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The cross firmed on Thursday after Wednesday’s close in red but continues to face headwinds at 0.8850 barrier (50% retracement of 0.9498/0.8202), as the action failed to break clearly higher in three consecutive attempts.

Technical studies on daily chart show rising positive momentum and MA’s in full bullish setup, underpinning the action, though overbought conditions may reduce the pace and keep the pair in extended consolidation.

Immediate bullish stance is expected to remain intact while the price holds above rising 10DMA (0.8787) that will keep the upside in focus.

Sustained break of pivotal barriers at 0.8850/66 (Fibo / Oct 12 lower top) is needed to generate signal of bullish continuation and expose targets at 0.9000 zone (psychological / Fibo 61.8% of 0.9498/0.8202).

Large bullish monthly candle of December (the pair was up 2.5%) completes reversal signal on monthly chart and helps bulls to tighten grip, as monthly studies are firmly bullish and bode well for further gains.

The ECB is expected to continue raising interest rates by 50 basis points in February and March that would add to positive outlook for Euro.

Res: 0.8850; 0.8866; 0.8895; 0.9000
Sup: 0.8826; 0.8787; 0.8713; 0.8697

The new trading year starts on a high note as the crucial non-farm payrolls print is set for release on the Friday, January 6. Before this “main course”, the market will be served the appetizers in the form of the ISM Manufacturing survey and the Fed minutes from the December meeting. Could these releases brighten the somewhat gloomy outlook?

Manufacturing weakness spreading

The ISM manufacturing kicks off a very busy week for the US economic calendar. Since March 2021 the headline index has been on an acute downtrend, finally dipping below 50 in November, signaling a contraction in the manufacturing sector. It is closely matching other manufacturing surveys from regional federal reserve banks. The December print released on Wednesday, January 4 is expected to show another drop to 48.5 for the headline indicator. This homogenous message of ongoing weakness is one the main factors contributing to the extensive recession talk for 2023.

Looking under the hood, the prices paid and the new orders sub-components are of particular interest. The former has been in freefall lately, easing concerns about runaway inflation. Most market participants and Fed members assume that the PCE index is past its peak. However, a jump in the prices paid sub-index, for example above 50 for December, could raise some eyebrows in the market about the future path of Fed funds rate. Similarly, the “new orders” component holds significant market impact potential. It comes amidst an overall clouded business outlook as seen in durable goods orders lately and other non-manufacturing business surveys.

Fed meeting minutes unlikely to hold surprises?

On Wednesday we also get the minutes of the December 14 Fed meeting. As it was expected, another rate hike, in the tune of 50bps, was announced at that meeting. However, the heightened terminal rate, seen at 5.1% against 4.6% at the October meeting, took the market by surprise. Powell’s rhetoric at the ensuing press conference was less hawkish than in previous meetings as the Fed feels more comfortable following a total of 425 bps of rate hikes. The full extent of the minutes would be closely scrutinized but the market focus would fall on any recession talk, especially as consumer spending is slowing and the housing sector is showing cracks. There is increasing evidence of a widespread slowdown in this crucial sector, especially as the reported prices have fallen for four straight months, according to the S&P Case-Shiller home price index.

But the icing on the cake would be the discussion on the Fed’s next steps. Powell commented that the Fed “still has some way to go on rate hikes” and it would be interesting to see the number of FOMC members agreeing wholeheartedly with this approach. As the Fed is approaching a decade-high in Fed funds rates, there could be louder voices in the Fed meeting asking for a more passive strategy ahead, for example pausing at the current rate and allowing the economy to digest the more expensive price of money. Such a strategy could potentially manage to ease the 2023 recession concerns and somewhat cheer up the troubled stock markets, especially the underperforming US technology sector.

EURUSD in waiting mode

USD is recording an abysmal fourth quarter following almost two years of continued outperformance against most currencies. EUR has been one of the main beneficiaries of the USD’s retreat. The pair has climbed aggressively above parity, evaporating the market forecasts for a move towards the 0.8 level. It currently appears to consolidate at the 1.06 area as market participants weigh their options ahead of the new trading year. The overall technical picture appears to be tilting towards the bullish side, particularly as the golden cross between the 50-day and 200-day SMAs could occur soon, and despite the stochastic oscillator prepping to potentially signal a bearish bias.

Daily Pivots: (S1) 0.9254; (P) 0.9281; (R1) 0.9315; More...

USD/CHF's break of 0.9214 support indicates that recent decline from 1.0146 is finally resuming. Intraday bias is back on the downside for 61.8% projection of 1.0146 to 0.9355 from 0.9545 at 0.9056. For now, outlook will remain bearish as long as 0.9341 resistance holds, in case of recovery.

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 might be a medium term down trend itself. Sustained break of 61.8% retracement of 0.8756 to 1.0146 at 0.9287 will pave the way to 0.8756. In any case, risk will stay on the downside as long as 0.9545 resistance holds.

Daily Pivots: (S1) 1.0588; (P) 1.0632; (R1) 1.0656; More...

EUR/USD is still bounded in tight range and intraday bias remains neutral. Further rally is expected as long as 1.0481 resistance turned support holds. Firm break of 61.8% projection of 0.9729 to 1.0481 from 1.0289 at 1.0754 will pave the way to 100% projection at 1.1041. However, firm break of 1.0481 will confirm short term topping and bring deeper fall to 1.0289 support.

In the bigger picture, focus stays on 38.2% retracement of 1.2348 (2021 high) to 0.9534 at 1.0609. Rejection by 1.0609 will suggest that price actions from 0.9534 medium term bottom are developing into a corrective pattern. Thus, medium bearishness is retained for another fall through 0.9534 at a later stage. However, sustained break of 1.0609 will raise the chance of trend reversal and target 61.8% retracement at 1.1273.

Daily Pivots: (S1) 1.1973; (P) 1.2049; (R1) 1.2096; More...

GBP/USD is still bounded in very tight range and intraday bias stays neutral. On the downside, break of 1.1991 will resume the fall from 1.2445 to 55 day EMA (now at 1.1916). Firm break there will target 38.2% retracement of 1.0351 to 1.2445 at 1.1645. On the upside, break of 1.2240 minor resistance will turn bias back to the upside for retesting 1.2445 instead.

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. This will remain the favored case as long as 55 day EMA (now at 1.1916) holds.

Daily Pivots: (S1) 132.90; (P) 133.25; (R1) 133.86; More...

USD/JPY's recovery lost momentum after hitting 134.49 and intraday bias is turned neutral first. On the upside, above 134.49 should resume the rebound through near term channel resistance, towards 38.2% retracement of 151.93 to 130.55 at 138.71 first. On the downside, however, break of 132.62 minor support will bring retest of 130.55 instead.

In the bigger picture, price actions from 151.93 medium term could be just a corrective pattern to up trend from 102.58 (2021 low). Strong support from 38.2% retracement of 102.58 to 151.93 at 133.07 and 55 week EMA (now at 131.76) will set the range for such corrective pattern. However, sustained break of 55 week EMA will pave the way to 61.8% retracement at 121.43.

Trading in the forex markets remain mixed and non-committal. Yen's pull back appeared to have run its course already, and recover broadly today. Euro and Swiss Franc are now on the firmer side. On the other hand, Dollar is weak together with Aussie and Sterling. Canadian and New Zealand Dollar are mixed. Meanwhile, European stock indexes and US futures are trading higher but it's unsure if the rebound could persist. Gold is also struggling in range.

In Europe, at the time of writing, FTSE is up 0.01%. DAX is up 0.58%. CAC is up 0.49%. Germany 10-year yield is down -0.002 at 2.496. Earlier in Asia, Nikkei dropped -0.94%. Hong Kong HSI dropped -0.79%. China Shanghai SSE dropped -0.44%. Singapore Strait Times dropped -0.54%. Japan 10-year JGB yield dropped -0.0096 to 0.448.

US initial jobless claims rose to 225k, matched expectations

US initial jobless claims rose 9k to 225k in the week ending December 24, matched expectations. Four-week moving average of initial claims dropped -250 to 221k.

Continuing claims rose 41k to 1710k in the week ending December 17. Four-week moving average of continuing claims rose 25k to 1680k.

CAD/JPY rejected by channel resistance, heading back to 95.83

CAD/JPY is one of the top moves today, following Yen's recovery, as well as weakness in oil prices. Recovery from 95.83 might have completed at 99.28, after rejection by near term falling channel and 99.46 support turned resistance. Deeper decline is now in favor back to retest 95.83 low first. Firm break there will resume whole fall from 110.33.

Nevertheless, break of 99.28 will now be a sign of stronger rebound ahead. Further rally would likely be seen through 110.24 resistance to 55 day EMA (now at 103.32) instead.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 132.90; (P) 133.25; (R1) 133.86; More...

USD/JPY's recovery lost momentum after hitting 134.49 and intraday bias is turned neutral first. On the upside, above 134.49 should resume the rebound through near term channel resistance, towards 38.2% retracement of 151.93 to 130.55 at 138.71 first. On the downside, however, break of 132.62 minor support will bring retest of 130.55 instead.

In the bigger picture, price actions from 151.93 medium term could be just a corrective pattern to up trend from 102.58 (2021 low). Strong support from 38.2% retracement of 102.58 to 151.93 at 133.07 and 55 week EMA (now at 131.76) will set the range for such corrective pattern. However, sustained break of 55 week EMA will pave the way to 61.8% retracement at 121.43.

Economic Indicators Update

CAD/JPY is one of the top moves today, following Yen's recovery, as well as weakness in oil prices. Recovery from 95.83 might have completed at 99.28, after rejection by near term falling channel and 99.46 support turned resistance. Deeper decline is now in favor back to retest 95.83 low first. Firm break there will resume whole fall from 110.33.

Nevertheless, break of 99.28 will now be a sign of stronger rebound ahead. Further rally would likely be seen through 110.24 resistance to 55 day EMA (now at 103.32) instead.

The British pound has shown little movement since before Christmas and remains quiet on Thursday. This is not surprising as trading volumes are down during the holidays and there are few key events on the calendar this week. In the European session, GBP/USD is trading at 1.2023, up 0.07%.

There are no tier-1 events out of the UK this week, leaving US data in the spotlight. On the manufacturing front, the Richmond Fed Manufacturing Index rebounded to 1 point in December, up sharply from -9 in November and ahead of the consensus of -4 points. The wage index rose to 35 in December, up from 27 in November, another indication that wage growth remains strong.

The US housing sector has been sending mixed signals for November. Existing home sales fell sharply while new home sales rebounded higher. Pending home sales were released on Wednesday, with a disappointing reading of -4.0% m/m, down from 4.7% in October and shy of the consensus of -1.0%. Pending home sales have been in a deep rut, posting a decline for six straight months and 12 of the last 13 months. The housing sector is clearly in trouble, although the silver lining could be that mortgage rates have been declining, which should lead to an increase in house purchases early next year.

Today’s highlight is US unemployment claims. Last week’s release rose slightly, from 214,000 to 216,000. The markets are braced for a jump to 225,000, but the markets are unlikely to react to volatility in the week-to-week releases; the four-week moving averages smooths the weekly data and provide a more accurate picture of unemployment.

GBP/USD Technical

• GBP/USD has support at 1.1949 and 1.1846
• There is resistance at 1.2095 and 1.2198

The Japanese yen has posted gains on Thursday, putting the brakes on this week’s dollar rally of over 1%. In the European session, USD/JPY is trading at 133.64, down 0.60%.

This week has been marked by low liquidity, with many traders closing their books or taking a holiday at the end of the year. Japanese markets have been open all week, and USD/JPY has shown more movement than the other majors.

BOJ defends yield curve target

In a week that has been light on economic releases, the Bank of Japan has provided plenty of material for the markets. The BoJ shocked the markets last week when it widened the yield curve band on 10-year bonds, from 0.25% to 0.50%. The move had the same effect as a rate hike and sent the yen sharply higher. After the move, Governor Kuroda said that the tweak was aimed at making the yield curve more sustainable rather than removing it. Investors remain unconvinced, with speculation rising that the BoJ could raise the cap to 0.75% or eliminate its yield curve control altogether.

The BoJ has tried to dispel speculation that further changes to the yield curve are on the way. The Bank announced on Wednesday and again today unlimited bond purchases, with the aim of defending its yield curve target, which is around 0% for 10-year bonds. The tweak on the yield curve band did not affect this target, which the BoJ has insisted will remain in place. What we are seeing here is a continuation of a cat-and-mouse game between the BoJ and investors, with each side testing the resolve of the other. In October, the yen fell close to 152 before the Ministry of Finance intervened in the currency markets and propped up the yen.

Inflation is on the rise in Japan and has climbed to 3.7%, a 40-year high. The BoJ, however, remains unconvinced that inflation is sustainable unless accompanied by stronger wage growth. If labour agreements in early 2023 result in higher wages, the BoJ could raise its yield curve control target, which would be a massive change in policy.

USD/JPY Technical

• USD/JPY tested support at 133.62 earlier. The next support level is 132.62
• There is resistance at 134.86 and 135.98