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Daily Pivots: (S1) 1.2663; (P) 1.2695; (R1) 1.2755; More...

USD/CAD edged lower to 1.2634 but quickly recovered. Intraday bias remains neutral first. Further rise remains mildly in favor. On the upside, break of 1.2795 will resume the rally from 1.2448 to 1.2963 resistance next. However, break of 1.2634 support will turn bias back to the downside for 1.2448 support instead.

In the bigger picture, focus stays on 38.2% retracement of 1.4667 (2020 high) to 1.2005 (2021 low) at 1.3022. Sustained break there should confirm that the down trend from 1.4667 has completed after defending 1.2061 long term cluster support. Further rise would then be seen towards 61.8% retracement at 1.3650. However, rejection by 1.3022 will maintain medium term bearishness. Break of 1.2005 will resume the down trend from 1.4667 and that carries larger bearish implications too.

Daily Pivots: (S1) 1.1371; (P) 1.1433; (R1) 1.1491; More...

EUR/USD edged higher to 1.1494 but failed to sustain above 1.1482 resistance and retreated. Intraday bias remains neutral first. Further rise is still in favor as long as 1.1265 minor support holds. Sustained break of 1.1482 will target 38.2% retracement of 1.2348 to 1.1120 at 1.1589 next. Sustained break there will argue that whole fall from 1.2348 has completed too and target 61.8% retracement at 1.1879. On the down, however, break of 1.1265 support will dampen this bullish view and bring retest of 1.1120 low instead.

In the bigger picture, the decline from 1.2348 (2021 high) is seen as a leg inside the range pattern from 1.2555 (2018 high). Sustained trading above 55 week EMA (now at 1.1613) will argue that it has completed and stronger rise would be seen back towards top of the range between 1.2348 and 1.2555. However, firm break of 1.0635 (2020 low) will raise the chance of long term down trend resumption and target a retest on 1.0339 (2017 low) next.

Daily Pivots: (S1) 1.3508; (P) 1.3576; (R1) 1.3628; More...

GBP/USD edged higher to 1.3642 but quickly retreat. Intraday bias stays neutral at this point. On the upside, break of 1.3642 will resume the rebound to 1.3748 resistance. Firm break there will revive the bullish case that correction from 1.4248 has completed with three waves down to 1.3158. Further rally should then be seen to retest 1.4248 high. On the downside, however, break of 1.3356 will bring retest of 1.3158 low.

In the bigger picture, as long as 38.2% retracement of 1.1409 to 1.4248 at 1.3164 holds, up trend from 1.1409 (2020 low) is still in progress. On resumption, next target will be 38.2% retracement of 2.1161 to 1.1409 at 1.5134. Nevertheless sustained break of 1.3164 will argue that whole rise from 1.1409 has completed and bring deeper fall to 61.8% retracement at 1.2493.

Daily Pivots: (S1) 0.9221; (P) 0.9259; (R1) 0.9291; More....

Range trading continues in USD/CHF and intraday bias remains neutral for the moment. Further rise will remain mildly in favor as long as 0.9090 support holds. break of 0.9372 will resume the choppy rally from 0.8925 to 0.9471 high. However, break of 0.9090 will turn bias back to the downside for 0.8925 support instead.

In the bigger picture, medium term outlook will be neutral at best as long as 0.9471 resistance holds. Larger down trend could still extend through 0.8756 (2021 low). However, firm break of 0.9471 will argue that the trend has already reversed and rebound the rally from 0.8756 with another impulsive move.

American shares declined on Thursday after bigger-than-expected inflation figures. The Dow Jones index declined by 0.40% while the S&P 500 fell by 0.62%. The yield of the 10-year also declined. Data showed that US inflation rose by 7.5% in January, higher than the median estimate of 7.3%. The increase happened as demand for goods remained high and supplies struggled. It also happened as the price of oil and gas jumped to a multi-year high. Excluding the volatile food and energy prices, inflation rose by 6% in January. Therefore, analysts believe that the Fed will tighten at a faster rate than expected. Some even see the bank making that decision before its scheduled meeting in March.

The British pound rose sharply ahead of upcoming UK inflation data that will come out in the morning session. Analysts expect the data will show that the economy expanded by1.1% in the fourth quarter. The economy is expected to do even better in the first quarter considering that the country is ending its Covid restrictions. They expect that business investments rose by 2.6% in the fourth quarter. Also, analysts expect that industrial and manufacturing production did well in Q4. On Thursday, the BOE chairman reiterated that the bank will be careful when implementing rate hikes.

The economic calendar will have several important items today. In the morning session, the German statistics agency will publish the latest inflation data. Analysts expect that the data will show that inflation rose by 5.1% in January. Switzerland will also publish its inflation numbers, which will be watched closely. As the data approaches 2.0%, analysts expect that the SNB will start tightening later this year. Elsewhere, the Russian central bank will deliver its first decision of the year while the Fed will publish its monetary policy report.

EURUSD

The EURUSD pair jumped sharply after the latest US inflation data. It rose to a multi-month high of 1.1496, which was above last week’s high of 1.1480. On the four-hour chart, the pair has moved above the 25-day moving average while the RSI is pointing higher. Therefore, the pair will likely keep rising in the near term as bulls target the key resistance at 1.1550.

XAUUSD

The XAUUSD pair rallied even after the strong American inflation data. It rose to a high of 1841, which was the highest level since December 26. It also rose above the 61.8% Fibonacci retracement level while the MACD and RSI are rising. It is also approaching the key resistance level at 1,853, which was the highest point this year. Therefore, the pair will likely keep rising.

AUDUSD

The AUDUSD pair also jumped sharply in the overnight session. It moved to a high of 0.7245, which was the highest level since January 20. The pair has jumped sharply from the year-to-date low of 0.6964. It rose above the 25-day and 50-day moving averages while the Relative Strength Index (RSI) moved to the overbought level. Therefore, the pair will likely keep rising today.

Thursday’s data showed that consumer prices in the US advanced from 7.0% to 7.5% in January, more than 7.3% penciled in by analysts.

The Fed hawks came back in charge aggressively following the US inflation print as St Louis President Bullard said he’d ‘like to see 100 basis points in the bag by July 1’.

We went from no rate hike in 2022 to the growing possibility of a 100bp hike by July - which also implies that the first rate hike in March would be no tinier than 50bp. The probability of a 50bp rate hike went from a meagre 20% to a solid 93% in a single session.

The 2-year yield jumped to 1.60% and the 10-year yield drilled above the 2% mark for the first time since summer 2019. The 10-year yield is now about where the 2-year yield kicked off the year.

So, the things are going quite fast in the US sovereign markets, almost as fast as Dogecoin.

Gains given back

All three major US indices were moody yesterday, but Nasdaq led losses as it’s the most sensitive to the rate changes. The index which was flirting with its 200-DMA the day before slipped more than 2% following the inflation data. Even the companies that are thought to do well in tighter monetary conditions like Apple slid. Apple lost more than 2.30%, as Google slid 2%, and Amazon gave back 1.36%.

The S&P500 on the other hand remained within its 100 and 200-DMA, having not damaged an important technical level just yet, but there is a bigger chance that we see the index close the week below the 200-DMA, than above it.

In the FX

Rising hawkish noises from the Federal Reserve (Fed) backed the US dollar. Buying the dip in the dollar has become a good bet lately, as the hawkishness in the Fed could go way deeper than many would have thought a couple of months ago.

The EURUSD is back below the 1.14 mark, but if there is one place where there is potential for hawkish surprises, it is well the euro, given that the European Central Bank (ECB) has also been ignoring the inflation problem - which will certainly come back as a slap in the Eurozone’s face in the foreseeable future.

For now, Christine Lagarde insists that acting too fast could choke the economy’s recovery, but not acting at all will choke the economy, as well. Therefore, despite being bullish in the dollar, I still think that the EURUSD will make its way higher against the greenback, because the inflation situation in Europe will likely become unbearable, as well.

Gold, no luck

Gold first rallied to $1842 an ounce as a kneejerk reaction to the US inflation data then tanked to $1820s as the rising US yields increased the opportunity cost of holding the non-interest-bearing gold and got investors to dump their positions.

Best places to go

Gold is therefore not the best hedge against inflation, commodity ETFs and energy-heavy stock indices are. iShares Diversified Commodity index runs from record to record, the British FTSE and the Brazilian Ibovespa outperform their rate-sensitive and tech-heavy US peers since the beginning of the year and should open up a lead in the actual energy-led inflationary setup.

UK GDP contracted -0.2% mom in December, better than expectation of -0.5% mom. Services output dropped -0.5% mom. Production rose 0.3% mom while construction rose 2.0% mom. Services and construction were both above pre-coronavirus levels, by 0.5% and 0.3% respectively, but production remained -2.6% below.

Q4 GDP grew 1.0% qoq, slightly below expectation of 1.0% qoq. The level of GDP in Q4 remained below -0.4% below its pre-coronavirus level in Q4 2019. Nevertheless, monthly GDP was already at its pre-coronavirus level in February 2020.

Full GDP release here.

Also published, manufacturing production rose 0.2% mom, 1.3% yoy in December versus expectation of 0.2% mom, 1.7% yoy. Industrial production rose 0.3% mom, 0.4% yoy, versus expectation of 0.1% mom, 0.6% yoy. Goods trade surplus came in at GBP -12.4B, versus expectation of GBP -13.0B.

Overview: A combo of renewed increases in commodity prices, very tight labour markets and high consumer inflation expectations continues to keep upward pressure on inflation intact. On a positive note, electricity prices in Europe have come down. Freight rates are still at high levels and delivery times very long. We look for US core inflation to rise further and peak at 6.6% in March 2022 before easing to around 4.6% by end-2022. We expect euro core inflation to peak now and fall below 2% in Q4.

Inflation expectations: Market-based long-term inflation expectations still move sideways, but US household long-term inflation expectations are at a 10-year high. Euro household price expectations for next 12 months stayed elevated in December.

US: CPI inflation rose to 7.5% y/y in December and once again the increase was higher than anticipated, implying an even higher pressure on the Fed to tighten sooner and faster (markets are now pricing in six rate hikes from the Fed in 2022). Energy and food prices (and usual suspects like used car prices) are explaining a lot but price increases are broad-based. Around 50% of small businesses expect to hike output prices within three months and long-term consumer inflation expectations are now 3.1% y/y, which is indeed in the upper end of what the Fed can tolerate, in our view.

Euro: In contrast to expectations, HICP inflation rose to yet another all-time high of 5.1% in January, as soaring food prices and strengthening core inflation pressures more than made up for German VAT base effects falling out of the equation. 'Saved-up' price increases by companies likely also played a role at the turn of the year, leaving core inflation elevated at 2.3%. The continued inflation upside surprises were an important trigger for the communication shift from ECB at the February meeting and with inflation risks still seen on the upside, we now expect two 25bp hikes (read more in ECB Review: New call - ECB to hike in Dec22 and Mar23, 3 February).

China: Chinese PPI inflation dropped from 12.5% to 10.3%% in December. We look for a further moderation in coming months but recent increases in commodity prices will moderate the decline. CPI is running at 1.5% y/y, clearly below the 3% target.

Full report in PDF.

Daily Pivots: (S1) 115.54; (P) 115.94; (R1) 116.40; More...

Intraday bias in USD/JPY remains on the upside with focus on 116.34 high. Firm break there will resume larger up trend from 102.58. Next target is 118.65 long term resistance. On the downside, though, break of 115.31 minor support will extend the corrective pattern from 116.34 with another falling leg, and turn bias back to the downside for 114.14 support and possibly below.

In the bigger picture, no change in the view that rise from 102.58 is the third leg of the up trend from 101.18 (2020 low). Such rally should target a test on 118.65 (2016 high). Sustained break there will pave the way to 120.85 (2015 high) and raise the chance of long term up trend resumption. This will remain the favored case as long as 55 week EMA (now at 111.21) holds.

Much volatility was seen in the markets overnight, but as dusts settled, risk-off sentiment dominated. Fed funds futures are now pricing in 94.7% chance of a 50bps rate hike by Fed after the strong CPI reading, comparing to just 33.7% a week ago. Dollar is trading generally higher in Asia, followed by Yen. Aussie is the weakest followed by Kiwi and then Euro.

Technically, the outlook in many major pairs and crosses are mixed. EUR/USD struggled to break 1.1482 near term resistance firmly, but the retreat is held well above 1.1265 minor support. USD/JPY is still limited by 116.34 high despite yesterday's rally. USD/CHF is staying in established range of 0.9176/0.9341. USD/CAD is also stuck in range of 1.2648/2795. Currency traders are not committing to a direction yet.

In Asia, at the time of writing, Hong Kong HSI is down -0.60%. China Shanghai SSE is down -0.68%. Singapore Strait Times is down -0.14%. Japan is on holiday. Overnight, DOW dropped -1.47%. S&P 500 dropped -1.81%. NASDAQ dropped -2.10%. 10-year yield jumped sharpy by 0.102 to close at 2.031.

Fed Bullard wants to be nimble on rates, but Daly and Barkin may not

St Louis Fed President James Bullard said yesterday's inflation report "shows continued inflationary pressure in the US" and is "concerning for me and for the Fed." He added, "you have got the highest inflation in 40 years and I think we are going to have to be far more nimble and far more reactive to data."

"I'd like to see 100 basis points in the bag by July 1," Bullard added. "I was already more hawkish but I have pulled up dramatically what I think the committee should do."

However, San Francisco Fed President Mary Daly said a half-point rate hike "is not my preference. ""Markets have already priced in the withdrawal of accommodation, and that is them hearing what the Fed is clearly communicating."

Richmond Fed President Thomas Barkin said "I'm open to it conceptually", regarding a half point hike. "Do I think there's a screaming need to do it right now? I'd have to be convinced of that," he added.

ECB Lagarde: We don't want to choke off the recovery

ECB President Christine Lagarde said in an interview that raising interest rates "would not solve any of the current problems." Instead, "if we acted too hastily now, the recovery of our economies could be considerably weaker and jobs would be jeopardized."

"The U.S. economy is overheated, whereas our economy is far from being that," she said. "That's why we can -- and must -- proceed more cautiously. We don't want to choke off the recovery."

"Inflation may turn out to be higher than we projected in December," Lagarde said. "We will analyze that in March, and then take it from there." She also noted that inflation would exceed 2% target in medium term only if wages were to "significantly and persistently" break that level. "We are not seeing that at the moment at all," she said. "In most euro-area countries, including Germany, wage demands are very moderate."

RBA Lowe: We have scope to wait and see

RBA Governor Philip Lowe told a parliamentary committee that it is "too early" to conclude that inflation is "sustainably in the target range". He added, "in underlying terms, inflation has just reached the midpoint of the target band for the first time in over seven years".

The board is "prepared to be patient" and "we have scope to wait and see how the data develop and how some of the uncertainties are resolved. Countries with higher inflation rates have less scope here."

RBNZ survey: Another rate hike expected in Q1, 4-5 hikes in a year

In the latest Survey of Expectations of RBNZ, OCR expectations continued to rise in the short, medium and long term. OCR is expected to rise from current 0.75% to 1.05% by the end of Q1. Mean estimate for OCR for one year ahead was 2.11%, indicating four to five 25bps hikes. Mean two-year ahead OCR expectations were at 2.47%

One-year inflation expectations rose from 3.70% to 4.4%, highest since November 1900. Two-year ahead inflation expectations rose from 2.96% to 3.27%, highest since 1991. Five-year inflation expectations also rose slightly from 2.17% to 2.30%, highest since 20-17.

Looking ahead

UK GDP, production and trade balance will be released in European session. Germany will release CPI final while Swiss will also release CPI. Later in the Day, US will release U of Michigan consumer sentiment.

USD/JPY Daily Outlook

Daily Pivots: (S1) 115.54; (P) 115.94; (R1) 116.40; More...

Intraday bias in USD/JPY remains on the upside with focus on 116.34 high. Firm break there will resume larger up trend from 102.58. Next target is 118.65 long term resistance. On the downside, though, break of 115.31 minor support will extend the corrective pattern from 116.34 with another falling leg, and turn bias back to the downside for 114.14 support and possibly below.

In the bigger picture, no change in the view that rise from 102.58 is the third leg of the up trend from 101.18 (2020 low). Such rally should target a test on 118.65 (2016 high). Sustained break there will pave the way to 120.85 (2015 high) and raise the chance of long term up trend resumption. This will remain the favored case as long as 55 week EMA (now at 111.21) holds.

Economic Indicators Update