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Daily Pivots: (S1) 1.3363; (P) 1.3398; (R1) 1.3430; More...

Intraday bias in GBP/USD is turned neutral with current recovery. But further decline is expected with 1.3523 minor resistance intact. As noted before, rebound from 1.3158 has completed at 1.3748 already, and down trend from 1.4248 is not over yet. Break of 1.3356 will resume the fall from 1.3748 to retest 1.3158 low. On the upside, though, above 1.3523 minor resistance will turn bias back to the upside for retesting 1.3748.

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.

Today we have seen the first slowdown in annual inflation in seven months, but the data is better than expected.

In January, consumer prices rose 0.4%, up 4.9% on the same month a year earlier. Analysts, on average, were expecting prices to fall by 0.2% and slow inflation to 4.3% YoY.

The harmonized price index (adjusted for tax changes) shows an even more significant gap between expectations and reality. The index rose by 0.9% (a fall of 0.4% was expected).

The figures clearly show that inflation has penetrated deeper into the economy and is increasingly taking on the features of permanent price increases.

Sustained inflation raises the expectation that the ECB will also tighten its rhetoric and proceed with policy tightening more quickly than previously promised.

The markets have priced in one rate hike of 0.25% by December. But with the Fed as an example, we can see how quickly things can change. These changes should be positive for the euro.

Stock indices consolidate January's heavy losses; Eurozone bond yields spike

January has been a rough month for global stock markets as more central banks prioritized their price objectives amid the inflation storm, with the Fed finally taking investors’ side and hinting at a faster pace of rate increases this year. Of course, US earnings releases have not demonstrated any panic so far despite companies keep facing supply constraints, but the reversal of easy-money policies in the near future is enough to frustrate investors, especially those who have a large exposure in overvalued tech stocks, and signal that the pandemic record gains will probably remain in the past.

US futures were pointing to a mixed open during the time of writing, with the S&P 500 and the Dow Jones set to dip back in the negative territory after Friday’s soft upturn, while the tech-heavy Nasdaq 100, which is down by 12% this month, facing its worst sell-off since 2008, could start the session mildly higher.

Meanwhile in Europe, the pan-European STOXX 600 staged a modest rebound on the back of rising tech and industrial shares as the German 10-year bond yields spiked back above zero to unlock an almost three-year high. Other Eurozone bond yields followed suit. On the other hand, declines in basic materials and healthcare stocks are offsetting any upside moves in the UK’s FTSE 100.

Aussie the best performer but wait for the RBA

Turning to FX markets, the risk-sensitive aussie was the best performer across the board followed by its New Zealand cousin, even though both are still pinned near their multi-year lows. The bullish reversal is probably supported by high expectations that the Reserve Bank of Australia (RBA) will terminate its bond buying program when it announces its policy decision on Tuesday at 03:30 GMT, while investors are also eagerly waiting to hear any plans for higher interest rates this year. The RBA governor Philip Lowe, however, has been somewhat conservative recently. Hence, he could still reject any rate increases, though investors will hear more from him when he delivers a detailed speech on Wednesday.

Australian monthly retail sales for December will be out on Tuesday as well a bit earlier at 00:30 GMT.

European currencies cannot get their feet after sharp sell-off

In other currencies, the euro could not capitulate much on stronger-than-expected preliminary German CPI figures and rising eurozone bond yields, ticking to an intra-day high of 1.1180 against the dollar before inching lower again. Earlier in the day, GDP growth figures out of the bloc marked a quarterly slowdown in Q4, adding more evidence that the eurozone’s economic expansion is still fragile and a tighter monetary policy may come with some delay. That said, the slight improvement in risk-on appetite, helped the euro steal some extra ground against the yen and the Swiss franc.

Likewise, pound/dollar is struggling to find buyers today, holding around its 50-day simple moving average at 1.3020 as political noises in Downing Street continue.

Note that the ECB and BoE are the next on the list to announce their policy decisions on Wednesday and Thursday, respectively.

The weakness in European currencies and stable bond yields helped the dollar index to remain elevated near Friday’s four-month high despite today’s soft pullback.

Gold near recent lows; oil neutral

In commodities, gold remained a victim of the dollar, barely moving around $1,792 even if military odds between Ukraine and Russia feed talks of war.

WTI oil crude futures are on a tight range marginally below seven-year highs for the third consecutive day, technically signaling a potential price reversal.

The euro is calm on Monday, after enduring a brutal week. The US dollar was broadly higher last week and steamrolled over the euro, as EUR/USD fell 1.72%. On Friday, the euro dropped as low as 1.1121, its lowest level since June 2020.

It is a busy data calendar for the eurozone, which could mean plenty of action for the euro this week. The ECB holds its policy meeting on Thursday. The central bank is expected to maintain rates, but ECB President Lagarde could provide guidance on when rate hikes could occur. Lagarde has been quite dovish when it comes to eurozone inflation, saying that the rise in inflation is transient (sound familiar? Think Jerome Powell).

Earlier in the day, German CPI for January came in at 4.9% y/y. This was unchanged from November, but somewhat higher than the consensus of 4.3%. It will be interesting to see if Lagarde stays true to her stance or acknowledges at the upcoming meeting that inflation has become more persistent than the ECB expected.

The US delivered some mixed December data on Friday. The Core PCE Price Index, the Fed’s preferred inflation indicator, climbed 4.9% y/y, up from 4.7% and above the forecast of 4.8%. This was the highest gain since 1983 and reinforces expectations that the Fed will act aggressively to curb surging inflation. At the same time, consumer numbers were on the soft side. Personal income rose 0.3% m/m, below the 0.4% consensus. Consumer spending declined by -0.6%, less than the forecast of -0.7%. As well, UoM Consumer Sentiment fell from 68.8 to 67.4, its lowest reading since 2011.

It is almost a given that the Fed will raise rates at the March meeting, but if you’re unclear on what happens after that, you are not alone. The markets have priced in five rates hikes in 2022 (up from four), but economists are nowhere near a  consensus, with forecasts ranging as low as three rate hikes and as high as seven. The Fed will need to provide some clarity to this confusion, otherwise, we can expect volatility in the financial markets.

• There is resistance at 1.1287, followed by 1.1428
• There is support at 1.1064 and 1.0982

Daily Pivots: (S1) 1.1121; (P) 1.1148; (R1) 1.1173; More...

Intraday bias in EUR/USD is turned neutral with current recovery. Some consolidations could be seen but upside should be limited well below 1.1482 resistance. On the downside, break of 1.1120 will resume larger down trend to 61.8% projection of 1.1908 to 1.1185 from 1.1482 at 1.1035. Break will target 100% projection at 1.0759.

In the bigger picture, the strength of the the decline from 1.2348 (2021 high) suggests that it's not a corrective move. But still, it could be the fourth leg of a sideway pattern from 1.0339 (2017 low), or resuming long term down trend. In any case, outlook will now stay bearish as long as 1.1482 resistance holds. Next target would be 1.0635 low.

Euro rebounds notably today as Germany 10-year yield turns positive. Nevertheless, Australian Dollar is even stronger as markets await RBA rate decision. On the other hand, Dollar and Yen are paring some recent gains. Sterling and Canadian Dollar are mixed.

Technically, EUR/GBP appears to be drawing support from 0.8304. Rebound from current level, followed by break of 0.8366 resistance, would bring stronger rise to 0.8421 resistance. That could be a hint on some rise in Euro elsewhere. In particular, while a break of 1.0510 resistance in EUR/CHF is not expected, stronger rise in EUR/GBP could at least pull EUR/CHF closer to this 1.0510 resistance level.

In Europe, at the time of writing, FTSE is up 0.17%. DAX is up 0.61%. CAC is down -0.06%. Germany 10-year yield is up 0.063 at 0.020, turned positive. Earlier in Asia, Nikkei rose 1.07%. Hong Kong HSI rose 1.07%. China Shanghai SSE dropped -0.97%. Singapore Strait Times rose 0.10%. Japan 10-year JGB yield rose 0.0070 to 0.176.

Eurozone GDP grew 0.3% qoq in Q4, EU up 0.4% qoq

Eurozone GDP grew 0.3% qoq in Q4, slightly below expectation of 0.4% qoq. EU GDP grew 0.4% qoq. The 2021 annual growth was at 5.2% based on first estimation for both Eurozone and EU.

Among the EU Member States for which data are available, Spain (+2.0%) recorded the highest increase compared to the previous quarter, followed by Portugal (+1.6%) and Sweden (+1.4%). Declines were recorded in Austria (-2.2%), Germany (-0.7%) and in Latvia (-0.1%). The year on year growth rates were positive for all countries.

From Italy, GDP grew 0.6% qoq in Q4, above expectation of 0.5% qoq. Germany CPI slowed from 5.3% yoy to 4.9% yoy in January, above expectation of 4.3% yoy.

Japan industrial production dropped -1.0% mom in Dec, expected to rebound in Jan and Feb

Japan industrial production dropped -1.0% mom in December, worse than expectation of -0.8% mom. Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expected output to grow 5.2% in January and 2.2% in February.

Retail sales grew 1.4% yoy in December, below expectation of 2.7% yoy. That's nonetheless the third straight month of increase for sales, lifted by demand for general merchandise and food and beverages. Housing starts rose 4.2% yoy in December, versus expectation of 7.1% yoy. Consumer confidence dropped from 39.1 to 36.7, below expectation of 37.3.

AUD/NZD resumes rally as RBA awaited, some previews

AUD/NZD rises sharply today as markets await RBA rate decision in the upcoming Asian session. Given the surprise drop in unemployment and strong inflation data, RBA is likely to just wrap up the QE program, rather than winding it down to end in May. That would also give the central bank some flexibility to raise interest rate to combat inflation. The question is how RBA would shape market expectation on the timing of the rate hike, or leave it to the Statement on Monetary Policy to be released later in the week. There is prospect of more upside in Aussie in crosses in RBA delivers something more hawkish than expected.

AUD/NZD's is now extending the whole rise from 1.0278. Next target is 161.8% projection of 1.0278 to 1.0610 from 1.0314 at 1.0851. A bullish scenario is that corrective fall from 1.1042 has completed with three waves at 1.0278 and rise from 0.9992 is ready to resume. The reaction to 1.0944 resistance will reveal if it's the case. For now, near term outlook will stay bullish as long as 1.0654 support holds, in case of retreat.

Suggested readings on RBA:

• Two Trades to Watch: EUR/USD, AUD/USD
• Aussie Storms Higher, RBA Next
• New Forecasts in RBA SOMP to Be Consistent with Rate Hike in 2022
• RBA to End QE and Bring Forward Rate Hike Guidance: AUDUSD
• RBA Meeting: Managing Rate Hike Expectations

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1121; (P) 1.1148; (R1) 1.1173; More...

Intraday bias in EUR/USD is turned neutral with current recovery. Some consolidations could be seen but upside should be limited well below 1.1482 resistance. On the downside, break of 1.1120 will resume larger down trend to 61.8% projection of 1.1908 to 1.1185 from 1.1482 at 1.1035. Break will target 100% projection at 1.0759.

In the bigger picture, the strength of the the decline from 1.2348 (2021 high) suggests that it's not a corrective move. But still, it could be the fourth leg of a sideway pattern from 1.0339 (2017 low), or resuming long term down trend. In any case, outlook will now stay bearish as long as 1.1482 resistance holds. Next target would be 1.0635 low.

Economic Indicators Update

AUD/NZD rises sharply today as markets await RBA rate decision in the upcoming Asian session. Given the surprise drop in unemployment and strong inflation data, RBA is likely to just wrap up the QE program, rather than winding it down to end in May. That would also give the central bank some flexibility to raise interest rate to combat inflation. The question is how RBA would shape market expectation on the timing of the rate hike, or leave it to the Statement on Monetary Policy to be released later in the week. There is prospect of more upside in Aussie in crosses in RBA delivers something more hawkish than expected.

AUD/NZD's is now extending the whole rise from 1.0278. Next target is 161.8% projection of 1.0278 to 1.0610 from 1.0314 at 1.0851. A bullish scenario is that corrective fall from 1.1042 has completed with three waves at 1.0278 and rise from 0.9992 is ready to resume. The reaction to 1.0944 resistance will reveal if it's the case. For now, near term outlook will stay bullish as long as 1.0654 support holds, in case of retreat.

Suggested readings on RBA:

• Two Trades to Watch: EUR/USD, AUD/USD
• Aussie Storms Higher, RBA Next
• New Forecasts in RBA SOMP to Be Consistent with Rate Hike in 2022
• RBA to End QE and Bring Forward Rate Hike Guidance: AUDUSD
• RBA Meeting: Managing Rate Hike Expectations

The commodity continues rallying. On Monday, 31 January, Brent is trading above $91 and may soon update its highs.

The key trigger that pushes the rally is that investors remain confident of the supply shortage in the commodity market. It was suggested earlier that the demand might become surplus in 2022 but there are no reasons for that so far.

Another factor that makes the oil price rise is the escalation in the Middle East with explosions in Iraq and the United Arab Emirates. They raise concerns about future oil deliveries and help the commodity market to go higher.

As a result, the market remains bullish and bullish only.

In the H4 chart, having completed the ascending structure at 88.85 along with the correction down to 85.00, Brent has rebounded from the latter level; right now, it is trading upwards with the target at 93.00. After that, the instrument may correct to return to 88.85 and then form another ascending structure to reach 95.00. From the technical point of view, this scenario is confirmed by MACD Oscillator: its signal line is moving above 0 inside the histogram area, thus indicating a further uptrend in the price chart.

As we can see in the H1 chart, after forming a new consolidation range around 90.15 and breaking it to the upside, Brent has reached the short-term target at 91.40. Today, the asset may continue growing towards 91.63 and then correct to return to 90.15. Later, the market may resume trading upwards with the target at 93.00. From the technical point of view, this idea is confirmed by the Stochastic Oscillator: after breaking 50 to the upside, its signal line is expected to continue growing and reach 80. Later, it may resume falling to reach 20.

January has been a month to forget for many investors after hundreds of billions of dollars were wiped off equity and bond markets. Traders have shifted from the speculative corners of the market to safe haven assets as global stocks have tumbled over the past four weeks. Unprofitable growth companies, cryptos, and SPACs have felt most of the pain as the Federal Reserve prepares for its war against inflation, clearly indicating that the game has now changed following two years of extraordinary easy monetary policy.

The Fed last week indicated it would lift interest rates in March for the first time since 2018, with markets guessing how many more hikes would occur during the rest of the year. Raphael Bostic, President of the Fed's Atlanta branch, even hinted at the possibility of a 50-basis point rate hike in March and raising rates at each of the seven remaining policy meetings. However, his base case scenario remains three 25-basis point increases for this year, though much will depend on economic data.

Stocks in Europe and the US are set to open in positive territory for the month's final trading day following a rally in Asian equities. Investors' fear over the prospect of tighter monetary policy has eased somewhat, and safe havens like the US dollar and Treasuries have retreated. Still, it’s a busy week full of risk events and a lot will depend on the upcoming economic data, corporate earnings, and monetary policy meetings from the BoE and the ECB.

So far, a third of the companies in the S&P 500 have reported Q4 2021 results, with 77% managing to beat EPS estimates. However, the beats are coming at a smaller margin than the 5-year average, which explains why earnings have not been very supportive of equity indices. More than 100 S&P 500 companies are due to announce results this week, including tech giants Alphabet, Meta, and Amazon. Given the new environment we're living in today, it will require robust results and positive guidance to encourage investors to buy the latest dip in the growth sector.

On the data front, all eyes will be on Friday's US non-farm payrolls report. The US economy is expected to have added 175,000 jobs in January, compared to 199,000 last month. However, estimates vary widely due to the disruption from the Omicron coronavirus, with some even predicting a negative print. Previously, the bad news was conceived as good news as a deteriorating jobs market meant further monetary policy easing. This time, a negative print shouldn’t deter the Fed from tightening policy, as the central bank focuses on rampant inflation. That's why it makes more sense to focus on wage growth rather than the headline jobs figure in the report. Tuesday's ISM Manufacturing PMI and Wednesday's ISM Services PMI will also provide further guidance on the inflation trajectory and should be on the radar of investors.

It was a week to forget for the Canadian dollar. USD/CAD jumped 1.51%, marking the Canadian dollar’s worst weekly performance since mid-August. The currency is in positive territory, as USD/CAD is down 0.31% on the day.

Canada releases the Raw Materials Price Index later today. The inflation index is expected to decline -1.3%, following a -1.1% beforehand. This week’s highlight is GDP for November, which will be released on Tuesday.

In the US, the week wrapped up with mixed numbers. The Fed’s preferred inflation gauge, the Core PCE Price Index, rose in December 4.9% y/y, up from 4.7% and above the forecast of 4.8%. This marks the highest gain since 1983 and reinforces expectations that the Fed will act aggressively to curb surging inflation. However, personal income rose 0.3% m/m, less than the 0.4% consensus. Consumer spending declined by -0.6%, less than the forecast of -0.7%. As well, UoM Consumer Sentiment fell from 6.8 to 67.4, its lowest reading since 2011.

These numbers point to weakness in consumer spending and confidence, which makes for a confusing picture, given that inflation is running rampant. The markets are having difficulty figuring out how many rate hikes are on the way, and Fed policymakers also have differing views on the subject.

Fed poised to raise rates

How hawkish will the Fed be? It is unclear, with forecasts ranging between 3 and 7 hikes this year. A March liftoff seems assured, with the likelihood of a quarter-point hike at 84%, and a 50-bps rise priced at 15%. Traditionally, the Fed raises rates in 0.25% increments, and that’s likely what it will deliver. However, a 0.50% hike cannot be ruled out, even though the Fed hasn’t implemented such a large hike in twenty years. Such a dramatic move would send a decisive message to the markets that the Fed means business and is determined to stamp out high inflation. The Fed could use a credibility-booster after Jerome Powell stuck to the ‘transient inflation’ script even when it was glaringly evident that surging inflation wasn’t going anywhere.

USD/CAD Technical

• USD/CAD faces resistance at 1.2857 and 1.2948
• There is support at 1.2615 and 1.2464