Key Points:

• RBNZ will need to raise rates to combat rising inflationary pressures.
• Inflation will largely stem from a tightening job market.
• CPI data suggests we may already have entered a high inflation period.

After being trapped in a low-interest rate environment for such an extended period, talk of real normalisation can, at times, seem more like wishful thinking than anything else. However, for one country at least, the data is beginning to put pressure on its central bank to finally begin the process of lifting rates back to historic norms. Specifically, New Zealand could see a slew of hikes moving forward as the RBNZ attempts to keep inflation in check and within its mandated band.

First and foremost, the question has to be asked, are inflationary pressures really building? In short, yes they are and there are a number of key drivers which are contributing to this uptick. Primarily however, blame can be laid at the feet of a tightening job market as, at 4.9%, unemployment is below the widely accepted natural rate for the country. As a result of this low unemployment rate, wage inflation is almost certain to be on the rise this year and general inflation should follow suit.

In addition to wage inflation, the property bubble in the nation’s largest city will be contributing to overall inflationary pressures. Specifically, rental prices have skyrocketed by around 7.1% over the past 12 months due to the lack of housing supply. What’s more, the mere presence of the bubble provides an incentive for the RBNZ to step in with some hikes as increasing rates would help to cool off the red hot property market.

Regardless of what is causing inflation to spike, the fact remains that we are already beginning to see the start of this period of higher inflation as was made quite clear in the latest CPI results. Coming in at 1.3% q/q, the figure was in stark contrast to the historically low inflation seen across the ditch in Australia which took most of the market by surprise. Further upticks of this magnitude will see the nation’s inflation rate move above the 3% upper limit targeted by the RBNZ which will necessitate at least a 25bps hike in the OCR.

Ultimately, we will have to wait and see whether or not the central bank will take this first move towards seeing rates back to their normal levels. However, faced with strong GDP growth of 3.5% y/y, recovering dairy prices, robust retail sales, and the other factors mentioned above, the RBNZ will be fairly loath to keep rates on hold. As a result, keep an eye on the February OCR announcement as it could be the first step in a road towards normalised rates.

Daily Pivots: (S1) 1.3055; (P) 1.3092; (R1) 1.3133; More...

Intraday bias in USD/CAD stays neutral for the moment. At this point, we're still slightly favoring the case that consolidation pattern from 1.3588 is completed with three waves down to 1.3017. Above 1.3387 will target 1.3598 resistance. Break there will extend the whole choppy rise from 1.2460 to next fibonacci level at 1.3838. However, break of 1.3017 will indicate completion of rise from 1.2460 and turn outlook bearish.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The first leg has completed at 1.2460. The second leg is still in progress and could target 61.8% retracement of 1.4689 to 1.2460 at 1.3838. As rise from 1.2460 is seen as a corrective move, we'd look for reversal signal above 1.3838. Meanwhile, break of 1.3017 will likely start the third leg to 1.2460 and below.

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Daily Pivots: (S1) 0.7507; (P) 0.7546; (R1) 0.7570; More...

Intraday bias in AUD/USD is neutral with a temporary top at 0.7608. Above 0.7608 will extend the rise from 0.7158. But we'd expect upside to be limited by 0.7777/7833 resistance zone to bring near term reversal. On the downside, break of 0.7448 will indicate that rebound from 0.7158 is completed and turn bias back to the downside for 0.7144 key support level.

In the bigger picture, AUD/USD is staying inside long term falling channel and it's likely that the down trend from 1.1079 is still in progress. Break of 0.6826 low will confirm this bearish case. We'll be looking for bottoming sign again as it approaches 0.6008 key support level. Meanwhile, sustained break of 0.7833 resistance will be a strong sign of medium term reversal.

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Daily Pivots: (S1) 1.0636; (P) 1.0701 (R1) 1.0744; More.....

Intraday bias in EUR/USD stays neutral for the moment. As noted before, choppy rise from 1.0339 is seen as a corrective move. Break of 1.0588 minor support will argue that it's completed and turn bias back to the downside for 1.0339 support. In case of another rise, upside should be limited by 1.0872 resistance.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

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Daily Pivots: (S1) 1.2540; (P) 1.2607; (R1) 1.2657; More...

Intraday bias in GBP/USD is turned neutral with a temporary top in place at 1.2673. Rise from 1.1986 is seen as the third leg of the consolidation pattern from 1.1946. Break of 1.2414 support will indicate that it's completed and turn bias to the downside for retesting 1.1946 low. In case of another rise, upside should be limited by 1.2774 to limit upside and bring down trend resumption eventually.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

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Daily Pivots: (S1) 0.9971; (P) 0.9999; (R1) 1.0029; More.....

Intraday bias in USD/CHF remains neutral for consolidation above 0.9958 temporary low. With 1.0121 minor resistance intact, deeper decline is still expected. As noted before, rise from 0.9443 has completed at 1.0342 already, after failing to sustain above 1.0327 key resistance. Fall from there would now target 61.8% retracement of 0.9443 to 1.0342 at 0.9786 and below. On the upside, break of 1.0121 resistance is needed to indicate short term bottoming. Otherwise, near term outlook will stay bearish in case of recovery.

In the bigger picture, rejection from 1.0327 resistance suggests that consolidation pattern from there is still in progress. Fall from 1.0342 is seen as the third leg and retest of 0.9443/9548 support zone could be seen. But we'd expect strong support from there to contain downside. At this point, we're still expect the larger rally to resume later to 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

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Daily Pivots: (S1) 113.42; (P) 114.13; (R1) 115.23; More...

USD/JPY's recovery from 112.51 continues but stays below 115.61 resistance. Intraday bias remains neutral at this point. No change in the view that choppy fall from 118.65 is a corrective move. Break of 115.61 will indicate that it's completed and will turn bias to the upside for retesting 118.65 resistance. Break will resume whole rise from 98.97 and target 125.85 key resistance. Below 112.51 will extend the decline but downside should be contained by 38.2% retracement of 98.97 to 118.65 at 111.13 to complete the correction and bring rebound.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

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Yen falls broadly today on news that BoJ boosted JGB purchases. The move is seen as an act under the so called yield curve control to cap surge in yields, which touched 11 month highs earlier this week. The central bank said today that it would buy JPY 450b of JGBs with maturity of more than five to 10 years. That's nearly 10% above the prior size of JPY 410b. Released from Japan, national CPI core improved to -0.2% yoy in December, up from -0.4% yoy and above expectation of -0.3% yoy. Tokyo CPI core rose to -0.3% yoy in January, up from -0.6% yoy, and above expectation of -0.4% yoy. The set of inflation data showed mild improvement to inflation outlook. But it's still far from hitting BoJ's 2% target. Technically, yen is staying in consolidation against Dollar, Euro and Sterling for the moment in spite of the selloff in the past two days.

In US, equities ended mixed after hitting new intraday record highs. DJIA gained 32.4 pts, or 0.16% to close at 20100.91, a record high. But S&P 500 closed down -1.69 pts, or -0.07%, at 2296.68. NASDAQ lost -1.16 pts, or -0.02%, to close at 5655.18. President Donald Trump's spokesman said that Trump would push to impose 20% tax of imports from Mexico to pay for a border wall along the southern border of the US. Mexican president Enrique Peña Nieto responded by cancelling the meeting with Trump. Form Fed chair Ben Bernanke said that there is no need to "rush" the process of reducing the size of its massive balance sheet. He emphasized that "the case for deferring action until short-term rates are meaningfully higher remains at least as strong as it was when the FOMC's strategy was first devised."

Talking about exiting QE, Bundesbank head Jens Weidmann said that "economic outlook at the beginning of the year is quite positive and the inflation rate is gradually approaching to the ECB's definition of price stability." And, "if this price development is sustainable, the prerequisite for the withdrawal from the loose monetary policy is created."ECB executive board member Yves Mersch said that "once inflation is sustainably back to our objective, monetary policy will normalize." Dutch central bank head Klaas Knot noted that "the tail risk of a deflationary spiral is no longer imminent, removing one important rationale for large-scale asset purchases." Meanwhile, Forward Eonia bank-to-bank rates imply that there is 50% chance of ECB rate hike by January 2018.

Elsewhere, Australia PPI rose 0.7% qoq, 0.7% yoy in Q4. Import price rose 0.2% qoq in Q4. German import price, Eurozone M3 will be released in European session. But main focus will be on US Q4 GDP and durable goods orders to be released in US session.

USD/JPY Daily Outlook

Daily Pivots: (S1) 113.42; (P) 114.13; (R1) 115.23; More...

USD/JPY's recovery from 112.51 continues but stays below 115.61 resistance. Intraday bias remains neutral at this point. No change in the view that choppy fall from 118.65 is a corrective move. Break of 115.61 will indicate that it's completed and will turn bias to the upside for retesting 118.65 resistance. Break will resume whole rise from 98.97 and target 125.85 key resistance. Below 112.51 will extend the decline but downside should be contained by 38.2% retracement of 98.97 to 118.65 at 111.13 to complete the correction and bring rebound.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

Economic Indicators Update

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EUR/USD

The American dollar traded firmer against all of its major rivals, resuming its post-US election correlation with local equities. Following Trump's victory, the greenback rallied alongside with equities, in the so-called "Trump trade," based on hopes the upcoming administration would work to boost growth and inflation. The impulse cooled down following Trump's first press conference since last year, as he failed to provide details on any political decision. Still, ever since he took the office last Friday, the announcement of huge infrastructure investment had revived the Trump trade, with the greenback benefiting from it just this Thursday. Yields rallied and the Dow surpassed 20,100, pushing the EUR/USD pair below the 1.0700 level.

In the data front, the German GFK Consumer Confidence Survey index rose more-than-expected to 10.2 in February from 9.9 in January, indicating that consumers believe local growth will continue next month. In the US, data came mixed, as weekly unemployment claims rose to 259K in the week ending January 21, above the upwardly revised figure of the previous week of 237K, still at multi-decade lows. Also, New Home sales fell to a 10-month low in December, reaching a seasonally-adjusted annual rate of 536,000, below the 588K expected. The positive note came from the preliminary Markit Services PMI for January, up to 55.1 from 53.9 in December, the fastest expansion rate since November 2015.

As for the EUR/USD technical picture, the pair settled around 1.0680 after briefly falling below a daily ascendant trend line coming from the multi-year low posted early January at 1.0340, and trades a few pips above it, maintaining the negative tone in its 4 hours chart, as the price is well below a now modestly bearish 20 SMA, whilst technical indicators entered bearish territory, now losing bearish strength. Supporting some further declines is the fact that the pair broke its latest range towards the downside, although a break below 1.0657, the daily low, is required to confirm such move for this Friday.

Support levels: 1.0655 1.0610 1.0565

Resistance levels: 1.0710 1.0740 1.0770

USD/JPY

The USD/JPY pair closed the day at 113.34 after trading as high as 114.85 this Thursday, a fresh weekly high, trading positively for the first time this week. The Japanese yen fell on continued demand for high-yielding assets, with US stocks extending their record gains and US yields advancing earlier on the day. The yield on benchmark 10-year Treasury note surged up to 2.55%, but eased in the American afternoon, now down to 2.51%, helping the JPY to recover some ground. Japan will release its Tokyo and National CPI figures during the upcoming Asian session, with the YoY readings expected to remain within deflationary territory below 0.0%. BOJ's efforts to end decades of deflation have so far been vain, and the new monetary policy, focused on keeping rates differentials near zero, has did as little as money printing. Inflation may raise for the wrong reasons, named higher energy prices rather than more consumption, which at the end, will force the BOJ to cut rate further into negative territory. At this point, the risk of another run towards 110.00 is still high, as the pair remains below some strong resistances, the 23.6% retracement of the latest daily advance at 114.50, and a bearish 100 SMA in the 4 hours chart, a few pips above it. In the same chart, technical indicators have turned lower, but hold well above their mid-lines, indicating that some further slides are required to confirm a steeper decline.

Support levels: 114.00 113.60 113.20

Resistance levels: 114.50 114.90 115.35

GBP/USD

The GBP/USD pair settled around 1.2590, pulling back from a fresh monthly high of 1.2673 and despite encouraging UK data. According to the official release, the first estimate of the UK's Q4 GDP came in better-than-expected, as the economy is estimated to have grown by 0.6% in the three months to December, above the 0.5% expected whilst the year-on-year figure came in at 2.2% against an expected 2.1%. Mortgage approvals rose beyond expected in December, up to 43.228K against a previously revised 41.003K, whilst borrowing rose in December 2016, but there are signs that demand may soften in 2017 as consumers and businesses anticipate higher interest rates, according to the official release. Also, Theresa May published the Brexit bill, in preparation for MPs' vote, which generate anger among policy makers, as the bill is just eight line long, designed to prevent any Parliamentary attempt to amend it, and gives the Houses just five days to debate it. The intraday decline looks just corrective as in the 4 hours chart, the decline stalled around a sharply bullish 20 SMA, whilst technical indicators have resumed their advances within positive territory, although stand now below previous daily highs. The mentioned 20 SMA stands at 1.2550, the level to break to see the pair falling further this Friday.

Support levels: 1.2550 1.2510 1.2470

Resistance levels: 1.2595 1.2635 1.2680

GOLD

Gold slide extended to fresh 2-week lows, with spot settling at $1,188.80 a troy ounce. The bright metal attempted to recover some ground early Asia, but turned south on dollar's broad recovery mid London session, falling as low as 1,184.38 before being able to bounce some. Nevertheless, the commodity seems to have found and interim top, and technical readings in the daily chart favor some further declines for this Friday, as not only the price was rejected by a bearish 100 DMA, but also broke below the 20 SMA for the first time since mid December. In the same chart, technical indicators present sharp bearish slopes and are currently crossing their mid-lines into negative territory, supporting a downward extension. In the shorter term, and according to the 4 hours chart, the risk is also towards the downside, as technical indicators are currently consolidating near oversold readings, whilst the 20 SMA has turned sharply lower, now converging with a Fibonacci resistance at 1,204.50.

Support levels: 1,184.40 1,173.15 1,162.10

Resistance levels: 1,196.00 1,204.50 1,214.60

WTI CRUDE

Crude oil prices advanced this Thursday, with West Texas Intermediate crude futures settling at $53.80 a barrel, holding however, within familiar ranges. Oilfield services company Baker Hughes published its quarterly earnings which showed its losses continued, despite an uptick in exploration and production activity, blaming it on the 32% decline in the average rig count through 2016. The news contained the advance, triggered by the sharp rally in US stocks and general market's optimism. Trading at fresh weekly highs, the daily chart favors additional advances, as the price recovered from a horizontal 20 DMA, whilst technical indicators head north within positive territory after spending most of the last two weeks in neutral territory. Shorter term, however, the commodity maintains its neutral stance, given that in the 4 hours chart, the moving averages remain all together and directionless in a tight range, in the 53.00 region, whilst technical indicators have turned lower within positive territory.

Support levels: 53.60 53.00 52.55

Resistance levels: 54.30 55.00 55.60

DJIA

Following a positive start, US stocks closed mixed, with the DJIA settling at fresh record highs of 20,100.91, up by 32 points or 0.16%, while the Nasdaq Composite and the S&P closed 1 point lower each, at 5,655.18 and 2,296.68 respectively. Du Pont was the best performer within the DAX, up by 1.72% followed by Boeing that added 1.95% and Goldman Sachs, up by 0.98%. Verizon topped losers' list, down by 1.31%. The DJIA retains the positive momentum seen on previous updates, advancing further beyond its 20 DMA, whilst technical indicators have extended their advances within positive territory. In the shorter term, the index is also biased higher, as the 20 SMA crossed well above the 100 and 200 SMAs, whilst technical indicators hold within overbought territory, with the RSI indicator resuming its advance around 76, as the index holds around its intraday high of 20,123 after the close.

Support levels: 20,037 19,949 19,878

Resistance levels: 20,090 20,150 20,200

FTSE 100

London equities closed lower, with the Footsie down by 3 points, to 7,161.49. Despite the great performance of banks, the index was weighed by mining-related equities, pressured by a sharp retracement in gold prices. Royal Bank of Scotland was the best performer, adding 5.86%, while leading losers' list was Fresnillo, down by 7.42%, followed by Randgold Resources that shed 6,35%. Earnings reports were mixed, with Unilever reporting that difficult market conditions are likely to persist during the first half of 2017, although its pre-tax profit rose 4.2% in 2016. The index has been confined to a tight range ever since the week started, but presents a negative tone daily basis, contained by selling interest around the 20 DMA and with technical indicators slowly heading lower within negative territory. In the 4 hours chart, technical indicators have turned modestly higher, with the RSI still below its mid-line and the Momentum within neutral territory, but with the index below a bearish 20 SMA, limiting chances of a recovery for this last day of the week.

Support levels: 7,130 7,085 7,025

Resistance levels: 7,180 7,241 7,288

DAX

European indexes closed mixed, with the German DAX managing to add 42 points to 11,848.63, underpinned by a recovery in pharmaceuticals and health care companies. Also, a continued advance in banking-related stocks across the region fueled the advance. Bayer was the best performer, ending the day up by 1.85%, whilst Fresenius Medical Care added 1.57%. Despite an early rally, Commerzbank closed the day pretty much flat, down 0.04%, while Volkswagen was the worst performer, shedding 1.70%. Technically, the daily chart shows that the index holds well above bullish moving averages, with the shortest being the 20 DMA at 11,605, but also that technical indicators have lost their upward strength, holding anyway within positive territory. In the 4 hours chart, the technical picture is quite alike, with the RSI indicator flat around 70 and the Momentum consolidating at weekly highs, not enough to support a downward move. The index has traded as high as 11,891, but faces a strong resistance at 11,920, May 2015 high, with gains beyond this last probably fueling the advance.

Support levels: 11,796 11,757 11,694

Resistance levels: 11,865 11,920 11,975

EURUSD

The EURUSD had a bearish momentum yesterday bottomed at 1.0657. The bias is bearish in nearest term. As you can see on my H1 chart below, price is at the lower line of the bullish channel, which is a good place to buy with a tight stop loss below 1.0650. Immediate resistance is seen around 1.0720. A clear break above that area could lead price to neutral zone in nearest term but would keep the bullish phase remains valid testing 1.0800 region. On the downside, a clear break and daily/weekly close below 1.0650 would expose 1.0500 region next week.

GBPUSD

The GBPUSD was indecisive yesterday. The bias is neutral in nearest term probably with a little bearish bias testing 1.2500 support area. Immediate resistance is seen around 1.2625. A clear break above that area could trigger further bullish pressure testing 1.2700 area. Overall I still prefer a bullish scenario at this phase targeting 1.2790 region and any downside pullback should be seen as a good opportunity to buy.

USDJPY

The USDJPY had a bullish momentum yesterday topped at 114.85. The bias is bullish in nearest term testing 115.60 which is a good place to sell with a tight stop loss. Immediate support is seen around 114.05. A clear break below that area could lead price to neutral zone in nearest term but would keep the double top bearish scenario remains strong targeting 111.30 area

USDCHF

The USDCHF had another indecisive movement yesterday. There are no changes in my technical outlook. The bias remains neutral in nearest term but overall price is still in a bearish phase since fell from 1.0335 (double top) as you can see on my H4 chart below with nearest bearish target seen at 0.9900. Immediate resistance is seen around 1.0025 followed by 1.0060. Overall I remain neutral.