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The Euro lost traction after repeated test of near-term congestion tops and fell below range low at 1.2260 on Tuesday.

Downbeat German inflation data (German inflation slowed more than expected and hit 15-month low in Feb) were initial trigger for bearish acceleration, which was further inflated by stronger dollar on Fed Powell's testimony.

Today's fall could be initial signal of fresh weakness after 30SMA repeatedly capped rallies, but bears still need a catalyst.

Close below 1.2260 would be negative signal to maintain fresh bearish sentiment for extension towards key supports at 1.2205 (09 Feb low) and 1.2173 (Fibo 38.2% of 1.1553/1.2555 rally) with sustained break here to generate strong bearish signal for deeper correction.

Alternative scenario would require lift above 30SMA (1.2344) and converged 10/20SMA's (1.2355/59) to neutralize and shift focus higher.

Res: 1.2277; 1.2310; 1.2346; 1.2360
Sup: 1.2247; 1.2205; 1.2173; 1.2160

Eurozone flash inflation figures for the month of February are scheduled for release on Wednesday at 1000 GMT. Price pressures are anticipated to ease on an annual basis, with market participants potentially extrapolating from the numbers to what European Central Bank policymakers will likely decide on when they next meet in March.

Headline CPI is projected to grow by 1.2% y/y and core CPI – the measure that excludes volatile food and energy items from its calculations – is forecast to expand by 1.1%. These compare to January's figures of 1.3% and 1.2% respectively, and should they materialize, they would stand at a distance to the ECB's target for inflation of below but close to 2% on an annual basis.

Softening oil prices in February are acting as a drag on headline inflation. The core rate, while not targeted by the ECB, has received considerable attention under a Draghi-led ECB and will also be closely monitored by market participants; last month's acceleration in core CPI was viewed as an encouraging sign.

Tomorrow's numbers will constitute the last inflation input ahead of the ECB meeting concluding on March 8 and thus the markets might assign a larger weight on them than would otherwise have been the case.

An upside surprise in the readings is expected to lend support to euro/dollar. In this case, the range from 1.2337 to 1.2357, which encapsulates the 61.8% Fibonacci mark of the February 9 to February 16 upleg on the lower bound and the 50-period moving average on the upper, might act as resistance. A data miss though could lead market participants to push further back in time their expectations for further monetary policy tightening by the ECB, spurring short positioning in the euro. Under such a scenario, euro/dollar might find support around the two-week low of 1.2258 that was recorded on February 22. The area around this level was congested in the past and also includes Monday's near one-week low of 1.2276.

Ahead of tomorrow's release, Germany, the eurozone's largest economy, has released its respective figures earlier on Tuesday. Those came in softer than expected and led to euro weakness, though the sell-off in the eurozone's common currency was fairly limited. Meanwhile, Spain's inflation numbers came in stronger than analysts projected.

On the policymaking front, it is worthy of mention that in a talk on Monday, ECB President Mario Draghi said that recent volatility in currency markets justifies close monitoring, adding that eurozone economies are expanding at a robust pace, though officials must persistently continue to provide stimulus.

Other risk events for the common currency as the week unfolds are the Italian national elections and the outcome of the vote by the German SPD on whether to revive the party's "grand coalition" with Chancellor Merkel's conservative bloc. Both outcomes will be known on March 4, with the odds for the latter being in favor of an endorsement of the coalition deal that was struck a few weeks ago.

Lastly, it should be mentioned that US-related developments and economic releases on the horizon also have the capacity to lead to positioning in the euro/dollar pair. For example, the world's largest economy will see the release of revised Q4 2017 growth figures on Wednesday, while January's core personal consumption expenditures (PCE) price index – the Fed's preferred inflation measure – will be made public on Thursday.

The dollar was higher across the board as Fed Chairman Powell stayed in line with existing stance regarding monetary policy, but somewhat hawkish tone firmed the greenback, which lacked spark for stronger rally, expected on more hawkish tone from the testimony.

Powell said that economic outlook remains balanced, but inflation is still a problem. As expected, he did not hint any change in pace of rate hikes this year, favoring gradual tightening, which will depend on inflation and labor.

The dollar index spiked above 90.00 barrier and came ticks ahead of last week's recovery high at $90.16.

Fresh rally after shallow pullback from 90.16 high which was completed in two-day consolidation, turns focus higher again, as daily MA's (10/20/30) are in bullish setup, but weakening momentum studies on daily chart warn of recovery stall.

The index is still holding within consolidation range after the latest bear-leg from 94.22 (12 Dec lower top of broader downtrend from Jan 2017 high) found footstep at 88.14 (16 Feb low) and firm break above range top and pivotal barrier at 90.44 ( 09 Feb recovery high/Fibo 38.2% of 94.22/88.14) is needed to generate stronger bullish signal for extension of recovery and confirm double-bottom at 88.24/14 (25 Jan/16 Feb lows).

However, dollar's recovery attempts may run out of steam as Powell did not provide any signal of more significant steers in the US monetary policy, regarding increasing pace of tightening in 2018 and from technical point of view, the price remains weighed by falling daily Ichimoku cloud.

Failure at initial 90.16 barrier would signal extended consolidation, while stronger negative signal could be expected on break below congestion floor and Monday's low at 89.41

Res: 90.16; 90.44; 90.82; 91.18
Sup: 89.61; 89.41; 89.15; 88.91

Durable goods orders fell 3.7 percent in January amid a drop in aircraft and defense orders. Core capital goods orders, however, were down 0.2 percent and the weakening trend points to slower business spending in Q1.

Back to Reality

Last year's moonshot in business spending is showing some signs of returning to earth. After increasing at a double-digit pace in both the third and fourth quarter of 2017, private equipment spending looks to be cooling according to the latest durable goods report. Durable goods orders fell 3.7 percent in January (we were expecting a 3.5 percent pullback). That came on the heels of a slight downward revision to December's now 2.6 percent gain.

The weakness in orders can be partly traced to the often volatile transportation sector. After two months of strong gains, nondefense aircraft orders fell 28 percent in January. Meanwhile, motor vehicles and parts posted a scant increase of 0.1 percent, which was just enough to offset December's decline. Orders for new vehicles are still rising at an impressive 11.9 percent pace on a three-month average annualized basis, although this is a bit softer from the pace set in December.

Orders for defense aircraft also fell sharply (down 46 percent). This led to a 26.3 percent decline in total defense orders, but excluding this category, private orders still looked weak, having declined 2.7 percent. Most disappointing in today's report was the 0.2 percent drop in orders when excluding aircraft and defense orders, or "core" orders. That followed a 0.6 percent decline in December and the trend in core capital goods orders has weakened noticeably from an impressive run in the fall; core capital goods orders are up at a 3.7 percent three-month average annualized pace, compared to over 18 percent as recently as November.

Converge They Must

With survey data still confirming soaring confidence in the business sector and the boost to after-tax corporate earnings just beginning to benefit from the tax cuts, there are plenty of silver linings for business spending. That said, the softening in core orders is beginning to look more at odds with soft survey data like the ISM manufacturing index, and consecutive declines in core capital goods orders cannot be ignored.

As we have previously written, we expect to see the hard data for orders converge with soft survey data. In times of such pronounced survey strength, however, the gap between hard and soft data is usually narrowed by business surveys getting reined in, rather than the hard orders data which feed into GDP experiencing a marked acceleration.

Therefore, we expect to see some softening in the ISM index when the February report is released on Thursday. Prior to this morning's release we also had already anticipated the lagged effects of the tax cuts and we had penciled-in a slower pace of equipment spending in the first quarter. Remarkably, against this backdrop of euphoria and favorable fiscal policy, the hard data suggest downside risk to our already-tempered forecast for capital goods spending in the first quarter.

Markets

Global core bonds traded with a small downward bias in the first half of European dealings despite mixed EMU eco data. EC confidence remains very strong. Spanish inflation rose faster than expected, but German CPI disappointed. Volatility on markets increased after the release Fed chairman's Powell first address to US Congress. The written statement suggest that he is bullish on the economy. Inflation is expected to move up this year and stabilize around the Fed's 2% target. Last month's spike in volatility won't derail the Fed from further gradually increasing its policy rate. Overall, the written statement resembled the statement from after the January policy meeting and the Minutes. The declaration offered no insight on a possibly increasing the neutral rate or on the exact amount of hikes to be expected this year. A spike lower in US Treasuries was rapidly undone because of simultaneously published weaker-than-forecast US eco data. US durable goods orders fell by the most in 6 months (-3.7% Y/Y). Orders for non-defense capital goods excl. aircraft, a proxy for business investment fell by 0.2% Y/Y instead of a 0.5% Y/Y increase. The US trade deficit widened more than forecast to the largest since 2008. This indicator is reappearing on investors' radar as the US's twin deficit problem gains more traction. The data currently have the upper hand on markets, but Powell's actual testimony still needs to start. US yields trade up to 1.4 bps (30-yr) lower at the time of writing. The German curve is up to 0.7 bps higher. 10-yr yield spreads vs Germany narrow up to 2 bps.

The dollar traded indecisive this morning as investors looked forward to the speech of Fed Powell before the House's financial committee. EUR/USD hovered in the 1.2320/40 area. USD/JPY held close to the 107 big figure. German regional inflation data came in on the softer side of expectations. Initially the data had little impact on markets. However, European yields and the euro declined slightly as the global figure was reported at 1.2% Y/Y this afternoon (1.3% expected). The written statement of Powell's testimony was published at 14.30 CET. The Fed Chairman expects ongoing solid growth and indicated to continue Yellen's approach of gradual further rate hikes. He also said that recent volatility was no reason for the Fed to change tactics. The text was in line with the Minutes of the January Fed meeting. US yields rose marginally upon the release of the text, but the rise is already undone. EUR/USD tries to decline below the 1.23 handle despite poor US eco data (cf supra). USD/JPY is still going nowhere in the 107 area. Will the Q&A session finally be able to trigger some more pronounced directional moves?

There were no data in the UK today, but there was still plenty of Brexit noise as the political debate continues. UK PM May will present the 'official UK Brexit approach' on Friday. However, recent steps/signs from the UK government and from the opposition (Labour party leader Corbyn favouring a customs union) didn't unlock the UK political stalemate. At the same time, Scotland, Wales & Northern Ireland still question the division of power between London and the local authorities post-Brexit. Earlier this week, investors saw tentative signs of a potential shift to a softer Brexit. However, for now, this proves to be unjustified. Sterling ceded again slightly ground. EUR/GBP trades in the 0.8840 area. cable hovers in the 1.3950 area.

News Headlines:

The ECB could end bond purchases this year while an interest rate hike in 2019 is not unrealistic if the euro zone's economic upswing continues, Bundesbank President Weidmann said.

Hungary's central bank left its main interest rates unchanged at record lows, as expected, holding onto its set of unconventional tools aimed at curbing long-term interest rates.

CADJPY has been plunging in the past three weeks, breaking below the 85.45 key level during the previous sessions. The aggressive sell-off drove the pair below the 20 and 40 simple moving averages in the daily timeframe, while the short-term indicators seem in confusion. It is worth mentioning that the pair recorded a fresh 8-month low of 83.82 last Thursday.

Turning our attention to the technical structure, the stochastic oscillator is creating a positive divergence with the price. The oscillator is moving higher at the same time where the price is moving lower, suggesting that a bullish correction is possible in the near-term. Moreover, the MACD oscillator is flattening in the negative territory, near its trigger line, signaling a neutral trend.

Further losses should see the June low of 83.20 acting as a major support. A drop below the aforementioned level would reinforce the bearish structure in the medium-term and open the way towards the next key support of 80.85.

In the event of an upside reversal, the 85.45 could act as a resistance barrier. A break above this level could shift the short-term outlook to neutral one as it could take the pair above the 20-day SMA. Further gains would lead the way towards the 86.70 level.

Dollar strengthens on Fed chair Jerome Powell's prepared remarks for his first Congressional testimony. But the movements in the markets are slight. The markets are generally staying in consolidation mode. Indeed, Powell offered nothing new comparing to the Fed's Monetary Policy Report released last week. Elsewhere, the Swiss Franc is trading as the strongest today while commodity currencies and Sterling are soft. Overall, the currency markets are quiet.

Fed Powell: To strike a balance in gauging monetary policy path

In his prepared speech to Congress, Powell said that "in gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2% on a sustained basis." He added that "the FOMC views the near-term risks to the economic outlook as roughly balanced but will continue to monitor inflation developments closely,"

Regarding the economy, "while many factors shape the economic outlook, some of the headwinds the U.S. economy faced in previous years have turned into tailwinds." Also, "the robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment."

Powell also down played recent financial market volatility and said "we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation,"

Released from US, trade deficit widened to USD -74.4b in January. Durable goods orders dropped sharply by -3.7% in January, ex-transport orders dropped -0.3%. Wholesale inventories rose 0.7% mom in January.

Bundesbank Weidmann: Asset purchase could end this year

Bundesbank President Jens Weidmann, a known hawk, said today that ECB "gradually and dependably reduce the degree of monetary policy accommodation when the outlook for price developments in the euro area permits us to do so." He added that "if the upswing continues and prices rise accordingly, in my view, there is no reason why the Governing Council should not end the net purchases of securities this year." He emphasized that policy normalization will "take a long time", and policy will "remain very expansive even after the end of net bond purchases." Weidmann's comments were very different from ECB President Mario Draghi's.

Draghi sounded cautious again in his comments yesterday. He warned that "given the uncertainty surrounding the measurement of economic slack, the true amount may be larger than estimated, which could slow down the emergence of price pressures." And therefore, the "right blend" of stimulus measures is still needed. Nonetheless, he said "these factors should wane as the economic expansion continues and unemployment further declines." "The relationship between growth and inflation remains largely intact, even if it has temporarily weakened in recent years to the extent that the speed of adjustment in inflation towards our aim has been affected." But he remained confident that " headline inflation will resume its gradual upward adjustment, supported by our monetary policy measures."

Eurozone business climate dropped to 1.48 in February, down from 1.54 but beat expectation of 1.47. Economic confidence dropped to 114.1, down from 114.7 and beat expectation of 114.0. Industrial confidence dropped to 8.0, down from 8.8, met expectations. Services confidence rose to 17.5, up from 16.7, beat expectation of 16.3. Consumer confidence was finalized at 0.1, unrevised. The confidence indicators remain at historically high level, despite a dip. Also from Eurozone, M3 rose 4.6% yoy in January. German CPI slowed to 1.4% yoy in February, down from 1.6% yoy, missed expected of 1.5% yoy.

EU to publish draft Brexit treaty

EU will publish their own draft of Brexit withdrawal treaty tomorrow. The 100-page document is set to ignore UK Prime Minister Theresa May's request to extend the transition period. That also comes just two days before May's scheduled high-profile speech on future trade relationship with EU. It's believed the EU's document will be solely from EU's perspective for the negotiation ahead. Meanwhile, it draws criticism from UK that EU is only trying to push its agenda, rather than producing something that reflects the positions of both sides.

Separately, French President Emmanuel Macron said that a customs union is "a possible option" for post Brexit relationship. But he emphasized that it's "not full access to the the single market". That's seen as a response to UK Labour leader Jeremy Corbyn's push for the customs union.

BoE Deputy Governor Sam Woods said today that the central bank was putting a "huge premium" on the government agreeing a Brexit transition deal with EU. And he urged that avoiding chaos in insurance markets due to Brexit is a "top priority" for the BoE. Also, he added that BoE will not "go soft" on enforcing EU capital rules for insurers. Woods also said that there was "no convincing evidence" to show that EU rules hurt profitability nor growth of the sector.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.2628; (P) 1.2670; (R1) 1.2725; More....

USD/CAD is staying in tight range below 1.2757 and intraday bias remains neutral first. On the upside, above 1.2757 will resume the rebound from 1.2246 and target a test on 1.2919 key resistance. We'd be cautious on strong resistance from there to limit upside. On the downside, below 1.2450 will turn bias back to the downside for 1.2246 support.

In the bigger picture, the rebound from 1.2246 is mixing up the medium term outlook. Nonetheless, USD/CAD is staying below falling 55 week EMA (now at 1.2771), hence, the bearish case is in favor. That is, fall from 1.4689 is not completed yet. Sustained break of 1.2061 key support will carry larger bearish implication and target 61.8% retracement of 0.9406 to 1.4689 at 1.1424. However, firm break of 1.2919 will revive the case of medium term reversal and turn outlook bullish.

Economic Indicators Update

Daily Pivots: (S1) 1.2277; (P) 1.2316 (R1) 1.2355; More....

Intraday bias in EUR/USD remains neutral as it's still bounded in range of 1.2205/2555. On the upside, break of 1.2555 will revive the bullish case of up trend resumption and target 100% projection of 1.0569 to 1.2091 from 1.1553 at 1.3075. However, break of 1.2205 will confirm rejection by 1.2516 key fibonacci level and trend reversal.

In the bigger picture, key fibonacci level at 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516 remains intact despite attempts to break. Hence, rise from 1.0339 medium term bottom is still seen as a corrective move for the moment. Rejection from 1.2516 will maintain long term bearish outlook and keep the case for retesting 1.0039 alive. However, sustained break of 1.2516 will carry larger bullish implication and target 61.8% retracement of 1.6039 to 1.0339 at 1.3862.

Daily Pivots: (S1) 1.3905; (P) 1.3988; (R1) 1.4048; More....

Intraday bias in GBP/USD remains neutral as it's bounded in range of 1.3764/4144. On the upside, break of 1.4144 will extend the rise from 1.3764 and target a test on 1.4345 resistance. Break there will resume larger up trend and target long term trend line resistance (now at 1.5056). On the downside, below 1.3764 will extend the correction from 1.4345 to 1.3651 resistance turned support instead.

In the bigger picture, as long as 1.3038 support holds, medium term outlook in GBP/USD will remains bullish. Rise from 1.1946 is at least correcting the long term down from 2007 high at 2.1161. Further rally would be seen back to 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466. However, GBP/USD fails to sustain above 55 month EMA (now at 1.4279) so far. Break of 1.3038 support, will suggests that rise from 1.1946 has completed and will turn outlook bearish for retesting this low.

Daily Pivots: (S1) 0.9339; (P) 0.9365; (R1) 0.9405; More...

Intraday bias in USD/CHF remains neutral as consolidation from 0.9186 is extending. Also, outlook stays mildly bearish with 0.9469 resistance intact and another decline is in favor. On the downside, break of 0.9186 will extend the larger down trend to 0.9115 medium term projection level next. However, considering bullish convergence condition in 4 hour MACD, break of 0.9469 will indicate near term reversal and turn outlook bullish for 55 day EMA (now at 0.9517) and above.

In the bigger picture, fall from 1.0342 is seen as a medium term down trend. Deeper decline should be seen to 100% projection of 1.0342 to 0.9420 from 1.0037 at 0.9115. Break will target 161.8% projection at 0.8545. In any case, sustained trading above 55 day EMA is needed to be the first sign of medium term reversal. Otherwise, outlook will stay bearish even in case of strong rebound.