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The Euro rose to the upper side of near-term congestion on Friday, after hitting new marginally lower low of larger downtrend from 1.1139 (Dec 28 peak).

Today’s bounce points to still strong bids, although without sufficient bullish momentum to sustain gains and rise above near-term range top, which would generate initial reversal signal and shift focus to the upside.

Strong support, provided by 200DMA (1.0842), contained dips again, keeping the downside protected for now, but falling 10DMA (1.0881) repeatedly capped the action, confirming that the price remains in extended sideways mode.

Daily studies are bearishly aligned (multiple bear-crosses of 10/20/55DMA’s / 14-d momentum in negative territory, however, Friday’s close above daily Ichimoku cloud top (1.0860) would keep in play hopes for fresh recovery attempts.

Lift above 10 and 55 DMA’s (1.0882/1.0900) to improve near-term structure, but close above pivotal barriers at 1.0932/37 (range top / Fibo 38.2% of 1.1139/1.0812) required to bring bulls in play for stronger recovery.

Conversely, eventual close below 200DMA would generate initial signal of bearish continuation and risk acceleration through 100DMA (1.0770) towards targets at 1.0723 /12 (Dec 8 higher low / Fibo 61.8% of 1.0448/1.1139 rally).

Res: 1.0882; 1.0900; 1.0937; 1.0976.
Sup: 1.0842; 1.0793; 1.0770; 1.0723.

Markets

European bond markets still opened stronger in the wake of yesterday’s unconvincing press conference by ECB President Lagarde. The move lacked momentum though with first individual ECB members sounding more hawkish than Lagarde did. We must admit that it weren’t the most high-profile representatives though. Latvian ECB Kazaks admits that rates should start to go down, but that the central bank should be in no rush whatsoever to start the process. From a risk-reward point of view, he warns against starting too fast because of the inflationary risk that it entails. Lithuanian ECB Simkus joined the chorus, saying he’s open-minded on a 2024 rate cut but suggesting that market pricing of an April move is too optimistic. Croat ECB Vujcic pointed out that markets are taking whatever the ECB is saying as being dovish even as (in his view) the underlying message didn’t change. Finally Slovenian ECB Vasle warned that that wage growth currently remains significantly above what would be consistent with 2% inflation in the medium term. Core bonds reversed opening gains to currently trade near opening levels. German yields add up to 1.5 bps today. US treasuries underperform, with part of the move coming after some volatility around today’s sole eco releases. PCE December deflators were nearly bang in line with forecasts, but could have been derived from yesterday GDP release. Media headlines centered around the core deflator’s first Y/Y print below 3% since March 2021. Markets had more eye though to personal income (0.3% M/M) and especially spending (0.7% M/M) figures. The dollar failed to profit from the relative yield dynamics as they were once again countered by extremely bullish risk sentiment on stock markets. Good corporate earnings offer part of the explanation together with central bankers reluctance to push hard against market pricing. The EuroStoxx50 adds another 1% to reach its highest level since 2001! From now, the market countdown starts to next week’s FOMC meeting. We don’t expect that to change post-ECB dynamics.

News & Views

German GFK consumer confidence declined sharply at the start of the year. In the forecast for February the overall index dropped 4.3 points to -29.7, the lowest since March 2023. In its press release, GFK states that both economic and income expectations as well as the willingness to buy are showing noticeable declines. GFK sees the rebound in inflation in December as a possible reason for the sharp decline in income expectations and buying intentions. The return to the regular 19 %VAT rate in the gastronomy industry and the increase in the CO2 tax for energy will probably boost prices and further weaken income expectations. Ongoing higher prices for essentials like food and energy reduce the planning security that is needed to make lager purchases. The significant decline in consumer sentiment also translates in a noticeable increase in willingness to save. This subindex rose to the highest level since 2008. The expectations on consumers’ individual situation occur in a context of growing pessimism on the future path of the economy as economic expectations dropped to the lowest level since December 2022. The German Bundesbank added to the negative news on the country as it sees the economy preforming (slightly) worse than previously expected. The economic rebound will be delayed, amongst other as sings that industrial foreign demand had already reached its lowest point weren’t confirmed. The delay in the recovery puts the 0.4% 2024 growth forecast at risk. For Q1, the Buba sees stagnation at best.

In the ECB’s Q1 Survey of Professional Forecasters (SPF), respondents revised down their expectations for HICP headline inflation to 2.4% in 2024 (-0.3%) and to 2% in both 2025 (-0.1%) and 2026. The downward revisions reportedly reflected the impact of lower than previously expected HICP data outturns and oil prices as well as weaker economic activity. Core HICP inflation, which excludes energy and food, was also revised down for 2024        (-0.3% to 2.6%) to and 2025 (-0.1% to 2.%). Longer-term expectations for both core end headline HICP were seen at 2%. Expectations for real GDP growth were revised down to 0.6% in 2024 (-0.3%), 1.3% in 2025 (-0.2%) and set at 1.4% in 2026. Respondents expected a slight contraction in real GDP in the final quarter of 2023, followed by a slow recovery of economic activity throughout 2024. Longer-term growth expectations remained unchanged at 1.3%.

Personal income grew 0.3% month-on-month (m/m) in December, a small step down from November's 0.4% gain and in line with market expectations.

Accounting for inflation and taxes, real personal disposable income rose 0.1% m/m, a slowdown from the upwardly revised 0.5% in November (0.4% previously.)

Personal consumption expenditures rose 0.7% m/m, an acceleration from the upwardly revised 0.4% gain recorded in November, and ahead of market expectations (0.4%). Spending in real terms also grew by a robust 0.5% for the second consecutive month.

Spending on services was up by 0.6% m/m and goods spending rose by 0.9% m/m. Within services, the largest contributors to the increase were financial services and insurance, health care, and recreation services. Within goods, the leading contributors were  motor vehicles and parts, other nondurable goods (led by prescription drugs), and gasoline.

On inflation, the headline personal consumption expenditure (PCE) deflator rose 0.2% m/m, an uptick from last month's decline (-0.1%), but the yearly measure held steady at 2.6% y/y. The core PCE price deflator (which is the Fed's preferred measure of inflation) ticked up marginally to 0.2% on a monthly basis but decelerated from 3.2% in November to 2.9% in December on an annual basis.

The personal savings rate declined in December to 3.7% from November's 4.1% reading.

Key Implications

There isn't much of a surprise in today's report given yesterday's GDP release. Consumers continued to defy the odds and kept spending to close out the year. December's outturn was even stronger than November's with consumers saving less to keep spending. With the holidays behind us however, and consumers still facing headwinds, the drive to spend is likely to lessen in the new year. As such, consumer spending is anticipated to decelerate to a more sustainable pace.

The Fed' s preferred measure of inflation continued its downward trek in December with the core PCE price deflator posting its 15th consecutive month of lower year-on-year growth. The measure dipped below 3% for the first time since March 2021. With inflation heading in the right direction, but still above target, and consumer spending displaying noteworthy resiliency, the central bank has even less urgency for  a rate cut and one is unlikely to occur before mid-year.

• GBPUSD picks up steam, heads towards important resistance
• Technical signals improve, but market structure is still neutral

GBPUSD has been trading with stronger positive momentum over the past couple of hours, aiming to reach July’s resistance trendline, which capped Wednesday’s pickup at 1.2773.

The upside reversal in the RSI and the upturn in the stochastic oscillator are endorsing the bullish action in the price, though the ongoing sideways move, which started in mid-December, is showing no cracks at the moment.

A decisive close above the constraining falling line at 1.2770 could generate additional gains, but only an advance above December’s peak of 1.2826 would put the market back in an uptrend. In this case, the pair may print a new higher high within the 1.2870-1.2900 region or stretch towards the 1.2950 zone to test the ascending line which connects the highs from November and December.

If the bears resurface, the pair could pull lower to meet the support trendline from the January 17 low at 1.2680. A defeat for the bulls there could bring the 1.2600-1.2630 region under examination. Breaking that floor could see a fast decline towards the 1.2545 constraining zone.

In brief, GBPUSD is facing upside pressures within a neutral structure. A continuation above 1.2770 would create some extra optimism, whereas a drop below 1.2600 would downgrade the outlook.  

The British pound is higher on Friday. In the North American session, GBP/USD is trading at 1.2751, up 0.34%.

UK consumer confidence rises 

The UK consumer remains in a sour mood but the pessimism eased in January. The GfK Consumer Confidence Index to -19, up from -22 in December and just shy of the consensus estimate of -21. This is the highest level since January 2022, which gives an idea of just how pessimistic consumers have been about the UK economy over the past two years. On the brighter side, consumer expectations of personal finances for the next 12 months were positive for the first time in two years, a sign that consumers are feeling better about the economy, which could translate into increased consumer spending.

As with other central banks, there is a large discrepancy in rate expectations between the Bank of England and the markets. Investors have priced in four quarter-point cuts this year, which would lower the benchmark rate to 4.25%. The BoE, however, hasn’t budged in its guidance and at last month’s meeting went as far as warning that further tightening might be necessary. The BoE held rates last month but three MPC members voted to raise rates by a quarter-point, which means there is strong support among Bank policy makers to remain hawkish. At the same time, with inflation on the decline and the Fed and ECB jumping on the rate-cut wagon, Governor Bailey will be feeling pressure to signal that rate cuts are on the table. The BoE has kept rates unchanged for three straight times and meets on February 1.

US Core PCE Price Index eases to 2.6%

The week wrapped up with good news on the inflation front. The Core PCE Price Index, one of the Fed’s preferred inflation indicators, fell to 2.9% y/y in December, down from 3.2% in November and just below the 3.0% consensus estimate. This was the lowest rate since March 2021. Monthly, Core PCE prices rose 0.2%, up from 0.1% in November and matching the consensus estimate.

GBP/USD Technical

• GBP/USD is testing resistance at 1.2740. Next, there is resistance at 1.2772
• There is support at 1.2711 and 1.2679

Daily Pivots: (S1) 147.20; (P) 147.55; (R1) 148.02; More...

Intraday bias in USD/JPY stays neutral, as consolidation from 148.79 is extending. With 145.97 resistance turned support intact, further rally is in favor. As noted before, corrective fall from 151.89 should have completed at 140.25 already. Break of 148.79 will resume the rise from there for retesting 151.89/93 key resistance zone.

In the bigger picture, stronger than expected rebound from 140.25 dampened the original bearish review. Strong support from 55 W EMA (now at 141.89) is also a medium term bullish sign. Fall from 151.89 could be a correction to rise from 127.20 only. Decisive break of 151.89/93 will confirm resumption of long term up trend. This will now be the favored case as long as 140.25 support holds.

Daily Pivots: (S1) 0.8636; (P) 0.8661; (R1) 0.8695; More....

Intraday bias in USD/CHF stays neutral for the moment. On the downside, below 0.8605 will resume the pull back from 0.8727 to 0.8487 support. Break there will argue that rebound from 0.8332 has completed, and bring retest of this low. On the upside, firm break of 0.8727 will resume the rebound to 61.8% retracement of 0.9243 to 0.8332 at 0.8995 instead.

In the bigger picture, while rebound from 0.8332 could be strong, there is no clear sign of medium term bottoming yet. This rebound is tentatively seen as a corrective move for now. Also, outlook will stay bearish as long as 0.9243 resistance holds. Larger down trend from 1.0146 (2022 high) should resume through 0.8332 low at a later stage.

Daily Pivots: (S1) 1.0811; (P) 1.0857; (R1) 1.0891; More...

EUR/USD recovered quickly after dipping to 1.0812. Intraday bias remains neutral at this point. On the downside, break of 1.0812 will resume the fall from 1.1138 to 1.0722 support. On the upside, above 1.0931 will turn bias to the upside for stronger rebound towards 1.1138 resistance.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is seen as the second leg. While further rally could cannot be ruled out, upside should be limited by 1.1274 to bring the third leg of the pattern. Meanwhile, sustained break of 1.0722 support will argue that the third leg has already started for 1.0447 and below.

Daily Pivots: (S1) 1.2679; (P) 1.2711; (R1) 1.2740; More...

Intraday bias in GBP/USD stays neutral and outlook is unchanged. On the upside, firm break of 1.2784 resistance will suggest that consolidation pattern has completed. Further rise should be seen through 1.2826 to resume the rise from 1.2036. Next target will be 1.3141 high. On the downside, while another pull back cannot be ruled out, downside should be contained above 1.2499 support to bring rebound.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to up trend from 1.0351 (2022 low). Rise from 1.2036 is seen as the second leg that's in progress. Upside should be limited by 1.3141 to bring the third leg of the pattern. Meanwhile, break of 1.2499 support will argue that the third leg has already started for 38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075 again.

Dollar falls mildly in early US trading hours, following the release of core PCE inflation data which indicated a slightly sharper than expected slowdown. However, this weakness in Dollar is somewhat counterbalanced by unexpectedly robust growth in consumer spending. Despite these movements, Dollar remains within its established trading range, with a decisive breakout yet to occur.

Euro, initially under pressure, saw a modest uplift following remarks from several ECB officials. They collectively cautioned against premature expectations of rate cuts, lending some support to the currency.

Nevertheless, Euro continues to lag in performance for the week, trailed by Kiwi and Loonie. Swiss Franc and Yen emerge as the strongest currencies, with the Sterling not far behind. Dollar and Australian Dollar are mixed in the middle.

Given that most major currency pairs and crosses are still confined within familiar ranges, there is potential for shifts in their standings during the final trading hours of the week.

In Europe, at the time of writing, FTSE is up 1.43%. DAX is up 0.10%. CAC is up 2.17%. UK 10-year yield is down -0.038 at 3.954. Germany 10-year yield is down -0.010 at 2.285. Earlier in Asia, Nikkei fell -1.34%. Hong Kong HSI fell -1.60%. China Shanghai SSE rose 0.14%. Singapore Strait Times rose 0.38%. Japan 10-year JGB yield fell -0.0294 to 0.720.

US PCE inflation unchanged at 2.6%, core PCE slows to 2.9%

US personal income rose 0.3% mom or USD 60.0B in December, matched expectations. Personal spending rose 0.7% mom or USD 133.9B, above expectation of 0.4% mom.

PCE price index rose 0.2% mom, matched expectations. Core PCE price index (excluding food and energy) rose 0.2% mom, matched expectations. Goods prices fell -0.2% mom while services prices rose 0.3% mom. Food prices rose 0.1% mom and energy prices rose 0.3% mom.

From the same month a year ago, PCE price index was unchanged at 2.6% yoy, matched expectations. Core PCE price index slowed from 3.2% yoy to 2.9% yoy, below expectation of 3.0% yoy. Goods prices increased less than 0.1% yoy while services prices rose 3.9% yoy. Food prices rose 1.5% yoy while energy prices fell -2.2% yoy.

ECB survey shows lowered inflation expectations and GDP growth forecast

In the latest ECB Survey of Professional Forecasters for Q1 2024, inflation expectations have been revised downwards across all horizons. For the immediate years, headline HICP inflation is projected to decrease from 2.4% in 2024 to 2.0% in 2025 and 2026. These revised figures represent a downward adjustment of 0.3 percentage points for 2024 and a slight 0.1 percentage point decrease for 2025.

Similarly, core HICP inflation, which excludes volatile components like energy and food, has also been revised downward for 2024 to 2.6%, with a further reduction to 2.1% expected in 2025. By 2026, core inflation is projected to align with ECB's target, reaching 2.0%. The revisions for 2024 and 2025, each marked by a 0.3 and 0.1 percentage point decrease respectively, reflect an anticipated easing in the underlying inflationary trends.

On the growth front, expectations for real GDP have been adjusted downward for both 2024 and 2025. The forecasters now anticipate GDP growth of 0.6% in 2024, followed by a modest recovery to 1.3% in 2025 and slightly higher growth of 1.4% in 2026. These projections, revised down by 0.3 and 0.2 percentage points for 2024 and 2025 respectively, indicate a cautious outlook on economic expansion in the near term.

ECB's Vujcic advocates gradual approach to future rate cuts

ECB Governing Council members Boris Vujcic and Gediminas Simkus have underscored the importance of a cautious approach to future interest rate reductions. In separate interviews occasions, both officials emphasized the need for patience in evaluating economic data before committing to rate cuts.

Boris Vujcic highlighted the necessity of ensuring that inflation is "firmly sustainably on the way" towards ECB's medium-term target. He emphasized a gradual approach, stressing that ECB should wait for sufficient data to validate a downward trajectory in inflation rates.

Vujcic also expressed a preference for rate cuts in increments of 25 basis points, though he did not exclude the possibility of larger steps if warranted by economic data.

Gediminas Simkus, on the other hand, indicated that a rate cut in March is unlikely. He suggested that the likelihood of rate reductions would increase as 2024 progresses, describing this increase as "exponential, not linear." This statement implies a growing possibility of monetary easing later in the year, contingent upon evolving economic indicators.

ECB's Kazaks cautions against hasty rate cuts

ECB Governing Council member Martins Kazaks emphasized a cautious approach to reducing interest rates in an interview with BloombergTV. He acknowledged that while a downward adjustment in rates is anticipated, the ECB should not hasten this process, cautioning against premature actions that could potentially rekindle inflation.

Kazaks drew parallels to historical instances, particularly from the 1970s and 80s, to underline the risks associated with relaxing monetary policy too soon. "There's the risk that inflation starts to come back and then one would need to raise rates much more," he added.

Regarding, the timing and magnitude of easing cycles, he indicated that ECB could opt for either smaller steps initiated earlier or larger steps taken at a later stage. But Kazaks emphasized that would be "all data dependent".

Germany's Gfk consumer sentiment plummets to -29.7, hopes of recovery dashed

Consumer sentiment in Germany has taken a substantial downturn, reaching its lowest level since March 2023. The Gfk Consumer Sentiment Indicator for February sharply declined from -25.4 to -29.7, faring worse than the anticipated -24.3. This significant drop signals a reversal of the temporary improvement observed last month, which now appears to have been a fleeting pre-Christmas optimism.

Economic expectations in January plummeted to their lowest since December 2022, dropping from -0.4 to -6.6. Income expectations suffered a marked decline from -6.9 to -20.0, the weakest since March 2023. Concurrently, willingness to buy among consumers decreased from -8.8 to -14.8. Willingness to save has shown an increase, rising from 7.3 to 14.0, the highest level since August 2008. This suggests a shift in consumer behavior towards saving rather than spending.

Rolf Bürkl, consumer expert at NIM, remarked that the brief improvement in consumer sentiment witnessed last month was merely a transient spike. The decline in income expectations and willingness to buy, coupled with a growing propensity to save, have contributed to a significant setback in the Consumer Climate at the start of the year.

Japan's Tokyo CPI slows sharply to 1.6%, raises questions on BoJ's negative rates exit

Japan's Tokyo CPI core (ex-food) slowed significantly from 2.1% yoy to 1.6% yoy in January, below expectation of 1.9% yoy. That's also the lowest rate since March 2022. Additionally, core-core CPI (ex-food and energy) declined from 3.5% yoy to 3.1% yoy, marking a fifth consecutive month of decline. Headline CPI mirrored this trend, falling from 2.4% yoy to 1.6% yoy.

The latest Tokyo CPI data has sparked a debate among economists regarding its influence on BoJ strategy to phase out negative interest rates. While some analysts believe this data won't significantly impact BoJ's plan, anticipating the first rate hike since 2007 in April, others are more cautious. They suggest that the surprising drop in Tokyo inflation might lead BoJ to reconsider or delay the decision.

In parallel, December's corporate services price index remained steady at 2.4% yoy, aligning with the near nine-year high recorded in November.

BoJ's minutes emphasize importance of discussions on exiting negative rates

The minutes from BoJ's meeting on December 18-19 highlighted a focus on strategic discussions regarding the future of its monetary policy. The members agreed on the importance to "deepen discussions" about the "timing of the exit" from the current monetary policy framework and determining the "appropriate pace of raising policy interest rates thereafter." This discussion is closely tied to the evolving dynamics of "wage and price developments."

A key sentiment echoed by many members was the prerequisite for a sustainable and stable achievement of the price stability target before considering the termination of the negative interest rate policy and the yield curve control framework. The establishment of a "virtuous cycle between wages and prices" was reiterated as a necessary condition for these policy shifts.

Additionally, some members expressed the viewpoint that BoJ is "not in a situation where it would fall behind the curve" if it did not rush to raise policy interest rates. This perspective suggests a cautious approach to monetary tightening, implying that the central bank doesn't feel pressured to act hastily in adjusting its interest rate policy.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2679; (P) 1.2711; (R1) 1.2740; More...

Intraday bias in GBP/USD stays neutral and outlook is unchanged. On the upside, firm break of 1.2784 resistance will suggest that consolidation pattern has completed. Further rise should be seen through 1.2826 to resume the rise from 1.2036. Next target will be 1.3141 high. On the downside, while another pull back cannot be ruled out, downside should be contained above 1.2499 support to bring rebound.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to up trend from 1.0351 (2022 low). Rise from 1.2036 is seen as the second leg that's in progress. Upside should be limited by 1.3141 to bring the third leg of the pattern. Meanwhile, break of 1.2499 support will argue that the third leg has already started for 38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075 again.

Economic Indicators Update