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WTI crude bounces higher after the EIA reported a sharp drop in US inventories.

Price action is looking to consolidate its gains above the psychological level of 90.00. Sentiment remains upbeat though the bulls need to take a breather after the latest vertical ascent.

88.00 on the 20-day moving average is the immediate support. An oversold RSI may attract buying interest. A deeper retracement would test 85.00. A recovery above 92.30 could trigger momentum buying once again and resume the rally towards 95.00.

The euro consolidates gains amid mixed messages from the ECB.

The pair found support at February 2020’s low at 0.8290, and a bullish MA cross on the daily chart suggests a potential turnaround. A break above the daily resistance at 0.8405 has put the single currency back on track.

An overbought RSI led momentum traders to take profit. The current pullback is testing the 38.2% Fibonacci retracement level (0.8405) which used to be a resistance. 0.8475 is the main hurdle for the reversal to gain traction.

The Australian dollar climbs as traders wager on a hawkish shift from the Reserve Bank of Australia.

On the daily chart, a break above the 30-day moving average suggests improved sentiment in the short term. The pair extended its gains after it broke the supply area around 0.7170.

As sellers scramble to cover their bets, driving up bids, the rally is heading to the next resistance at 0.7210. The RSI’s overbought situation may cause a temporary pullback with 0.7110 as the first support.

Markets

The bond market sell-off took breather yesterday. There were no important data with investors counting down to today’s key US CPI release. Central bankers’ comments were plenty but didn’t alter the market assessment in any profound way. Fed members Bostic and Mester were on a same line, supporting a March rate hike. A 50 bps step isn’t excluded, but for now they favour a gradual approach of 25 bps at subsequent meetings. There is also a growing consensus to start the balance sheet roll-off soon and at a rather swift pace. US yields initially dropped 3-4 bps, but especially the short end soon rebounded. Investors apparently didn’t want to be wrongfooted by today’s expected multi-year high inflation. The US 2y yield still closed at a 1.36% cycle top. The longer end fared better, supported by strong investor interest at the Treasury’s $37bn 10y bond sale. At the close, the US curve again returned to a modest flattening trend with the 2y rising 2.3 bps and the 10y easing 2.3 bps. This time the real yield also eased mostly. The European yield correction had some more traction. German yields eased 5-6 bps for in the 2/10y sector. The very long end underperformed (-2.8 bps for the 30y). Equity investors embraced the calm on the bond markets. The EuroStoxx 50 gained 1.8%. US indices rose between 0.86% (Dow) and 2.08% (Nasdaq). Slightly USD supportive interest rate differentials combined with a positive risk sentiment kept the trade weighted dollar (DXY) more or less in balance (95.55). EUR/USD tried to move higher in the lower half of the 1.14 big figure, but the move had no strong legs (close 1.1425). Sterling underperformed with EUR/GBP rebounding from the 0.8415 area to close near 0.8441. BoE’s Chief economist Pill confirmed a further hiking cycle but also advocated a gradual pace.

Focus turns to the US January CPI release today. Headline inflation is expected at 0.4% M/M and 7.2% Y/Y, which would be the highest reading since 1982. Core inflation might accelerate to 5.9% Y/Y from 5.5%. The pace, especially M/M dynamics, will determine whether the Fed should consider a 50 bps hike. Yesterday’s late session rise in ST yields suggests that markets are positioned for a high figure. So there could be some further ST consolidation after the recent yield rise. If so, the room for a substantial yield correction stays limited. European yields yesterday eased off recent peak levels. Also here, we expect the 0.10% level for the German 10y and the 0.60% for the 10y swap to offer solid support. EUR/USD currently stabilizes in a tight 1.1395/1.1485 consolidation range. If US inflation doesn’t surprise on the upside, a retest of 1.1485 is possible. For sterling, quite some BoE tightening is already discounted. Some further sterling underperformance, both against the euro and the dollar might be on the cards. Also keep an eye at the Riksbank policy meeting. Will this ‘last man standing’ finally also leave ‘team temporary’?

News Headlines

Speaking before the Chamber of Commerce, Bank of Canada governor Macklem said the central bank won’t be on “autopilot” when it starts raising interest rates, most likely in March. He hinted that much will depend on business investment, noting that all else being equal, the less investment there is (because of inflation uncertainty), the higher rates will have to be. According to the governor, the current strong price growth (4.8% Y/Y in December) is not “the result of generalized excess demand” but mostly a supply issue. Productivity growth is essential to have non-inflationary growth, he added. Macklem said interest rates may even have to rise above the neutral rate around 2.25%. The Canadian dollar marginally strengthened to USD/CAD 1.267.

The central bank of India left the repo rate unchanged at 4%. The reverse repo remains steady at 3.35%, defying expectations of a hike to 3.55% which would have indicated a tighter policy stance to mop up excess liquidity. Indian inflation came in at 5.59%, above the 4% mid-point target, but the central bank chooses to help growth recover from the omicron hit. Governor Das said this will allow India to grow at the fastest pace among major economies. GDP growth is projected at 7.8% for the next fiscal year 2022-2023 after growing 9.2% this FY. Inflation is forecasted to ease from 5.3% this FY to 4.5%. The Indian rupee briefly went north of USD/INR 75 before paring losses to 74.93.

BoJ Governor Haruhiko Kuroda was quoted by Mainichi newspaper saying that "as long as our current price projection lives, there's no chance we will debate" stimulus exit before his term ends in April 2023. "We're not engaging in any debate of an exit. Doing so is inappropriate given Japan's price developments," he added.

"Japan's economic recovery is slower than that of the United States and European countries, and (consumer) inflation is just 0.5%," Kuroda said. "As such, there's no need to scale back monetary stimulus or shift toward policy tightening. Doing so is unlikely,"

The change of consumer inflation accelerating sharply was "very small" and "the key would be wage growth".

EUR/USD

The currency pair is still in a consolidation phase, just above the support level at 1.1409. At the time of writing, neither the bulls nor the bears have managed to gain enough momentum to dominate the market. A possible attack on and a breach of the resistance at 1.1481 could paint a more bullish picture. On the other hand, a reduction in the price and a breach of the mentioned support could give the bears the necessary incentive needed to potentially lead the trade towards the next significant support level at 1.1321. During today's trading session, the most important economic news that would be of interest to the market participants will be the consumer price index data and the initial jobless claims data reports for the U.S. at 13:30 GMT.

USD/JPY

The dollar continues to gain ground against the Japanese yen during the last few days, and at the time of writing the analysis, the bulls are facing a test of the resistance zone at 115.66, which outlines the local highs for the currency pair. An unsuccessful test here could change the sentiment, and in the event of bear predominance, we could see a drop back towards the support area at 114.90.

GBP/USD

Despite the sell-off being capped at the support level at 1.3509, the bulls are still unable to gain enough momentum in order to breach the resistance area at 1.3607. We are seeing a consolidation just above the mentioned support zone, and in case of a possible bear predominance scenario and a successful breach, we could witness a deepening of the sell-off towards the next support level at 1.3370. Today, the data on the gross domestic product for the UK from 09:30 GMT could have an impact on the market, with increased volatility expected for the currency pair.

EUGERMANY40

After the German index managed to overcome the resistance at 15470, the bulls lost their previously gained momentum, and at the time of writing the analysis, we see an attempt to breach that level, but in a downward direction. If the buyers manage to recover and bring the trade towards the level of the next significant resistance at 15700, then we may expect the mentioned resistance to be successfully overcome, thereby interrupting the range move, which was formed between 15000 and 15700. On the other hand, if the bears prevail, then we can expect an attack on the lower boundary of the mentioned range.

US30

The U.S. blue-chip stock index continues to gain positions, and at the time of writing the analysis, we are seeing a slight buyer pullback. In the event of a bear predominance, we may witness another serious decline towards the support area at 34800. On the other hand, market participants could find better entry levels around the support level at 35700 which, according to the higher time frames, could lead the index up towards the next important resistance at 36500. The economic news, mentioned in the EUR/USD analysis, could have an impact on market participants’ sentiment, with volatility expected to increase around the announcement of the data.

The momentum in Wall Street extended on Wednesday as investors reacted to strong quarterly results by companies like CVS, CME, and Chipotle Mexican Grill. In general, while companies like PayPal, Meta Platforms, and JP Morgan disappointed, the earnings season has been relatively strong. According to FactSet, companies are set to report earnings growth of over 20% for the fourth straight quarter. Some of the other companies that will publish their results today are Coca-Cola, PepsiCo, Duke Energy, Piper Sandler, and Twitter.

The price of crude oil tilted higher after the latest American inventories data. According to the Energy Information Administration (EIA), the overall inventories declined by more than 4.75 million last week. That decline was higher than the median estimate of an increase of 369k. It was also higher than the previous 1 million barrels. Other data showed that the US imported more than 1.4 million barrels of oil per day last week while the inventories at Cushing rose to more than 2.8 million barrels. Prices rose as the escalation between western countries and Russia continued.

The economic calendar will have several important events today. The most important one will be the latest American consumer price index data. Analysts expect the data to show that the headline CPI rose to 7.3% while the core CPI rose to 5.9%. These numbers are important because they are part of Fed’s dual mandate. The US will also publish the latest initial jobless claims numbers. Elsewhere, the Indian and Swedish central banks will deliver their rate decisions.

XAUUSD

The XAUUSD pair has been in a bullish trend in the past few days. The pair is trading at 1,830, which is the highest it has been since January 26th. The pair has moved to the 23.6% Fibonacci retracement level. It has also risen above the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved close to the overbought level. Therefore, the pair will likely keep rising ahead of the American CPI data.

EURJPY

The EURJPY strong rebound has paused in the past few days as investors assess the ongoing divergence between the BOJ and the ECB. On the four-hour chart, the pair has formed a bullish flag pattern. It has also moved between the upper and middle lines of the Bollinger Bands. Also, the price has moved slightly above the 25-day moving average. Therefore, the pair will likely have a bullish breakout soon.

EURUSD

The EURUSD pair rose slightly ahead of the upcoming American consumer inflation data. It is trading at 1.1435, which is slightly above the upper side of the bullish flag pattern. It has also moved above the 25-day moving average while the Relative Strength Index (RSI) has moved slightly below the overbought level. Therefore, the pair will likely break out higher in the coming days since it has formed a cup and handle pattern.

Risk appetite was surprisingly strong into the US inflation data, expected to advance to another forty-year high at today’s print.

The S&P500 jumped above its 100-DMA, and Nasdaq hit its 200-DMA after pulling out an important Fibonacci resistance, the major 38.2% retracement on November – January selloff, hinting at a short-term bullish reversal in Nasdaq 100 index.

The pre-CPI rally in the US stocks suggests that the hawkish Federal Reserve (Fed) expectations have been broadly priced in, and that the perception that the worst reaction to the Fed rate hikes is mostly done.

But there is a risk that investor optimism is premature, and a stronger-than-expected inflation read could send all the recent gains crashing, as there is still room for Fed hawks to price in a tighter Fed policy. Activity on Fed fund futures hint that there is only about 20% chance of a 50bp hike from the Fed in March. There is room to bet for a more aggressive first rate hike from the Fed if inflation goes further out of control.

So, US equity futures are pointing to the downside at the time of writing, as the US inflation data is still a threat to the overall market mood, and could be a pivot moment for this week. Either we will see a reasonable CPI read and the equity rally could carry on, or we will see an ugly number, and the bears will run into the marketplace and destroy the recent gains.

One last thing about inflation. The Fed cannot do miracles by hiking the rates faster as inflation doesn’t necessarily come from the demand side. One of the biggest drivers of higher consumer prices has been the supply chain crisis. Maersk, for example, which handles a fifth of containers shipped globally has been capable of rising its prices by 80% last year without putting costumers off- Although the company warned that supply chain crisis will improve from the second half of the year, the rising consumer prices could continue translating into higher wages and higher rents and make inflation stickier.

And if rising the rates doesn’t bring inflation down, it could cause recession. Therefore, the Fed’s got to find the right balance, to be patient and to tighten gradually.

There is a decent acceleration in the gold prices. The price of an ounce rebounded 3% since its $1780 dip two weeks ago. Gold is now behaving positively in risk-on markets, and negatively in risk-off markets as the rising yields hit appetite in gold as much as they hit appetite in equities. Therefore, if we see the markets changing direction and hit the south, again, we could well see gains in gold crumble and pull the price of an ounce back below the $1800 mark.

Daily Pivots: (S1) 156.11; (P) 156.48; (R1) 156.77; More...

Intraday bias in GBP/JPY stays mildly on the upside for 157.74/158.19 resistance zone Decisive break there will resume larger up trend. On the downside, break of 155.11 minor support will turn bias back to the downside, to extend the consolidation pattern from 158.19 with another falling leg.

In the bigger picture, price actions from 158.19 are seen as developing into a consolidation pattern to up trend from 123.94 (2020 low). Downside should be contained by 123.94 to 158.19 at 145.10 to bring rebound. Firm break of 158.19 will resume the up trend to long term fibonacci level at 167.93. However, sustained break of 145.10 will raise the chance of trend reversal and target 61.8% retracement at 137.02.

Daily Pivots: (S1) 131.70; (P) 131.93; (R1) 132.23; More....

Intraday bias in EUR/JPY remains neutral for the moment. As noted before, corrective pattern from 134.11 should have completed three waves down to 127.36. Firm break of 132.11 will bring retest of 133.44/134.11 resistance zone. Decisive break there will resume larger up trend from 114.42. In case of deeper pull back, downside should be contained well above 128.23 support to bring another rally.

In the bigger picture, price actions from 134.11 are currently seen as a consolidation pattern only. As long as 38.2% retracement of 114.42 (2020 low) to 134.11 at 126.58 holds, up trend from 114.42 is still in favor to continue. Break of 134.11 will target long term resistance at 137.49 (2018 high). However, sustained break of 126.58 will raise the chance of bearish reversal. In this case, deeper decline would be seen to 61.8% retracement at 121.94, and possibly below.