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ECB Chief Economist Philip Lane said in an interview, "our assessment of December remains solid, that we needed a sequence of 50 basis point hikes to bring us inside a zone where we would need to think harder about whether rates are sufficiently restrictive to deliver the return of inflation to 2%.

"The data flow since then suggests that the assessment is solid, that we need another 50 basis points in March," he said.

Beyond March, "the overall philosophy is that we will bring rates to a level that is sufficiently restrictive, which depends on where the inflation forecast is, where we are with underlying inflation and where we are with the monetary transmission mechanism."

"There is a zone of interest rate paths that the Governing Council will have to assess in March, in May and thereafter, and determine where in that zone we want to be," he added.

Without commenting on whether rate will stay at a significantly long plateau, Lane said "I absolutely sign up to the monetary policy philosophy that wherever we get to, we should be slow to come down until we have very strong evidence – not just in the forecast but also in our ongoing assessment of underlying inflation – that we are returning inflation to target."

Full interview here.

Swiss KOF Economic Barometer rose for the third month in a row, from 97.4 to 100 in February, hitting the long-term average. It's also above expectation of 98.0.

KOF said, "Since the last low in November 2022 (89.3), we are now observing an encouraging upward trend lasting for already three months."

"The indicators from the manufacturing sector are primarily responsible for the increase, but the indicators for the consumer-related sectors and the export economy as well as, albeit somewhat less clearly, the financial sector are also sending positive signals.

"The other indicators included in the barometer show hardly any change, with the exception of the hotel and restaurant industry, where sentiment has deteriorated slightly."

Full release here.

Swiss GDP stagnated in Q4, worse than expectation of 0.3% qoq. Looking at some details by production approach, manufacturing contracted -0.3% qoq. Construction was down -0.2% qoq. Trade rose 0.4% qoq. By expenditure approach, private consumption rose 0.3% qoq, government consumption rose 0.3% qoq, construction investment dropped -0.5% qoq, exports of goods dropped -1.7% qoq.

SECO said, "The challenging international environment curbed manufacturing output and also exports. Domestic demand showed robust growth."

Full release here.

EURUSD is battling with the medium-term uptrend line as the market sank towards a new seven-week low of 1.0530 on Monday. The 20- and 50-day simple moving averages (SMAs) confirmed the recent negative move as they posted a bearish crossover. The MACD is extending its bearish structure beneath its trigger and zero lines, while the RSI is pointing down in the negative region.

Further losses should see the seven-week low of 1.0530 acting as a major support ahead of the 1.0480 barrier and the 38.2% Fibonacci retracement level of the up leg from 0.9535 to 1.1030 at 1.0460. A drop below this level would reinforce the bearish structure and open the way towards the next key level of the 200-day SMA at 1.0330.

In the event of an upside reversal, the 23.6% Fibonacci retracement at 1.0680 could act as a barrier before being able to re-challenge the bearish cross of the SMAs at 1.0725. A break above this line would shift the outlook to a more neutral one, meeting 1.0800 and the 1.1030 peak. More gains could add optimism for more bullish movements towards 1.1180.

All in all, EURUSD posted a bearish wave from the 1.1030 peak but if there is a daily close beneath the uptrend line again, this may open the way for more losses.

The USDCHF pair seems to be forming a triple zigzag Ⓦ-Ⓧ-Ⓨ-Ⓧ-Ⓩ. Its final part, wave Ⓩ, is under development.

It is assumed that the wave Ⓩ can end in the form of a standard intermediate zigzag (A)-(B)-(C). Wave (A) is a 5-wave bearish impulse, wave (B) has a horizontal internal structure of a double three W-X-Y.

Thus, the formation of the final intermediate wave (C) can be expected in the near future. It is possible that it will be at 76.4% of impulse (A), and will end near 0.871.

Alternatively, the development of correction (B) may continue. Its structure is similar to the double three W-X-Y.

At the moment, two parts have been completed in it - the minor sub-waves W and X. Both of these sub-waves are similar to double zigzags of the minute degree ⓦ-ⓧ-ⓨ.

To confirm this scenario, the last minor wave Y is needed, it can also be a minute double zigzag.

It is likely that the bulls will send the market to the level of 0.960, which is on the resistance line.

Markets

The EU and the UK struck a deal to reform the Northern Irish Protocol. Dubbed the Windsor Framework, the agreement entails a so-called green lane in the Irish Sea with significantly reduced checks for goods coming from the UK mainland and destined to stay in Northern Ireland. Goods continuing into Ireland, part of the European single market, need to follow a red lane. The pound profited though strengthened already in the run-up on rumours that an announcement was coming. EUR/GBP fell from 0.883 to 0.8795. In core bond markets, US Treasuries and German Bunds parted ways. While both headed south initially, UST’s found a bid going into US dealings, leading to yield losses of -3.1 to -4.7 bps in the 2y-10y bucket. That’s despite some strong US data (core capital goods orders & shipments and pending home sales). German yields across the curve meanwhile all hit new cycle highs with gains ranging from 3.3 bps to 7.5 bps with the 10y yield heavily testing critical resistance at 2.56% (62% recovery on the 2007-2020 decline). The same tenor in swap yields is hitting an important reference at around 3.2%. That didn’t stop European equities from staging a forceful comeback after Friday’s sell-off. The Euro Stoxx 50 rebounded at some point 2% to close with gains of 1.66%. Wall Street rose 1.5% only to pare gains as the US session evolved. The most important indices eventually finished between 0.22%-0.63% higher. The dollar was pressured, lifting EUR/USD back above 1.06 and DXY below 105.

A Reuters interview with ECB chief economist Lane published this morning grabs some headlines in an otherwise uneventful Asian session. The Irishman said forward-looking indicators suggest inflation will slow down, but that the case for a 50 bps rate hike in March remains solid. He added that when rates hit their plateau, they will probably stay there for “quite a long-lasting period, a fair number of quarters”. Barring a few exceptions, regional stocks eke out a slight gain. The dollar appreciates with EUR/USD struggling to keep the 1.06. US cash yields advance a few bps.

Today’s economic calendar contains some US regional business confidence indicators and Conference Board consumer confidence for February. The latter is expected to improve slightly from 107.1 to 108.5. EU member states France and Spain publish February inflation numbers, seen at 7% (vs. 7% in January) and 5.7% (vs 5.9%) respectively. As a precursor for the European number due on Thursday, they will set the tone on markets in early European dealings. With European yields at important technical crossroads, just imagine what an upward inflation surprise could do. EUR/USD’s daily fate depends on whether a sustained core bond yield advance spills over to equity markets (eg. Friday’s market moves). Support in the pair is located at 1.0461/1.0479. For sterling we think the NI protocol boost will be short-lived. The currency wasn’t really bothered with the issue anyway while there are more important things at hand in mainland UK, including a cost-of-living crisis.

News and views

Australia’s current account surplus increased by $13.4bn to $14.1bn in Q4 2022. The increase is mainly due to the second highest on record trade surplus of $40.9bn. Exports of goods and services increased 3%, driven by rises in metal ores and minerals as constraints eased and travel services as the number of international students and visitors arriving in Australia increased. Imports of goods and services declined 3.1%. The rise in the trade surplus of $6.1bn is expected to contribute 1.1 percentage point to Q4 GDP growth. The Australian net primary income deficit (2nd component of current account balance) declined from a record $30.4bn in Q3 to $26.4bn in Q4. It remains historically high though due to high operating profits on direct investment off the back of continued strength in commodity prices, according to the Australian Bureau of Statistics. In a separate release, Australian retail sales rose slightly more than expected in January (1.9% M/M). AUD/USD this month lost out against an overall strong dollar, with the pair falling from 0.7150 towards 0.67. Next support kicks in around 0.6547.

Polish President Duda yesterday accused the EU of using various legal loopholes and questionable interpretations just to show that it can influence the legal order of a member state. The aggressive rhetoric follow’s the President’s decision not to sign into law the government’s plan to change Poland’s court system to unlock €35bn of EU funds. Instead, Duda sent the legislation to Poland’s top court – part of the EU’s complaints – for a review. The maneuvering suggests that the stalemate might only be solved after Polish elections in October.

The Dax 40 bounced back helped by the optimism from a EU-UK trade deal on Northern Ireland. On the daily chart, the trajectory remains up and the latest sharp fall in a shorter time frame may only have shaken out the weak hands. A bounce off 15200 at the base of a breakout rally in early February suggests that the bulls have enough firepower to defend their positions. 15540 is the closest resistance and its breach would put the recent peak at 15650 in the crosshairs, which would be a step closer to a bullish continuation.

The New Zealand dollar continues to struggle after downbeat retail sales in Q4. A break below January’s low of 0.6200 on the daily chart confirms the bearish MA cross and signals more room on the downside in the medium-term. The RSI’s oversold condition attracted some buying interests but the bears are expected to sell into strength as sentiment sank along with the price action. The 0.6200-0.6240 range has become a fresh supply area. 0.6090 would be the next target when the downward momentum returns.

The US dollar retreats as traders pull some chips off the table ahead of jobs data. On the daily chart, the pair is testing the critical level at the January low of 1.0500, where a bearish breakout would cause a deeper correction and dent the recovery mood. Solid buying pressure has emerged in the demand zone due to a combination of short-covering and renewed buying, driving the price up and leaving 1.0550 as a fresh support. 1.0630 is next and the bulls must lift 1.0700 on the 20-day SMA to turn the situation around.

Daily Pivots: (S1) 135.92; (P) 136.23; (R1) 136.55; More...

Immediate focus stays on 38.2% retracement of 151.93 to 127.20 at 136.64. Rejection by this fibonacci level, followed by break of 134.04 support, will argue that such rebound from 127.20 has completed, and turn bias back to the downside. However, sustained trading above 136.64 will indicate that fall from 151.93 has completed, and bring further rally to 61.8% retracement at 142.48.

In the bigger picture, focus is now on 38.2% retracement of 151.93 to 127.20 at 136.64. Sustained break there will indicate that price actions from 151.93 medium term are merely a corrective pattern. Such development will maintain long term bullishness. Rejection by 136.64 will, on the downside, extend the fall from 151.93 to 61.8% retracement of 102.58 to 151.93 at 121.43 at a later stage.