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• Signs of de-escalation in the Ukraine crisis spark relief rally
• Stock markets and euro storm back, gold and oil prices retreat
• Fed minutes and US retail sales eyed - is the dollar rally exhausted?

Risk appetite comes back 

A sense of optimism has returned to global markets following reports that Russia has withdrawn some forces from the border with Ukraine. Equity markets came back swinging as traders priced out geopolitical risk and loaded up on riskier assets again, betting that the peak of the storm had passed. 

In the FX space, the signs of de-escalation translated into a stronger euro amid hopes that Europe won’t be forced to impose sanctions on Russia and cut off its own energy supply in the process. The euro advanced the most against the defensive Japanese yen, which suffered a double whammy as safe haven demand faded and global bond yields edged higher.

The situation remains fluid and sentiment can turn on a dime, but for now, financial markets are trading like we are out of the danger zone. Judging by the size of the relief rally, some geopolitical premium is still baked into riskier assets, which suggests there’s scope for the recovery to continue in case the wind continues to blow in the direction of peace.

Commodities cool off 

In the commodity sphere, gold prices came off the boil as the perceived risk of an invasion declined. Real Treasury yields have started to grind back higher, reducing the appeal of non-interest-bearing assets like bullion. This is where the real battle begins for gold. 

The precious metal absorbed the spike in real yields without even a scratch in recent weeks amid rising demand for portfolio protection, but now that geopolitical fears are starting to subside, we’ll find out what the fallout from tighter monetary policy is. If bullion can slice above the $1880 region in this environment, it would be a strong sign that the path of least resistance is higher.

Crude oil prices came under pressure too after Putin said some troops were being withdrawn. There were also some encouraging signs in the Iran talks after the EU’s foreign policy chief said that “we are in the last steps of the negotiation”. The supply side of the equation is therefore looking more bearish as US shale producers are also ramping up production. 

That said, markets are very hungry for oil right now. Futures contracts are still in extreme backwardation, a pattern that indicates traders are willing to pay more for near-term supply. As such, some modest increase in production might not break the uptrend entirely, but rather slow it down.

US events coming up

The US dollar will be in the spotlight today when the latest retail sales numbers and the minutes of the most recent Fed meeting hit the markets. Traders are betting the Fed will take a sledgehammer to crush inflation with six and a half rate increases already priced in for the year, so every release is crucial.

The worrisome part is that the dollar hasn’t been able to capitalize properly on positive data surprises recently. Take last week’s inflation numbers. One extra rate hike was priced into bond markets in the aftermath but the dollar barely rose, until fears of armed conflict in Ukraine sent investors into the reserve currency’s safety.

When a currency cannot rally on good news, that’s usually a sign of exhaustion in the trend. Hence, today’s releases will be especially important. If retail sales exceed expectations for instance and the dollar cannot stage a lasting rally in response, it would be another sign that the uptrend is losing power.

Finally, the earnings season will enter the final stretch with Nvidia, Applied Materials, Rio Tinto, Shopify, and many others releasing their quarterly results today.

Canada’s CPI report looms

Inflation remains the bane of the economy for many industrialized nations, and Canada has not been immune to this trend. CPI took a step backwards in December, with a reading of -0.1% m/m. However, inflation is expected to have jumped in January, with a consensus of a strong gain of 0.6%. A reading within expectations would indicate that high inflation remains alive and well and will put pressure on the Bank of Canada to take aggressive action in order to curb inflation.

BoC Governor Tiff Macklem has said that more rate hikes are coming in order to lower inflation to the central bank’s 2% target, and there are high expectations that the BoC will match the Federal Reserve in March and raise rates by 25 basis points. Macklem is still singing a tune that inflation is transitory and will ease in the second half of the year. Still, with inflation galloping at a 30-year high and consumers feeling the pinch of higher prices, the BoC may have to raise rates several times before inflation is brought down.

The world remains focused on the crisis at the Ukraine/Russia border, with fears that a Russian invasion could be imminent. Moscow has apparently moved some troops away from the border but President Biden said that this has not been verified and warned that an invasion remains “distinctly possible”. Biden has warned Russia that it would face severe consequences if it invades, and the ball is squarely in Moscow’s court as to what happens next. The US dollar has taken a pause from recent gains, but investors aren’t about to snap up riskier assets until Russia lowers the tensions.

USD/CAD Technical

• USD/CAD faces resistance at 1.2781 and 1.2828
•  1.2661 is under pressure in support and could be tested during the day. Below, there is support at 1.2588

The pound has edged higher today after annual inflation in the UK surged to its highest level in 30 years. The bad news is that price pressures are likely to intensify even more, before falling back. The pound’s somewhat muted response suggests investors are not sure whether the impact of the Bank of England’s response in terms of policy tightening will outweigh the negative impact falling real wages will have on the economy. Still, the upcoming rate hikes should help support the pound, especially against weaker currencies like the Japanese yen. Not only does the Bank of Japan remain one of the most dovish central banks out there, but as an oil consumer nation, rising crude prices are clearly negative for the Japanese economy.

So, the GBP/JPY should remain fundamentally supported.

Source: ThinkMarkets and TradingView.com

The GBP/JPY has been making higher lows and higher highs in recent months. With price holding above both the short-term 21-day exponential moving average as well as the longer term 200-day simple moving average, the technical outlook remains objectively positive. Thus, I would favour looking for bullish trades on this pair. I reckon we will soon see a breakout above last year’s high of 158.20ish.

UK CPI highest since 1992

The pound’s latest gains came after data revealed this morning that consumer prices in the UK rose to an annual pace of 5.5% in January, its highest level since March 1992. The data beat expectations, while other measures of inflation, such as the RPI (7.8% y/y) also topped forecasts. The sharp rise in energy bills that will hit consumers in April means price pressures are only likely to exacerbate.

Key economic data coming up this week

Wednesday

• CPI estimate Canada
• US retail sales, industrial productions and FOMC meeting minutes

• Australian employment data
• FedSpeak: FOMC members Bullard and Mester

• Retail sales data from UK and Canada
• FedSpeak: FOMC members Waller and Williams

Stock markets are a little flat on Wednesday as we await the Fed minutes and digest more inflation data from China and the UK.

We saw a strong rebound on Tuesday as some Russian troops completed military drills near the Ukrainian border and returned to their normal bases in what was the first de-escalation in the region in weeks. It came at a time when various world leaders were warning about the threat of invasion this week, something Russia repeatedly denied.

Friday's warnings carried an additional urgency that triggered a sell-off late in the day and saw oil, gas, and gold rally. We've since seen some of those positions being unwound as the threat of conflict appears to have reduced. But with the threat level still relatively high, there's still a certain amount of risk premium in the markets. Especially with NATO and Ukraine suggesting they aren't seeing evidence of troops withdrawing yet.

We're basically drifting from one crisis to another at the minute; from soaring inflation and higher interest rates to deteriorating living standards and now the prospect of conflict in Ukraine, which in turn exacerbates the first two. With tensions easing on the border, attention has quickly shifted back to inflation following some more disappointing figures this morning.

Pressure intensifying on the BoE

It seems a long time since we saw an inflation print that wasn't above the consensus, or central bank estimates, which is fueling further concerns about interest rates and the cost of living crisis. While inflation is expected to peak in April, the road back is becoming ever-more perilous with every above-consensus reading. The peak is now likely to be higher again than many anticipated which probably means more rate hikes and a further squeeze on households and businesses.

Ultimately, the economy will suffer further even if many are better able to absorb higher prices as a result of savings built up over the last couple of years. That may encourage the Bank of England to be cautious in raising rates in the second half of the year as inflation falls but markets are clearly not of that view. Another five hikes are heavily priced in this year, on top of the two consecutive increases in December and February, which would take Bank Rate to 1.75%, the highest since the start of 2009.

Chinese inflation dips, paving the way for further rate cuts

China on the other hand is more focused on supporting the domestic economy, with inflation running well below target and slipping further to 0.9% in January. Producer prices remain high at 9.1% but have been on a downward trajectory in recent months which will allow the central bank to continue to cut rates this year and further shield the economy from the various headwinds it faces including the pandemic and property market turbulence.

Fed minutes to confirm hawkish evolution

I'm not sure what we'll learn from the Fed minutes later today that we're not already aware of, with numerous policymakers expressing increasingly hawkish views in recent weeks. Few have been as hawkish as James Bullard who's called for a full percentage point of increases before July and raised the prospect of inter-meeting hikes. I expect the minutes will reflect the ongoing hawkish evolution at the central bank but it shouldn't shift the dial as far as markets are concerned, with six hikes already priced in.

Oil edging higher again as NATO questions Russian withdrawals

Oil prices are trending higher again on Wednesday, despite tensions in Ukraine appearing to ease. They spiked late on Friday and at the start of the week as the perceived risk of a Russian invasion increased, threatening to impact supplies in an already extremely tight market.

While crude has pulled back from the highs as Russian troops began leaving the border - NATO remains unconvinced by those assurances - the market remains extremely tight and prices had been on an upward trajectory prior to the escalation. The softening of tensions may have only delayed the march to $100, rather than preventing it. API reported a small drawdown last week which is roughly in line with what's expected from the EIA report later today.

Gold remains supported as inflation continues to beat expectations

Gold is trading a little higher again today and above $1,850 where it has dipped below over the last 24 hours. This is the first big test of support, with it having been a major barrier of resistance in January. If it can hold above here, we could see it target yesterday's highs again in the coming days and weeks even as the risk of a Russian invasion declines.

The yellow metal continues to be supported by rapidly rising inflation even as markets price in more and more rate hikes from central banks. Another above-consensus reading from the UK this morning shows the trend is not improving as we near the peak over the next couple of months. Gold could remain well supported for a while yet.

A major breakout coming for Bitcoin?

Bitcoin continues to look very healthy after weathering the geopolitical storm well before benefiting from the improvement in risk appetite on Tuesday. Once again it finds itself trading a little shy of $45,500 where it ran into resistance last week after repeatedly seeing support there back in December. A move above here will be a big psychological boost and could propel bitcoin higher. Of course, risk appetite remains important, especially that linked to inflation and interest rates, which could continue to be a drag if anxiety remains in the broader markets.

UK inflation rises to 5.5%

UK consumers continue to feel the cost-of-living squeeze, as inflation climbed to its highest level in 30 years. January CPI rose to 5.5% y/y, up from 5.4% in December and ticking above the consensus of 5.4%. Similarly, Core CPI rose from 4.2% to 4.4% and beat the forecast of 4.3%. Inflation is expected to continue to accelerate, with predictions that it will hit 7% come April.

These inflation numbers, together with the rise in wage growth are putting more pressure on the Bank of England to tighten its policy. The bank is widely expected to raise rates at the March meeting to 0.75%, which would mark three consecutive rate hikes for the first time in the BoE’s history. Inflation is expected to ease in the second half of the year, which means that the BoE might raise rates again in May but could then take a pause.

The Federal Reserve also has been dealing with the headache of surging inflation, which has forced the central bank to become more hawkish and abandon its stance that inflation is transitory. The Fed expects inflation to ease in the second half of 2022, but cannot afford to sit idle and plans to raise rates in March. The only question is the extent of the hike – the CME’s FedWatch has pegged a 57% chance of a 50-basis point hike and a 43% likelihood of a 25-basis point hike. It’s clear to all that this will mark the start of a series of hikes this year, although the exact number will depend on economic developments.

The crisis on the Ukraine/Russia border has eased but the situation remains very tense. Russia has apparently moved some troops away from the border but President Biden said that this has not been verified and warned that an invasion remains “distinctly possible”.  Biden has warned Russia that it would face severe consequences if it invades, and the ball is squarely in Moscow’s court as to what happens next.

GBP/USD Technical Analysis

• There is resistance at 1.3640. and 1.3719
• There is support at 1.3487 and 1.3413

Eurozone industrial production rose 1.2% mom in December, well above expectation of 0.3% mom. Production of capital goods rose by 2.6%, intermediate goods by 0.5% and non-durable consumer goods by 0.4%, while production of durable consumer goods fell by -0.3% and energy by -0.8%.

EU industrial production rose 0.7% mom. Among Member States for which data are available, the largest monthly increases were registered in Ireland (+10.3%), Lithuania (+6.2%) and Luxembourg (+5.1%). The highest decreases were observed in Czechia (-2.9%), Austria (-1.1%) and Italy (-1.0%).

Full release here.

Britain’s consumer price index fell 0.1% in January, not as sharply as analysts had expected; they were expecting an average fall of 0.2%. Year over year inflation reached 5.5%, a new record since March 1992. There are plenty of signs that peak inflation is near, but the big question is how quickly price growth will return to its 2% target and what effort it will take from the Bank of England.

Among signs of a cooling inflation outlook, we highlight the second month of slowing producer prices to 13.6% YoY in January against 13.9% and 15.2% in the previous two months. This is an early indicator which allows us to expect less pressure from commodity prices on producers further down the line, which will cool consumer inflation in the coming months.

Among the early indicators of inflation around the world is also the Chinese producer price index, which noted a slowdown in January to 9.1% from 10.3% a month earlier and a peak of 13.5% in October.

The publication of the UK inflation accelerated the rise in the pound, sending GBPUSD above 1.3570.

USDJPY is exhibiting a bullish tone as it approaches the 116.00 handle after the 50- and 100-day simple moving averages (SMAs) defused sellers’ attempts to steer the pair lower. The soaring SMAs are shielding the broader ascent in the pair.

Additionally, the short-term oscillators suggest that upside momentum is growing. The MACD is holding above its red signal line in the positive section, while the RSI is creeping higher in the bullish zone. Furthermore, the uptick in the stochastic %K line is promoting more advances in the pair.

To the upside, the fortified 116.00-116.34 resistance ceiling could delay price gains from gaining pace. However, if this barrier fails to keep growing bullish pressures at bay, the 116.87 and 117.53 highs, identified in the first half of January 2017, could come under attack. Should a more profound up move evolve, the 118.17-118.66 tough barricade, shaped over early November until mid-December 2016 that includes a double top formation, may be challenged.

Otherwise, if price developments become curbed by the 116.00-116.34 obstacle, an initial support band may transpire from 115.00 until the 50-day SMA at 114.72. In the event a deeper price pullback unfolds, the 100-day SMA at 114.15 could act as another upside defence before sellers aim for the lower Bollinger band at 113.68 and the adjoining 113.13-113.52 support base. In the event downward forces remain in control, the critical 112.00-112.72 support border may then draw traders’ attention.

Summarizing, USDJPY is currently sustaining a neutral-to-bullish tone above the 115.00 hurdle and the SMAs. A clear break of the 116.00-116.34 boundary could resuscitate the broader uptrend. That said, a price dive below the 113.13-113.52 support base may spark worries about a deeper correction unfolding in the pair.

NZDUSD refused to return to the bottom of its downtrend earlier this week, pivoting once again near the 0.6600 round level to retest the 20-day simple moving average (SMA) at 0.6640, which has been constraining bullish actions for almost a week now.

The way higher, however, looks to be bumpier and the bulls will need to breach a few more barriers before they stage a meaningful rally. The RSI and the MACD are also reflecting some caution among traders. Although they keep progressing, the former is still beneath its 50 neutral mark and the latter is within the negative zone for the third consecutive month.

The 23.6% Fibonacci retracement of the 0.7217 – 0.6528 downleg at 0.6690 could immediately cease any upside movements above the 20-day SMA. Within breathing distance, the 50-day SMA could also prove a tough obstacle along the tentative descending trendline at 0.6730, while the 38.2% Fibonacci of 0.6790 could prevent an acceleration towards the previous high of 0.6889 and the resistance trendline currently sitting around 0.6900.

On the downside, a pullback below the 20-day SMA could initially seek support around 0.6600. If this floor cracks this time, the bears may again attempt to build the downward structure below January’s low of 0.6528 and the 0.6500 level with scope to reach the June 2020 limitations around 0.6378.

In brief, NZDUSD is expected to push for more gains in the short-term following the bounce above 0.6600. Yet, whether any upside corrections will be strong enough to boost buying confidence above 0.6730 remains to be seen.

The British Pound is facing a strong resistance near the 1.3620 and 1.3640 levels against the US Dollar. Recently, the GBP/USD pair declined and traded below the 1.3550 level.

It traded as low as 1.3486 and currently correcting higher. There was a move above the 1.3520 and the 50 hourly simple moving average. An immediate resistance is near the 1.3545 level. Besides, there is a key bearish trend line forming with resistance near 1.3545 on the hourly chart.

The next key resistance is near the 1.3565 level. Any more gains might push the pair towards the 1.3600 level, where the bears could take a stand in the near term.

An initial support on the downside is near 1.3535 on FXOpen. The main support is forming near the 1.3520 level. A break below the 1.3520 support could even push the pair below the 1.3500 support.