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Cable bounced above initial barrier at 1.2200 today, signaling extended recovery from 1.2133 (fresh 7-week low) where bear-leg from 1.2568 showed strong signals of stall.

Double-Doji on Thu-Fri and today's rally generated initial signal of reversal that requires minimum sustained break above 1.2200.

Further gains need to clear barriers at 1.2250/68 (07 Mar high / falling Tenkan-sen) to open next pivot at 1.2300 zone (lower base / Fibo 38.2% of 1.2568/1.2133 descend).

Correction is also signaled by reversal of slow stochastic from oversold zone and daily RSI starting to point higher.

With technical studies being supportive for extended correction, focus turns on other very important political / economical events that would have strong impact on the pair in coming days.

Broken 1.2200 barrier now acts as initial support and needs to hold dips to keep fresh recovery in play.

Otherwise, near-term risk would shift again towards key near-term supports at 1.2155/33.

Res: 1.2235; 1.2250; 1.2268; 1.2300
Sup: 1.2200; 1.2155; 1.2133; 1.2100

The Euro hit fresh five-week high at 1.0713 today, in extension of last Thu/Fri rally from 1.0524 trough.

The pair broke above thickening daily cloud that generated bullish signal, with Friday's long bullish daily candle underpinning near-term rally.

The rally also cracked important barrier at 1.0700 (Fibo 61.8% retracement of 1.0827/1.0492), with close above it to provide another positive signal for extension of recovery rally from 1.0492 higher base.

Daily MA's turned into full bullish setup, with bullish momentum building up and being supportive for further advance

Easing from fresh high is expected to face strong support at 1.0655 (daily cloud top / 100SMA), where dips should be contained to keep intact hopes of further recovery.

Above 1.0700/13 levels, next target lies at 1.0748 (Fibo 76.4%).

Conversely, return and close below daily cloud top would slow current rally and risk test of lower breakpoint at 1.0605 (daily cloud base, reinforced by Tenkan-sen line).

A number of important events, due this week, are likely to influence pair's action, with Fed's rate decision being in focus.

Res: 1.0700; 1.0713; 1.0748; 1.0761
Sup: 1.0670; 1.0655; 1.0641; 1.0605

Fed to maintain 'dot' signal for this year at three hikes

In our view, the February jobs report removed the last obstacle for a Fed hike on Wednesday, in line with the message Fed Chair Yellen set in her recent speech, see also our Flash Comment here.

It is still a bit surprising to us that the Fed has turned so hawkish so quickly. There were not many signs in neither the last FOMC statement, the minutes from the last metering nor Yellen's hearing in Congress that the Fed was going to hike already in March.

We do not expect any major changes to the statement, as not much has happened since the last meeting.

We expect the Fed to maintain the 'dot' signal for this year at three hikes in the updated projections. Yellen said in her speech that four hikes is likely one too many, as it would make monetary policy neutral instead of accommodative, see Tweet.

We expect the Fed to hike three times this year (March, July and December) and three-four times next year. We expect the Fed to begin the reduction of its balance sheet in Q1 18 (see also slide 4).

Fed still awaits more information about 'Trumponomics' but previous meetings have revealed that 'almost all' FOMC members think there are upside risks to growth due to the expectations of more expansionary fiscal policy. We have not got new information on Trumponomics since the meeting but the Fed has communicated it wants to offset more expansionary fiscal policy by increasing the hiking pace.

It is worth keeping in mind that the Fed is data dependent and will not hike unless data support the case - remember the Fed signalled four hikes in 2016 back in December 2015 but only delivered one. After the Fed turned more hawkish, we have seen a drop in the oil price, lower inflation expectations and a small selloff in the US equity markets - perhaps a small sign that the Fed has turned too hawkish, too quickly.

Markets have fully priced in a Fed hike this week - 50% probability of another hike in June

Repricing of Fed

Markets have fully priced in a Fed hike this week. Note that markets price a 50% probability of another hike in June.

Markets price in 2.7 hikes this year and nearly a total of five hikes before year-end 2018.

We think it is difficult to see a more hawkish pricing of the Fed at the moment, though we expect the Fed to deliver one or two hikes more by the end of 2018 than currently priced.

One trigger for a harder Fed pricing could be that the Fed begins to signal four hikes this year, which, however, we think is unlikely given Yellen's comments in her speech.

The Fed will soon begin to discuss reinvestment strategy

'Quantitative tightening' is becoming a market theme

FOMC members have become more vocal on their desire to reduce the Fed's balance sheet in recent months and the minutes from the last meeting revealed that the Fed should begin to discuss 'the economic conditions that could warrant changes' in the current reinvestment strategy 'at upcoming meetings'.

The Fed wants to begin the reduction when the normalisation of the Fed funds rate is 'well under way', which seems to be when it is around 1.50% (half of the Fed's estimated neutral rate at 3.00%).

We think the Fed will begin the reduction in Q1 18. An NY Fed survey shows that primary dealers expect it to begin a bit later in mid-2018.

Macro charts

Growth rebounded in H2 16 after a slowdown in H1 16

Private consumption the main growth engine

Have investments bottomed out? We think so

Higher US oil production and rig count suggest a rebound in oil investments

Still a bit more slack left in the labour market

Fed sees the world through the Phillips curve

Global business cycle has turned - synchronised recovery signal across regions

Financial conditions are easy

Actual PCE core inflation still below 2% target

Inflation expectations have rebounded but are still low

BoE to stay on hold – risks to EUR/GBP skewed to the upside

We do not expect Bank of England (BoE) to make any policy changes at its March meeting. We expect BoE to maintain the Bank Rate at 0.25%, while leaving the targets for the stock of government bond purchases (APF) and the stock of corporate bond purchases (CBPS) unchanged at GBP435bn and GBP10bn, respectively. We do not expect any changes to the Term Funding Scheme (TFS) either.

We expect BoE to maintain its neutral stance by repeating it can move 'in either direction'.

We still expect the BoE to remain on hold for the next 12 months. While we think it is unlikely the BoE will tighten monetary policy in a time of elevated political uncertainty, we think we need to see substantially slower growth and/or higher unemployment before easing becomes likely again. Also, BoE Governor Mark Carney has said that one of the reasons the UK has been resilient to Brexit uncertainties so far is due to the significant monetary easing from the BoE.

Note that the BoE reaction function has changed since the financial crisis: BoE puts more weight on growth/unemployment relative to inflation (see also a speech by former Monetary Policy Committee member Martin Weale here, 18 July 2016). In our view, BoE seems to be more worried about slower growth than too-high inflation if this is only temporary.

EUR/GBP has reached our 1-3M target of 0.87 and we are currently reviewing our forecast. We still see risks skewed to the upside for EUR/GBP in the coming months ahead of and after the triggering of Article 50.

Three main triggers for BoE

The summary of the last BoE meeting contains three main triggers for changes to the BoE's current monetary policy stance.

1. CPI inflation.
2. Wage growth.
3. Private consumption.

Higher CPI inflation and/or higher wage growth than currently expected would increase the likelihood of a hike.

Slower private consumption growth than expected would increase the likelihood of a cut.

Markets price in a small probability of a hike already this year

First full BoE hike priced in by summer 2019

Softer BoE pricing in recent months

BoE February projections

BoE expects CPI inflation to move higher from here

In the latest inflation report, BoE projected CPI inflation to increase significantly from here due to the weaker GBP, which has pushed up import prices.

It expects inflation to peak around 2.8%.

BoE expects the overshooting of inflation to be temporary, i.e. it expects inflation to fall back to 2% beyond the forecast horizon.

Inflation expected to move above the 2% target

BoE expects GDP growth to slow in coming years to around 1.5%

BoE projects GDP growth to slow in coming years due to

1. slower private consumption growth
2. slower business investments.

We are more pessimistic on GDP growth than the BoE.

BoE still expects growth to slow

BoE expects unemployment rate to stabilise above NAIRU

The BoE no longer expects the unemployment rate to rise significantly as in previous inflation reports.

One reason is that BoE has revised down its NAIRU estimate from 5.0% to 4.5%, i.e. there is currently more slack left in the labour market than previously estimated.

BoE has lowered its NAIRU estimate from 5.0% to 4.5%

Macro charts

GDP growth has been resilient to Brexit uncertainties

GDP growth continued at same pace in H2 16…

… but growth seems to have slowed in Q1 17

PMIs suggest Q1 GDP growth in the range of 0.3%-0.4% q/q

PMI composite has fallen but is still strong

Unemployment rate has stabilised at low levels

Inflation expected to rise supported by weak GBP

CPI inflation set to increase to close to 3%

Weaker GBP implies higher import prices

End of food and energy deflation

Higher food prices

Gasoline prices have stabilised

Inflation expectations have rebounded

Inflation expectations have risen significantly

Daily Pivots: (S1) 0.8713; (P) 0.8747; (R1) 0.8804; More...

EUR/GBP retreats sharply today but stays above 0.8704 minor support so far. Intraday bias remains on the upside for the moment. Rise form 0.8402 is expected to target 0.8851 resistance and above. Nonetheless, actions from 0.8303 are seen as the second leg of the corrective pattern from 0.9304. Hence, we'd expect strong resistance from 100% projection of 0.8303 to 0.8851 from 0.8402 at 0.8950 to limit upside. On the downside, below 0.8704 minor support will turn bias neutral and bring retreat before staging another rally.

In the bigger picture, price actions from 0.9304 are viewed as a medium term corrective pattern. Deeper fall cannot be ruled out yet. But we'd expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside. Overall, the corrective pattern would take some time to complete before long term up trend resumes at a later stage. Break of 0.9304 will pave the way to 0.9799 (2008 high).

EUR/JPY - 122.52

Recent wave: wave v of (C) ended at 94.12 and major correction in wave A has ended at 149.79

Trend: Near term up

New strategy :

Buy at 121.80, Target: 123.80, Stop: 121.20

Position: -
Target:  -
Stop:-

As the single currency has retreated after marginal rise to 122.89, suggesting minor consolidation below this level would be seen and pullback to 122.00-05 cannot be ruled out, however, reckon downside would be limited to 121.70-80 and bring another rise later, above said resistance at 122.89 would signal the rise from 118.24 low is still in progress and may extend further gain to 123.30-35. Looking ahead, a sustained breach above this level is needed to retain bullishness and signal early erratic fall from 124.10 top has ended at 118.24, bring further rise to 123.85-90 first.

In view of this, would not chase this rise here and would be prudent to reinstate long on pullback as 121.70-80 should limit downside and bring another rise. Below 121.30 would abort and signal top is formed instead but only break of previous resistance at 121.13 would confirm and bring further fall to 120.45-50 first. 

Our latest preferred count is that wave (ii) is ABC-X-ABC which ended at 123.33 and wave (iii) is unfolding with wave iii ended at 100.77, followed by wave iv at 111.57 and wave v as well as the wave (iii) has ended at 97.04, followed by wave (iv) at 111.43 and wave (v) has ended at 94.12 which is also the end of the larger degree v, this also implied the major wave (C) has also ended there, hence major correction has commenced from there with (A) leg unfolding in its lower degree wave c which has possibly ended at 145.69. Under this count, A-B-C wave (B) has commenced with A leg ended at 136.23, wave B at 143.79 and wave C has possibly ended at 149.79.

Our larger degree count is that the decline from 139.26 is wave (C) and is sub-divided into a diagonal triangle i-ii-iii-iv-v with wave i - 105.44, wave ii- 123.33, wave iii - 97.03, wave iv - 111.43, followed by the final wave v as well as the end of wave (C) at 94.12, this also mark the bottom of larger degree wave B. Under this count, major rise in wave C has commenced as an impulsive wave with minor wave III ended at 145.69, wave V is still in progress for further gain to 150.00. Having said that, this so-called wave V could well be the first leg of larger degree 5-waver wave C and this wave C should bring at least a retest of wave A top at 169.97 (July 2008).

Daily Pivots: (S1) 1.4080; (P) 1.4130; (R1) 1.4194; More...

With 1.4064 minor support intact, intraday bias in EUR/AUD remains on the upside first. We're favoring the case of medium term trend reversal defending key support level at 1.3671, on bullish convergence condition in daily MACD. Rise from 1.3624 should target 1.4289 resistance first. Sustained break there will affirm our bullish view and target 1.4721 key resistance next. On the downside, below 1.4064 minor support will turn bias neutral and bring consolidation. But downside should be contained above 1.3874 support and bring another rally.

In the bigger picture, price actions from 1.6587 medium term top are viewed as a corrective pattern. We'd expect strong support from 1.3671 key level to contain downside and bring rebound. Up trend from 1.1602 should not be finished and will resume later. Break of 1.4721 resistance will indicate completion of such correction and turn outlook bullish for retesting 1.6587 high. However, sustained break of 1.3671 will invalidate our bullish view and would turn focus back to 1.1602 long term bottom.

Daily Pivots: (S1) 139.20; (P) 139.87; (R1) 140.22; More...

Intraday bias in GBP/JPY remains neutral for the moment as it's bounded in choppy trading inside range of 138.53/142.79. Price actions from 148.42 are viewed as a consolidation pattern. On the downside, break of 138.53 support will bring deeper decline to 136.44 support and possibly below. However, we'd expect strong support at 50% retracement of 122.36 to 148.42 at 135.39 to bring rebound. On the upside, above 142.79 will turn bias back to the upside for 144.77 and above.

In the bigger picture, price actions from 122.36 medium term bottom are still seen as a corrective pattern. Main focus is on 38.2% retracement of 195.86 to 122.36 at 150.42. Rejection from there will turn the cross into medium term sideway pattern with a test on 122.36 low next. Though, sustained break of 150.42 will extend the rebound towards 61.8% retracement at 167.78.

AUD/USD – 0.7576

Recent wave: Wave 5 ended at 1.1081 and major correction has commenced for fall to 0.7000 and then towards 0.6500-10

Trend: Near term up

Original strategy :

Sold at 0.7605, stopped profit at 0.7585

Position: - Short at 0.7605
Target:  -
Stop: - 0.7585

New strategy :

Stand aside

Position: -
Target:  -
Stop:-

Despite last week’s anticipated fall to 0.7491, lack of follow through selling and the subsequent stronger-than-expected rebound dampened our bearishness and suggest a temporary low has possibly been formed there, hence consolidation with mild upside bias is seen for further gain to 0.7600-10, however, break of resistance at 0.7633 is needed to add credence to this view, bring a stronger rebound to 0.7665-70, above there would suggest the fall from 0.7741 top has ended, then gain to 0.7700 would follow.

In view of this, would be prudent to stand aside in the meantime. Below  0.7525 minor support would revive bearishness and bring test of said support at 0.7491 but break of this last week’s low is needed to signal the fall from 0.7741 top has resumed for further fall to previous support at 0.7543 first. 

On the 4-hour chart, the move from 0.8066 is the wave 5 with i: 0.8860, ii: 0.8315, wave iii is an extended move ended at 1.0183, iv: 0.9706 and wave v has ended at 1.1081 (also the top of entire wave 5). The subsequent selloff is the major correction which is unfolding as ABC-X-ABC and 2nd A leg has ended at 0.8848, followed by a-b-c wave B which ended at 0.9758, hence, 2nd C wave is now in progress and indicated downside target at 0.7000 and 0.6950 had been met, so further fall to 0.6710-20 cannot be ruled out.

Daily Pivots: (S1) 121.70; (P) 122.26; (R1) 123.03; More...

Intraday bias in EUR/JPY remains on the upside for the moment as the rebound from 118.23 should continue. As noted before, correction from 124.08 has completed at 118.23 after defending 118.45 cluster support (38.2% retracement of 109.20 to 124.08 at 118.39). More importantly, whole rise from 109.20 is likely resuming. Further rally should now be seen to 124.08 high. Break will confirm this bullish case and target 126.09 key resistance next. On the downside, below 121.88 minor support will turn bias neutral and bring retreat before staging anther rally.

In the bigger picture, current development suggests that medium term rise from 109.20 is still in progress. Focus is now on 126.09 key resistance level. Sustained break will confirm completion of the whole decline from 149.76. And rise from 109.20 is of the same degree as the fall from 149.76. In such case, further rally would be seen to 104.04 resistance and possibly above before topping. Meanwhile, rejection from 126.09 will extend the fall from 149.76 through 109.209 low.