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Silver struggles as the US dollar nears a six-week peak. The price is drifting to last November’s low of 20.90, a daily support at the origin of a bullish breakout. Buying interest or a lack of in this important zone would dictate the metal’s outlook in the weeks to come. Intraday-wise, the RSI’s oversold condition has triggered a ‘buy-the-dips’ behaviour. A combination of profit-taking and fresh buying may drive the short-term price up. 22.00 is the closest resistance and the bulls will need to lift 22.60 before a recovery could happen.

The pound clawed back some losses after January’s retail sales beat expectations. A fall below 1.1970 has invalidated the rebound and put buyers under renewed pressure. As the cable tests the demand zone above this year’s low of 1.1850, the RSI’s double dip into the oversold area attracted some bargain hunters near 1.1920. 1.2070 is the immediate resistance and stiff selling could be expected around 1.2200-1.2260 as sentiment remains downbeat. A return to the critical level of 1.1850 could trigger a deeper correction.

Markets

Technical levels prevailed on Friday during US trading hours. A strong repositioning drive pulled core bonds lower since the release of January US payrolls. Markets are finally embracing the idea that policy rates will peak at higher levels and remain there for longer. ECB Villeroy for the first time implicitly put forward 4% as potential end zone (“peak by September”; “slowing down pace after March”). Both the German 10-yr and US 10-yr yield tested important resistance, respectively at 2.55% (2022 high & 62% retracement on 2008/2020 decline) and 3.9% (neckline double bottom formation). Ahead of the long US weekend (markets closed for President’s Day), markets lacked the drive to already force the break higher. US yield eventually declined by 4-5 bps across the curve with the front end underperforming (2y: -2.3 bps). German yields dropped between 0.4 bps (2-yr) and 4.3 bps (30-yr). Technical pictures now even suggest some short term trend reversal with a bearish engulfer on the German 10-yr chart and a (sort of) inverted hammer on the US 10-yr chart. From a data point of view, this week hasn’t that much to offer to nevertheless extend the upleg in yield, though we see some opportunities. First of all via tomorrow’s global PMI’s. Those could strengthen the picture that the global economy is actually showing much more resilience than feared. Second, via Wednesday’s FOMC Minutes. Last week’s “coming out” of Fed governors Mester and Bullard suggested that the early Fed decision to downshift the pace of rate hikes from 50 bps to 25 bps wasn’t so unanimous after all. Both argued in favour of sticking to 50 bps and will do so again in March. Minutes could show how big the hawkish minority within the Fed already was ahead of the January data releases (stellar payrolls, stubborn inflation and strong retail sales). The Fed’s preferred PCE deflators on Friday are this week’s final data point, though there direction is probably known given this month’s earlier CPI prints. The US Treasury’s end-of-month refinancing operation (2y-5y-7y) and central bank speeches serve as wildcards.

As US yields hit resistance, the dollar lost momentum on Friday as well. EUR/USD last week dropped out of the upward trend channel in place since November. The pair set a new short term low at 1.0613 before closing at 1.0695 with a technical hammer formation suggesting some short term improvement ahead. We think that the pair will rapidly run into resistance near 1.0750 though. EUR/GBP holds just narrowly below the 0.89 big figure, but the uptrend in the pair remains firmly in place.

News and views

Czech National Bank vice governor Jan Frait in an interview with daily DenikN indicated that no rate cuts will be discussed that the CNB policy meetings of March and May. If the economy actually develops in line with the CNB’s forecast, the central bank might consider whether it can cut rates in the third quarter of the year. However, Frait warned that this is already a far distant horizon which contains a high degree of uncertainty. Even in such a scenario, Frait assessed that interest rates will have to stay relatively high for a longer period of time. In assessing the options for monetary policy, the CNB will keep a close eye at the development in the real estate market. Higher core market rates last week’s caused the Czech krona to ease off a multi-year top against the euro. Even so, at EUR/CZK 23,7, the Czech currency continues holding strong.

Rating agency S&P affirmed the Polish A- long term credit rating (stable outlook). S&P assesses that the discontinuation of some energy-related tax cuts by the Polish government will probably result in a lower 2023 fiscal deficit than initially anticipated. The government might stabilize the general government debt to GDP ratio at around 45% in the coming years. S&P also mentions Poland’s competitive and diversified economy as well as strong external and public balance sheets to help mitigate the negative consequences of the war. S&P expects inflation to peak around 20% in February and average 12.9% this year and 6.2% in 2024, above the NBP’s 2.5% (+/- 1%) inflation target. The zloty over the previous weeks underperformed the forint and the Czech koruna, but last week resisted the impact of higher core yields rater well holding near EUR/PLN 4.76/4.77.

Tensions between US and China ramped up as Wang Yi said that Americans’ response to the spy balloon was ‘hysterical’.

Antony Blinken said that the object’s entry in the US airspace was ‘irresponsible’. He also said that they have information that China is considering a dangerous aid to Russia which could cause ‘a serios problem’.

As a response, China said they will hold naval exercises with Russian and South Africa.

North Korea fired an intercontinental ballistic missile which landed off Hokkaido.

US, South Korea and Japan held aerial drills to show off a force.

And Pentagon’s top China official went to Taiwan on Friday – it was the first known trip to the island since 2019.

Then, international atomic monitors detected that Iran has uranium enriched to the levels just below what’s needed for a nuclear weapon.

The only good news is that there could be finally a Brexit agreement on Northern Island. But I won’t clap before I see the concrete agreement.

Escalating geopolitical tensions combined with the hawkish Federal Reserve (Fed) bets boost demand in the US dollar, while gold sees demand below the $1840.

Note that an ounce of gold came as close as $4 to a critical support last Friday, which is the major 38.2% Fibonacci retracement, if cleared will mark the end of November to February bullish trend. Will the boiling tensions between US, China, Russia, and Koreas help keeping gold’s head above water is yet to be seen. Because the US yields are trending higher on an increasingly hawkish Fed talk, and that could well send the precious metal into the bearish consolidation zone, sooner rather than later.

ECB’s Schnabel sends ECB rate expectations rocketing

The European Central Bank’s (ECB) Isabel Schnabel warned last week that investors may be underestimating the persistence of inflation, and more importantly the response needed to tame it.

She said that the ECB may have to act more forcefully to bring inflation to the 2% target. Her words boosted the ECB rate bets, with money markets pushing the peak ECB’s deposit rate to 3.72%, from around 2.50% where it stands currently. The latter helped the EURUSD rebound from the 1.0612 dip on Friday, but the pair remains under pressure with decent resistance seen into the 50-DMA, which stands near the 1.0730 mark.

The European stock markets, however, continue performing well despite the hawkish ECB expectations and the few more 50bp hikes to come.

The rebound in the euro since the end of September has been a boon for European stocks, as the stronger euro made energy costs – that are negotiated in the USD terms - more affordable for European companies.

The mild winter in Europe also helped divert the risk of an energy shortage.

Even though the EURUSD started easing in February, the strength in European stocks continued on the back of softening energy prices. The DAX is now at one-year high levels, at levels before the start of the Ukrainian war, and the CAC40 hit an all-time high last week. It’s unbelievable.

The European nat gas futures continue trending lower, on the other hand, we are also at levels before the war in Ukraine started. The barrel of American crude fell to $75bp on Friday, and interestingly, the Chinese reopening, the fading global recession odds, strong economic data, or supply cuts from Russia… nothing has been appetizing enough to give the oil bulls the momentum they needed to clear the 100-DMA resistance.

That’s great news for the DAX, because the energy costs will be falling further even with a softer euro. And, on the other hand, the softer euro is a boon for French luxury brands, as they make more sales abroad.

What could go wrong? The ECB. Higher ECB rates, and a potential U-turn in energy prices are the main risks to the European stock rally right now.

The only place where the central bank will remain soft enough is China, to recover from a series of absurd Covid measures that pushed the economy into an unnecessary depressed zone. So People’s Bank of China kept its lending rates unchanged for the 6th straight month and urged banks to “front-load” credit extensions and help support the recovery. Is it enough to make people willing to buy Chinese stocks is yet to be seen. The geopolitical tensions aren’t going in the right direction for restoring confidence. Nasdaq’s Golden Dragon China index is down by more than 10% since the January peak. Alibaba is down by more than 17%. Alibaba and Baidu will announce their latest quarterly earnings this week, and may not come as a blessing. The revenue is seen 6% lower over the year. Even the Singles Day sales may not save the day.

Market movers today

Today, focus will be on Sweden where we get January inflation data and Riksbank minutes. We expect both headline and core CPIF to print higher than Riksbank's forecasts: CPIF at 10.2% y/y and CPIF excl. Energy at 8.4 % y/y.

US markets are closed today for the Presidents Day.

Tomorrow, focus turns to preliminary February PMIs from the US and euro area. The German ZEW index is also out.

On the central bank front, FOMC minutes will be published on Wednesday but considering the strength in macro data and the hawkish tone by Fed speakers recently, the message might be outdated by now. We also have the Reserve Bank of New Zealand meeting on Wednesday and the central cank of Turkey meeting on Thursday.

The 60 second overview

Central banks: Central bankers had mixed views on the inflation outlook and the most recent upbeat data releases on Friday. ECB's Schnabel said markets might underestimate inflation risks, but later Villeroy appeared more dovish, noting that rates have 'clearly passed the neutral rate' and emphasizing that ECB is not on a pre-committed path.

In the US, Fed's Bowman (voter) noted that the recent data suggests Fed's actions 'have yet to be effective' and that more rate hikes will be needed. Barkin (non-voter) also said labour demand remains too high relative to supply. Barkin (non-voter) was less worried, and highlighted that the seasonal adjustment issues (potentially linked to the unusually warm weather) might have distorted the recent employment and retail sales figures. He favoured 25bp hikes also going forward.

Munich security conference: Relations between the US and China remain tense after US Secretary of State Blinken met with China's top diplomat Wang at the Munich security conference over the weekend. Blinken noted that there was 'no doubt' the balloon recently shot down by US military was used for surveillance purposes, while Wang called the US actions 'almost hysterical'. Blinken also warned China against providing military support for Russia, saying that US was concerned China was planning to send weapons over to be used in the war.

PBoC: The People's Bank of China left its Loan Prime Rates (LPR) unchanged overnight, which was widely expected after it did not make changes to its medium-term lending facility rate (MLF) last week.

FI: After an initial sell-off on hawkish comments from Schnabel on Friday saying risks are for markets underestimating inflation outcomes, European rates staged a strong rally of 11bp from the peak to the trough as Villeroy voiced more moderate tunes. Rates markets have repriced as the expectations for peak policy rates have seen a significant change since the US labour market and CPI reports earlier this month, talking peak deposit rate to almost 3.75% in ECB and slightly above 5.25% in the US. In particular the ECB seems divided about the future need of policy tightening. 2y UST yields are 50bp higher than the US labour market report now at 4.62%.

FX: Last week was characterised by JPY and NOK weakness amid the broader tightening of global financial conditions, lower oil and higher USD rates. EUR/USD temporarily moved below the 1.0650 level on Friday but rebounded during US hours. EUR/SEK has edged slightly higher again trading just south of 11.20.

Credit: The increased focus on rising rates and the potential ensuing damage to the economy and default rates once again drew attention to Friday's credit markets. This left credit indices weaker with iTraxx main wider by 2bp to 77.8bn and Xover wider by 12bp to 404.5bp.

Nordic macro

Sweden: Both January inflation (08.00 CET) and Riksbank minutes (09.30 CET) are out Monday morning. We expect both headline and core CPIF to print higher than Riksbank's forecasts respectively: CPIF at 10.2 % yoy vs 9.3 % yoy and CPIF excl. Energy at 8.4 % yoy vs 8.2 % yoy. Markets' call is closer to Riksbank's view than our own. That said, January inflation tends to be volatile and there is the usual uncertainty for the January print given updated basket weights. Hence, any outcome either higher or lower should not be over-interpreted, and we will get two more inflation prints before the next Riksbank meeting in April.

The Riksbank minutes will be scrutinized about how the four 'old' board members came to change their minds about active quantitative tightening. During the autumn meetings these members were content with reducing the bond portfolio by just letting bonds mature, to shift their stances to active QT with the two new board members (Thedéen and Bunge) at the February meeting. This time we would also not be surprised to see the krona being discussed by all board members and we are especially keen on any thoughts concerning potential policy action being linked to the SEK and how Board members view the SEK toolbox.

Daily Pivots: (S1) 1.0639; (P) 1.0669; (R1) 1.0724; More...

Intraday bias in EUR/USD remains neutral at this point, and risk stays on the downside as long as 1.0803 resistance holds. Below 1.0610 will resume the corrective fall from 1.1032 and 38.2% retracement of 0.9534 to 1.1032 at 1.0463. Strong support should be seen around there to bring rebound, at least on first attempt.

In the bigger picture, the rally from 0.9534 low (2022 low) is a medium term up trend rather than a correction. Further rise is in favor to 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 next. This will remain the favored case as long as 1.0482 support holds.

Daily Pivots: (S1) 1.1955; (P) 1.2002; (R1) 1.2089; More...

Intraday bias in GBP/USD remains neutral for the moment. Risk stays on the downside as long as 1.2269 resistance holds. Break of 1.1914 will resume the fall from 1.2446, as the third leg of the corrective pattern from 1.2445, to 1.1840 support and possibly below.

In the bigger picture, rise from 1.0351 medium term bottom is at least correcting whole down trend from 1.4248 (2021 high). Further rise is expected as long as 1.1644 resistance turned support holds. Next target is 61.8% retracement of 1.4248 to 1.0351 at 1.2759. Sustained break there will pave the way back to 1.4248.

Daily Pivots: (S1) 0.9210; (P) 0.9271; (R1) 0.9302; More...

Intraday bias in USD/CHF remains neutral for the moment. On the upside, break of 0.9331 will resume the rebound from 0.9058 to 38.2% retracement of 1.0146 to 0.9058 at 0.9474. However, break of 0.9135 will indicate that the rebound has completed and bring retest of 0.9058 low.

In the bigger picture, decline from 1.0146 is seen as part of a long term sideway pattern. As long as 38.2% retracement of 1.0146 to 0.9058 at 0.9474 holds, another fall is in favor through 0.9058. However, sustained trading above 0.9474 will indicate that the medium term trend has reversed, and open up further rally to 1.0146 again.

Daily Pivots: (S1) 133.69; (P) 134.40; (R1) 134.85; More...

Intraday bias in USD/JPY remains neutral for the moment. On the upside, break of 135.09 will resume the rise from 127.20 to 38.2% retracement of 151.93 to 127.20 at 136.64. Strong resistance could be seen there to complete the corrective rebound. On the downside, break of 132.89 will bring deeper fall to 129.79 support.

In the bigger picture, prior break of 55 week EMA (now at 131.47) raises the chance of medium term bearish reversal, but that's not confirmed yet. Strong rebound from current level, followed by sustained break of 38.2% retracement of 151.93 to 127.20 at 136.64 will argue that price actions from 151.93 is merely a corrective pattern. However, rejection by 136.64 will solidify medium term bearishness for 61.8% retracement of 102.58 to 151.93 at 121.43 and 38.2% retracement of 75.56 to 151.93 at 122.75.

Australian Dollar is leading other commodity currencies higher, in otherwise quiet markets today. US and Canada will be on holiday while European calendar is near empty. Trading should remain relatively subdued. RBNZ rate hike is a major focus this week while PMIs will also catch much attention. Yet, the key is whether risk markets could break out of consolidations and resume near term rally. Such development could dictate the movements in the currency markets, in particular Dollar.

Technically, GBP/CAD is worth a note. So far, price actions from 1.6075 are more likely a consolidation pattern. That is, falls from 1.6690 and that from 1.6846, are not completed that. Break of 1.6075 will target 100% projection of 1.6846 to 1.6099 from 1.6690 at 1.5943. However, firm break of 1.6296 resistance will argue that whole three wave decline from 1.6846 has finished and bring stronger rise back to 1.6690. The next move could depend much on whether Canadian CPI (Tue) would agree to BoC's pause.

In Asia, Nikkei rose 0.07%. Hong Kong HSI is up 1.15%. China Shanghai SSE is up 1.92%. Singapore Strait Times is down -0.39%. Japan 10-year JGB yield is up 0.0030 at 0.506.

USD/CNH extending rebound towards 6.9559 fibonacci level

Chinese Yuan weakened notably last week as the dispute with US over "spy balloons" continued. The meeting between US Secretary of State Antony Blinken and China's top diplomat Wang Yi in Munich yielded no results.

In a separate statement, China warned "If the U.S. insists on taking advantage of the (spy balloon) issue, escalating the hype, and expanding the situation, China will follow through to the end, and the U.S. will bear all the consequences."

In an interview with NBC, Blinken said "there was no apology" from China. "I told him quite simply that that was unacceptable and can never happen again," he said.

USD/CNH's down leg from 7.3745 should have completed at 6.6971. Further rebound should be seen to 38.2% retracement of 7.3745 to 6.6971 at 6.9559. Reaction from there would reveal whether USD/CNH is heading for another down leg through 6.6971, or stronger rise to 61.8% retracement at 7.1157.

A look at AUD/NZD, NZD/USD ahead of this week's RBNZ

New Zealand Dollar is trading with a soft tone in Asian session today. While a rate hike is expected from RBNZ this week, there are chatters of the possibility of smaller hike, or even a pause, in response to the damage done by cyclone Gabrielle. There are also some speculations of a slight dovish twist which might signal a lower terminal rate. But traders will still need to wait for RBNZ Governor Adrian Orr's statement before making adjustment on their bets.

For now, AUD/NZD is extending the rally from 1.0469 despite loss of upside momentum. Further rise is expected as long as 1.0961 support holds. Sustained trading above 61.8% projection of 1.0469 to 1.0935 from 1.0735 at 1.1023 could prompt upside re-acceleration to 100% projection at 1.1201.

As for NZD/USD, it's still extending the fall from 0.6537, which is seen as the third leg of the consolidation pattern from 0.6512. Deeper decline is expected as long as 0.6308 minor resistance holds, for 38.2% retracement of 0.5511 to 0.6512 at 0.6130. But strong support should be seen there to bring rebound. However, sustained break of 0.6130 will raise the change of near term reversal and target 61.8% retracement at 0.5893.

RBNZ to hike 50bps; PMIs in focus

RBNZ is expected to slow the pace of tightening this week, and raise the OCR by 50bps to 4.75%. With inflation remaining strong, RBNZ should maintain the stance that more rate hikes are underway. There are some expectations that OCR would rise further to 5.25% this year before peaking. In other central bank activities, RBA and Fed will publish monetary policy meeting minutes.

On the data front, flash PMIs would be the major focuses of the week, along with Germany ZEW and Ifo, Canada CPI and retail sales, as well as US PCE inflation. Here are some highlights for the week:

• Monday: UK Rightmove house price, Eurozone consumer confidence.
• Tuesday: New Zealand PPI; Australia PMIs, RBA minutes; Japan PMI manufacturing; Swiss Trade balance; Eurozone PMIs; Germany ZEW; UK PMIs; Canada CPI, retail sales; US PMIs, existing homes sales.
• Wednesday: New Zealand trade balance; Japan corporate services prices; Australia wage price index, construction work done; RBNZ rate decision; Germany CPI final, Ifo business climate; Swiss Credit Suisse economic expectations; Canada house price index; FOMC minutes.
• Thursday: Australia private capital expenditure; Eurozone CPI final; US GDP revision, jobless claims.
• Friday: Japan CPI; Germany GDP final, Gfk consumer climate; UK Gfk consumer confidence; US personal income and spending with PCE inflation, new home sales.

AUD/USD Daily Report

Daily Pivots: (S1) 0.6833; (P) 0.6858; (R1) 0.6905; More...

Intraday bias in AUD is turned neutral as recovery from 1.6810 extends. Risk will stay mildly on the downside as long as 0.7028 resistance holds. Below 0.6180 will resume the corrective fall from 0.7156, and target 100% projection of 0.6854 to 0.7028 from 0.6854 at 0.6736, which is close to 0.6721 key structural support. Strong support is expected there to bring rebound.

In the bigger picture, corrective decline from 0.8006 (2021 high) should have completed with three waves down to 0.6169 (2022 low). Further rally should be seen to 61.8% retracement of 0.8006 to 0.6169 at 0.7304. Sustained break there will pave the way to retest 0.8006. This will now remain the favored case as long as 0.6721 support holds.

Economic Indicators Update