighter near-term economic outlook remains a double-edged sword, as it risks prolonging inflationary pressures. Energy inflation has slowed faster than expected, but underlying inflation remains high. Lagarde pointed to delayed supply effects and pent-up demand in some sectors are still pushing up prices, while upside risks remain from catch-up effects in wage growth. With a resilient labour market and still elevated selling price expectations, high core inflation could remain a worry for the ECB for some time. Yet, the ECB now sees a more balanced risk picture, also with respect to the inflation outlook.

Hawkish on decision - but soft on guidance reflects a split GC

On the face of it, the ECB took a hawkish decision to hike 50bp today and signal another 50bp hike is coming in March, but the subtle changes left markets to conclude that it will soon soften its monetary policy stance and that the ECB is coming close to the end of its hiking cycle. In particular, the reference to a 'more balanced' inflation outlook, especially in the near term, was noted by markets. During the press conference, President Lagarde also opened the door for a potential hike of a size other than 50bp, and emphasised that it would be taken only at the March meeting, where the ECB also has new staff projections on which to base its monetary policy decisions. Despite this data dependency, she believes that when assessed on various underlying inflation measures, 50bp was warranted. Unsurprisingly, the ECB confirmed the data-dependent and meeting-by-meeting decision approach. This means that with markets trading on a narrative other than that which the ECB wants to convey on a more holistic plan (e.g. one of underlying inflation lingering, despite lower headline), we saw significantly lower yields to today's meeting.

We interpret Lagarde's communication during the press conference as reflecting a very split governing council, where she also said that any decision is the fruit of compromise. In the end, the ECB's intention to hike 50bp at the March meeting is not a 100% commitment. As late as in June, the ECB also 'intended' to hike the rates by 25bp at the coming July meeting, but in the end decided to hike 50bp at that meeting.

44bp priced in March – cuts early 2024

Markets repriced the peak policy rate lower by 5bp compared with pre-press release level,
at which point it had already repriced slightly on spillover from the BoE’s policy meeting
earlier in the day. At the time of writing, markets see a peak policy rate of 3.40%, which is
10bp lower than yesterday. Markets price in 44bp for March and 25bp in May.

The ECB repeated its judgement of rates will have to rise significantly and stay sufficiently
restrictive to get inflation to the 2% target, but markets downplayed the importance of that
guidance and focused on the data-dependent and meeting-by-meeting approach to policy
decisions.

QT details were relatively uneventful

The announcement of the reinvestment policies was relatively uneventful, as expected. The
ECB confirmed its decision to allow EUR15bn/month to mature on average from March to
June. As regards the reinvestments that will be done, it said that this will be done
proportionally to the redemptions in the jurisdiction and asset class, thereby not actively
pursuing another portfolio composition. This conclusion does not include the private sector
purchases, which were seen as reinvestments under the CSPP, tilted more to the better
climate performance issuers.

EUR-crosses decline on Lagarde communication

While the initial market reaction in FX markets was fairly limited, the EUR initiated a
broader-based decline during the press conference. EUR/USD is now firmly below the 1.10
mark and EUR/Scandies are also trading considerably lower.

In recent weeks, EUR/USD has defied the shift and sudden underperformance of Eurozone
equities, which we otherwise deem to have been an important driver behind the EUR/USD
rally since September (Eurozone equities overperforming during this period). Our tactical
conviction on EUR/USD is not high, but we maintain a clear sell-on-rallies bias for the
cross as we still think medium-term drivers indicate that EUR/USD is overvalued (and not
undervalued).

Bank of England Review - 50bp Hike Today and a Final 25bp Hike in Store for March

• In line with our expectation, the BoE today hiked policy rates by 50bp, bringing the Bank Rate to 4.00%.
• We expect the increasingly weak growth outlook to support a near-term ending to the hiking cycle.
• We maintain our call for a final 25bp hike in March with risks to our call skewed towards additional hikes in 2023 if wage growth shows increasing persistence.

In line with our expectation, the Bank of England (BoE) hiked the Bank (policy) Rate by 50bp to 4.00% with 7 members voting for a 50bp hike and two members voting for keeping the Bank Rate unchanged.

Overall, the message was slightly to the dovish side with the BoE increasingly shifting to a more data dependent approach. Most importantly, the shift in characterising future course in action by removing the phrase "further forceful monetary policy response" from the December guidance to "further tightening in monetary policy would be required". As expected, the BoE revised its growth forecast upwards, now projecting a much shorter and shallower technical recession in 2023. Consequently, BoE now expects the rise in unemployment to prove smaller than previously expected. Likewise, their inflation projections were revised lower reaching 3% in Q1 2024 compared to 4% in the November projections. Overall, we think the statement and press conference confirm our call of a final hike in March of 25bp. The key concern for the BoE remains developments in wage data as well as service inflation, which leaves a potential for further hikes down the road.

We were left with little guidance in terms of monetary policy and potential cuts later in the year, with Bailey refraining from pushing back on market pricing (40bps of cuts during H2). Markets reacted by pushing expectations of policy rate in December lower to 3.93% compared to 4.13% yesterday. We do not expect any cuts to materialize before 2024.

Rates. Gilts yields on all horizons ticked lower during the day, spiked on the announcement and then started trending lower again with the 10Y trading around 30bp lower compared to yesterday. Like us, investors seem to interpret today's meeting as dovish as the peak rate was pushed slightly lower to 4.3% in June/August from 4.4% in the beginning of the week.

FX. EUR/GBP initially moved lower upon announcement but quickly retraced as expected with the more dovish nature of the statement. Followed by a less than expected hawkish ECB EUR/GBP is back close to opening levels. We continue see a case for the EUR/GBP cross to move modestly lower in the coming year as a global growth slowdown and the relative appeal of UK assets to investors are a positive for GBP relative to EUR.

Our call. We continue to expect the BoE to deliver a final 25bp hike in March. Our expectations fall below current market pricing (currently 34bps until June 2023) as we expect the rest of the BoE committee to increasingly turn less hawkish amid a weakening growth backdrop and easing labour market conditions. Markets is pricing in 40bp of cuts during H2, while we keep our forecast of the first cut to be delivered in the beginning of 2024.

Summary

• The European Central Bank (ECB) delivered a 50 basis point increase in its Deposit Rate at today's monetary policy announcement, and offered a relatively determined message to continue along its monetary tightening path. In particular, the ECB pre-committed to another 50 basis point increase in March, a somewhat unusual move, and said it would keep interest rates at restrictive levels for some time.
• Today's announcement does not alter our outlook for the path of ECB monetary policy. We expect a further 50 basis point increase in the Deposit Rate in March and a final 25 basis point increase in May, which would see the ECB's Deposit Rate peak at 3.25% for the current cycle.
• The Bank of England (BoE) raised its policy rate 50 basis points to 4.00% at today's announcement, while also delivering relatively balanced accompanying commentary. In fact, based on current market expectations for interest rates, the BoE expects CPI inflation to fall back below 2%. At the same time, the BoE noted considerable uncertainties around the outlook and said inflation risks were significantly to the upside.
• While the BoE could conceivably already be done, the upside inflation risks combined with a desire from BoE policymakers to ensure they “finish the job” in returning inflation sustainability back towards the 2% inflation target means we believe some modest further tightening is more likely than not. We expect a final 25 basis point rate increase at the March meeting, bringing the policy rate to a peak of 4.25%. We expect the policy rate to remain at that level through until late 2023, before the BoE embarks on rate cuts in Q4 this year.

ECB Stays the Course on Monetary Tightening

The European Central Bank (ECB) delivered a 50 basis point increase in its Deposit Rate at today's monetary policy announcement, and offered a relatively determined message to continue along its monetary tightening path. In addition to today's interest rate increase, the ECB said:

“In view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March, and it will then evaluate the subsequent path of its monetary policy. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. In any event, the Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.”

Meanwhile, with respect to its quantitative tightening plans, the ECB said it would reduce its Asset Purchase Program portfolio by €15 billion per month from March through June, with the subsequent pace of portfolio reduction to be determined over time. Partial reinvestment will be conducted in line with current practice. The quantitative tightening plans were in line with those signaled at the ECB's December meeting.

We view the ECB's announcement as notably, though not ultra-aggressively, hawkish. We view the pre-commitment to a 50 basis point rate hike in March as unusual and thus noteworthy. Overall, today's announcement does not alter our outlook for the path of ECB monetary policy. We expect a further 50 basis point increase in the Deposit Rate in March and a final 25 basis point increase in May, which would see the ECB's Deposit Rate peak at 3.25% for the current cycle.

Bank of England Gets Ready to Pivot

The Bank of England (BoE) raised its policy rate 50 basis points to 4.00% at today's announcement, while also delivering relatively balanced accompanying commentary. The BoE noted that domestic inflation pressures have been firmer than expected and the labor market remains tight by historical standards, although there has started to be some loosening in labor market conditions. Meanwhile, the central bank also expects inflation to fall back sharply in the coming quarters, driven by softer energy prices. In fact, in its updated economic projections, which is based on a market-implied path for the policy rate that rises to around 4.5% in mid-2023 and falls back to just over 3.25% in three years time, CPI inflation declines below the 2% inflation in the medium-term. Indeed, even with a constant policy rate of 4.00%, the medium-term inflation forecast also fall belows 2%.

Taken at face value, an inflation forecast that drops below the 2% inflation target over time might signal that the BoE's monetary tightening is done. However, BoE policymakers note:

“There are considerable uncertainties around this medium-term outlook, and the Committee continues to judge that the risks to inflation are skewed significantly to the upside.”

This is further elaborated upon in the minutes of the meeting, in which

“The Committee continued to judge that the risks to inflation were skewed significantly to the upside, primarily reflecting the possibility of greater persistence in domestic wage and price setting, and also upside risks to the wholesale energy price conditioning assumption. Qualitatively, an inflation forecast that took into account these upside risks was judged to be much closer to the 2% target at the policy horizon than the modal central projection.”

It is this medium-term outlook that likely led to some softening in the BoE policy guidance. The Bank of England said it will:

“Continue to monitor closely indications of persistent inflationary pressures, including the tightness of labor market conditions and the behavior of wage growth and services inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”

The contingent nature of further rate increases, along with dropping references to the need to act forcefully, both suggest a less aggressive approach from the Bank of England moving forward. While the BoE could conceivably already be done, the upside inflation risks combined with a desire from BoE policymakers to ensure they “finish the job” in returning inflation sustainability back towards the 2% inflation target means we believe some modest further tightening is more likely than not. We expect a final 25 basis point rate increase at the March meeting, bringing the policy rate to a peak of 4.25%. We expect the policy rate to remain at that level through until late 2023, before the BoE embarks on rate cuts in Q4 of this year.

Daily Pivots: (S1) 1.0894; (P) 1.0948; (R1) 1.1043; More…

While EUR/USD retreats slightly, further rise is expected as long as 1.0800 support holds. Current rally from from 0.9534 should target 61.8% projection of 0.9630 to 1.0733 from 1.0482 at 1.1164 next. Nevertheless, break of 1.0800 should confirm short term topping and turn bias back to the downside for deeper correction.

In the bigger picture, current development suggests that the rally from 0.9534 low (2022 low) is a medium term up trend rather than a correction. Further rise is in favor to 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 next. This will remain the favored case as long as 1.0482 support holds.

Daily Pivots: (S1) 1.2300; (P) 1.2347; (R1) 1.2420; More…

Intraday bias in GBP/USD remains neutral for the moment as sideway trading continues. On the downside, firm break of 1.2252 minor support will turn bias to the downside, and extend the corrective pattern from 1.2445 with another falling leg. On the upside, decisive break of 1.2445 will confirm resumption of whole rise from 1.0351. Next target will be 1.2759 fibonacci level.

In the bigger picture, rise from 1.0351 medium term bottom is at least correcting whole down trend from 1.4248 (2021 high). Further rise is expected as long as 1.1644 resistance turned support holds. Next target is 61.8% retracement of 1.4248 to 1.0351 at 1.2759. Sustained break there will pave the way back to 1.4248.

Daily Pivots: (S1) 128.21; (P) 129.31; (R1) 130.07; More…

USD?JPY is still bounded in range above 127.20 and intraday bias stays neutral. On the downside, break of 127.20 will resume the whole decline from 151.93 and target 121.43 fibonacci level. Nevertheless, on the upside, break of 131.56 resistance should confirm short term bottoming, and turn bias back to the upside for stronger rebound to 55 day EMA (now at 133.75) and possibly above.

In the bigger picture, the break of 55 week EMA (now at 131.39) raises the chance of medium term bearish reversal, but that’s not confirmed yet. Strong support could be seen around 61.8% retracement of 102.58 to 151.93 at 121.43 and 38.2% retracement of 75.56 to 151.93 at 122.75 to bring rebound. But break of 131.56 resistance is needed to indicate bottoming first. Otherwise further fall will remain in favor.

Daily Pivots: (S1) 0.9042; (P) 0.9113; (R1) 0.9155; More…

No change in USD/CHF's outlook and intraday bias stays on the downside. Sustained break of 61.8% projection of 1.0146 to 0.9355 from 0.9545 at 0.9056 will resume the whole fall from 1.0146 to 100% projection at 0.8754, which is close to 0.8756 long term support. Nevertheless, strong rebound from current level, followed by 0.9287 resistance, should confirm short term bottoming.

In the bigger picture, rise from 0.8756 (2021 low) has completed at 1.0146, well ahead of 1.0342 long term resistance (2016 high). Based on current downside momentum, fall from 1.0146 should be a medium term down trend itself. Next target is a test on 0.8756 low. Strong support should be seen there to bring rebound. Still, further decline will now be expected as long as 0.9407 resistance holds, in any case.

Daily Pivots: (S1) 141.15; (P) 141.49; (R1) 142.07; More….

EUR/JPY drops sharply today but stays in range of 155.33/161.80. Intraday bias remains neutral first. On the downside, firm break of 155.33 will resume the whole decline from 148.38 to 135.40 fibonacci level next. On the upside, decisive break of 142.84 resistance will argue that the correction from 148.38 has completed. Stronger rally should then be seen back to 146.71 resistance.

In the bigger picture, as long as 55 week EMA (now at 138.81) holds, larger up trend from 114.42 (2020 low) is still in progress for 149.76 long term resistance. However, firm break of 55 week EMA will bring deeper fall to 38.2% retracement of 114.42 to 148.38 at 135.40. Sustained break there will raise the chance of trend reversal, and target 61.8% retracement at 127.39.