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The Dow Jones 30 inches higher supported by better-than-expected earnings. The index steadied after successive breaks above 34800 and 35450.

Nonetheless, the recent recovery slowed down on the 30-day moving average, a sign of a lingering cautious mood. 34500 is a key support to keep the rebound relevant.

A bearish breakout could extend the correction to 33800. On the upside, a rally above 35700 could attract momentum traders and initiate a bullish reversal to 36500.

The sterling turns higher as traders price in an increasingly hawkish Bank of England. A break above 1.3520 forced sellers to cover some of their positions.

However, the pound’s rally came to a halt in the supply zone around 1.3620. The RSI’s overbought situation and bearish divergence suggest softness in the underlying momentum.

The pair found bids on the 50% Fibonacci retracement level (1.3490), which sits in the aforementioned supply area. A new rally may propel the pair to the daily resistance at 1.3750.

The euro fell back after ECB President Lagarde tried to cool rate hike expectations. The rally came under pressure at the January peak of 1.1480.

The RSI’s overextension at this daily resistance prompted momentum buyers to cash in. A combination of profit-taking and fresh selling may drive the exchange rate lower.

Short-term sentiment remains upbeat though unless the single currency drops below the origin of its bullish push at 1.1270. A recovery above 1.1480 could pave the way to last October’s high at 1.1690.

EUR/USD

The corrective phase for the EUR/USD was limited to the support at 1.1409, and during the early hours of today`s trading, the pair is hovering just above the mentioned zone. The current expectations are for a new attack on the resistance at 1.1481. A successful breach here would easily continue the rally and could strengthen the positive expectations for the future path of the currency pair. If the bears manage to gain enough momentum and violate the support zone at 1.1409, then their next target can be found at the level of 1.1321.

USD/JPY

The resistance zone at 115.66 withheld the bullish attack, and at the time of writing the analysis, the pair is consolidating around the support at 115.40. If the bears prevail and the aforementioned support is breached, then the sell-off will most likely deepen towards the level at 114.90.. If the bulls ramp up their pressure on the market and manage to violate the resistance at 115.66 could easily continue the rally and could lead to future gains for the dollar against the yen.

GBP/USD

After the decline was limited by the support zone at 1.3509, the British pound regained some of its positions against the dollar and the Cable tested the resistance zone at 1.3548. A confirmation of the breach will most likely lead to a move towards the upper target at 1.3670, where a violation could easily help secure a more sustained rally towards the resistance at 1.3686. The first significant support is the level of 1.3509, followed by the zone at 1.3437.

EUGERMANY40

The EUGERMANY40 successfully violated the resistance zone at 15245 and the expectations are for the appreciation to continue. A breach of the next target at 15470, followed by a successful test of the zone at 15703, should easily strengthen the positive sentiment of the market participants and could lead to a move towards the levels at around 16000. The first target for the bears is the zone at 15245, now acting as support, followed by the major one at 15075.

USD30

Just like most of the markets around the globe, the U.S. index recovered some of its recent losses and at the time of writing is headed for a test of the resistance zone at 35709. A successful breach of the mentioned level could easily pave the way for an attack on the next target at 35984, where a breach could lead to even more gains. If the bullish momentum fades, then the bears could return the US30 back within the range of 34803 and 35335.

American stocks wavered on Tuesday as investors reflected on the latest corporate earnings. The Dow Jones rose by 100 points while the S&P 500 and Nasdaq 100 declined by about 0.20% each. Peloton rose by more than 20% for the second straight day after the company’s CEO resigned. Other big winners were firms like Harley Davidson and Chegg that reported strong earnings. On the other hand, Pfizer’s shares declined by more than 6.50% as investors reacted to the company’s weak guidance. As a result, other vaccine-related stocks like Moderna and Novavax also retreated.

The price of crude oil and natural gas declined slightly as investors focused on the ongoing diplomatic standoff between the US and Russia. In a statement on Tuesday, Emmanuel Macron said that Putin committed not to escalate the tensions by invading Ukraine. The Russian foreign affairs said that the two leaders had not reached such a deal. Russia has long maintained that it was not intending to invade Ukraine. The crisis is important for oil and gas prices because Russia is one of the biggest producers in the world. At the same time, Europe buys most of its oil and gas from Russia.

The economic calendar will be a bit muted today. In Germany, the statistics office will publish the latest exports and imports numbers. Analysts expect the data will show that imports declined by 1.5% in December while exports declined by 0.2%. These numbers will be in line with previous numbers that revealed that the German economy underperformed in the fourth quarter. Other important data will be the latest US inventory numbers by the Energy Information Administration (EIA).

EURUSD

The EURUSD pair continued moving sideways as investors start focusing on the upcoming American consumer inflation data. The pair is trading at 1.1418, where it has been in the past few days. On the four-hour chart, it has formed a bullish flag pattern. It is also slightly above the 25-day and 50-day moving averages. Therefore, there is a possibility that the pair will have a bullish breakout later this week.

XBRUSD

The XBRUSD pair tilted lower ahead of the upcoming inventories data. It fell to a low of 89.60, which was lower than this month’s high of 93.37. It managed to move slightly below the key support level at 90.0. Also, it dropped below the 25-day moving average while the MACD has formed a bearish divergence pattern. Therefore, the pair will likely continue falling as bears target the key support at 87.30.

USDJPY

The USDJPY pair rose to a high of 115.90, which was the highest level since January 28. On the four-hour chart, the pair is slightly below the upper side of the Bollinger Bands. It has also moved slightly above the 25-day MA while the Relative Strength Index (RSI) has been in a bullish trend. Therefore, the pair will likely keep rising.

Markets

The repositioning/sell-off on core bond markets yesterday simply built on the established dynamics even without high profile eco news. A bit different from recent dynamics, the rise in core yields this time didn’t really translate into a substantial further flattening of the yield curves. The US yield curve rose between 5.7 bps (5y) and 4 bps (30y), with real yields (10y) still responsible for the lion’s share of the rise. The US treasury’s $50bn 3y bond sale met with strong end investor demand (above average bid-cover of 2.45). However, the successful sale didn’t really change the intraday dynamics. The German curve bear steepened with yield changes between -1.1 bp (2y) and +6.2 bps (30y).

In an address before the finance committee of France’s national assembly, ECB Villeroy assessed that markets probably went too fast in their reaction after last week’s ECB policy meeting. He signaled that the bank won’t engage in a monetary tightening and won’t go beyond a neutral orientation. Even comments from ECB Lagarde on a gradual ECB approach on Monday didn’t impress markets.

Intra-EMU spreads versus Germany continued their widening trend with Italy underperforming (+3 bps). Greek bonds slightly outperformed (-5 bps) coming on the back of a sharp underperformance post-ECB. European equities mostly showed modest gains, but strong earnings inspired US equites to close near session highs with the Nasdaq closing at + 1.28%.

The dollar slightly outperformed despite the risk rally. USD/JPY (close 115.55) is nearing 115.68 short-term resistance. EUR/USD closed at 1.1415 (from 1.1442). However, for now the technical picture hasn’t really deteriorated. Sterling profited only modestly from a further sharp rise in UK yields. EUR/GBP closed at 0.8429.

Asian markets join the constructive close on WS yesterday evening with gains on average between 1% and 2%. The rise in US yields is taking a breather. However, we don’t draw any firm conclusions, with US bond investors still looking forward to tomorrow’s US CPI release.

Today, the US and EMU eco calendar is again extremely thin. Comments from BoE chief economist Pill and Fed’s Mester are worth looking at. Also keep an eye at the sale of $37bn of US Treasuries (10y). A pause after the recent steep yield rise is possible, but for now we don’t see any trigger for a sustained correction as central banks probably will have to act swiftly to address persistent inflationary risk.

With the Fed and the ECB now looking in the same direction, the odds for the EUR/USD cross rate also look more balanced. A short-term trading range might develop between 1.13 and 1.1484. The yen still underperforms. A break of USD/JPY above 115.68 would open the way to the January/multi-year top of 116.35. EUR/GBP is holding resilient. The downside looks better protected with first support in the 0.8350 area.

News Headlines

Hungary is doubling down on a pre-election spending spree. It will pay out the largest pension bonus so far today, worth €1bn. It follows a higher-than-expected annual increase in pension payments from January, costing the country an annual €550 million. Families with children will get a personal income tax rebate later this month totaling €1.7bn and workers younger than 25 won’t have to pay any. These are a few of the additional spending measures announced since the 2022 budget was published last summer. They come ahead of a general election in April, PM Orban’s toughest since he took office in 2010 after an unusual alliance by six opposition parties to oust him.

The National Bank of Poland raised rates yesterday by an expected 50 bps to 2.75%. The economy is strong, rising an estimated 5.7% in 2021. The labour market continues to tighten, leading to a marked increase in average wages. Inflation hit 8.6% y/y in December. Rising household income, energy prices and ongoing supply chain disruptions will keep inflation elevated also in 2022. Monetary policy tightening should decrease price growth over time but there are risks that it will run above the 2.5% (+/- 1%) target over the policy horizon. This implies further tightening at the current pace is likely. The NBP welcomes PLN-appreciation, saying in an added sentence that it would be consistent with the current direction of policy. The Polish zloty finished the day marginally stronger at EUR/PLN 4.528..

The British Pound remained well bid above the 1.3500 level against the US Dollar. The GBP/USD pair is slowly rising and trading above the 1.3520 level.

There was a break above the 1.3550 resistance and the 50 hourly simple moving average. Besides, there is a key bullish trend line forming with support near 1.3540 on the hourly chart.

On the upside, the pair is now facing resistance near the 1.3565 zone. The next key resistance is near the 1.3580 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 1.3550 on FXOpen. The main support is forming near the 1.3540 level. A break below the 1.3540 support and the trend line could even push the pair below the 1.3520 support.

Risk sentiment improves both in the European and the American stock markets since yesterday, thanks to the abating sovereign bond selloff. Yet, the sovereign bond bears are not far with the prospects of less central bank buying, and that means that they will continue threatening the gains in the coming weeks. Therefore, the choppy trading is here to stay as the strategic positioning in the market is changing along with the fundamentally, and perhaps unreversible hawkish shift from the major central banks, unless inflation abates magically.

Yesterday, financials and mining stocks took the lead, small caps outperformed their big cap peers, with Russell 2000 bouncing 1.63%, whereas gains in the major US indices remained between 0.85% and 1.30%.

US crude slipped below the $90 per barrel although the weekly API data suggested a 2-million barrel decline in the US inventories versus the expectation of a 400’000 barrel build. The more official EIA data is due today, and a surprise decline in inventories could invite the oil bulls back to the market at the current dip, as the trend in crude prices remains comfortably positive due to the supportive mix of rising post-pandemic demand and supply constraints.

Caution

Improved sentiment is put on the back of more optimism about reopening, meanwhile the hawkish Fed expectations and the rising yields continue being a serious threat to the actual gains, as the major triggers behind the latest bond selloff are still in play. This means that there is a high risk of a sudden mood swing before Thursday’s US inflation data.

On the index level, the S&P500 is stuck between its 100 and 200-DMA levels and Nasdaq remains below a major Fibonacci resistance near the 14850 level (38.2% retracement level on the latest November – January selloff), which should distinguish between the actual selloff and a medium-term bullish reversal. There is a thick layer of top-sellers within the 14800/15000 range.

Daily Pivots: (S1) 155.89; (P) 156.31; (R1) 156.95; More...

Intraday bias in GBP/JPY is back on the upside as rebound from 152.88 resumes. Further rise should be seen to 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) 131.59; (P) 131.81; (R1) 132.15; More....

Intraday bias in EUR/JPY remains neutral first. Some consolidations could be seen below 132.11 temporary top. But downside should be contained well above 128.23 support to bring another rally. As noted before, corrective pattern from 134.11 should have completed three waves down to 127.36. Above 132.11 will bring retest of 133.44/134.11 resistance zone. Decisive break there will resume larger up trend from 114.42.

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.