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Another US data beat. Retail sales jumped 3% m/m (headline series) in January after two weak months end last year. That’s more than the 2% expected. All 13 categories printed an increase in sales. The control group excluding food services, gas, building materials and cars also rose by a more-than-expected 1.7% m/m. This series is viewed as more indicative for consumer spending. Demand is still robust and has the excellent shape of the labour market to thank for. On a sidenote, the Empire Manufacturing index also recovered by more than anticipated, from -32.9 to -5.8. The recent (exceptionally) strong US data mean the Fed’s work isn’t done, in our view (which is increasingly shared by Fed governors) not even when it hit the December dot plot terminal rate of 5-5.25%. US yields added a few more bps to their earlier advance before paring gains back to pre-retail sales’ levels. Current changes amount to 2.6-3.8 bps across the curve. European yields gain a few bps as well. The euro 10y swap yield is testing the symbolic 3% barrier for the first time since the start of the year. The dollar benefits. Trade-weighted DXY flirted with the 104 recent high. A break didn’t occur though with a not too bad equity sentiment capping the greenback’s gains. EUR/USD is intensively testing support at 1.068. A close at or below that level implies losing the upward sloping trend channel.

UK inflation decelerated more than expected in January, wrongfooting those anticipating a US-like surprise. Price growth eased from 10.5% to 10.1% (10.3% expected). The core gauge fell from 6.3% to 5.8% compared to the 6.2% estimate. The Bank of England put the next rate hike conditional on “evidence of more persistent inflationary pressures”. But among the indicators it has on its watch list aside from inflation, is “tightness of the labour market”. We currently expect two more 25 bps rate hikes to 4.5%. Despite the setback today, UK money markets do too. Gilt yields ease 5.7-10 bps across the curve after surging by double digits (starting with a “2” at the front end) yesterday. Sterling takes a hit and by doing so EUR/GBP’s upward sloping trend channel was saved by the bell. EUR/GBP surpasses 0.8867 resistance and comes close to a test of the next one at 0.8897. Cable (GBP/USD) tests 1.20 support, with dollar strength (after US retail sales) adding to the downleg.

The Kingdom of Belgium successfully auctioned a €5bn 30y (OLO98, June 22, 2054) bond, priced at OLO95 +8 bps compared to +10 bps area guidance. Books ran above €34bn. With today’s syndication, the debt agency has completed about 28% of its €45bn OLO funding need. With the dual debt offering, the Slovak Republic placed a €2bn 12y (Feb 23, 20235) bond, priced at MS+80 (vs +95 guidance) and a €1.5bn 20y (Feb 23, 2043) bond, priced at MS+120 (vs +130 guidance). Books for each bond sale ran above €6.7bn and €5.5bn respectively.

News & Views

According to Statistics Poland, inflation in January reaccelerated to 2.4% M/M and 17.2% Y/Y (from 0.1% M/M and 16.6% Y/Y). The rise was mainly driven by a 6.0% M/M jump in costs for dwelling, including a 10.4% monthly rise in prices for electricity, gas and other fuels as some of last year’s tax cuts were reversed. Food prices increased 1.9% M/M. KBC estimates that core inflation rose to about 12% (11.5% in December). Poland’s central bank last week left its policy rate at 6.75%. The NBP hasn’t officially ended its rate hike cycle. But governor Glapinski assessed the current level as appropriate to bring inflation back to the 2.5% (+/- 1.0%) target. The zloty since end last year weakened from EUR/PLN 4.63 to almost EUR/PLN 4.80 earlier this week. It rebounds slightly further today (4.7575).

Total Norwegian GDP increased 0.2% Q/Q in Q4 2022 compared to 1.3% in Q3. Mainland activity grew at 0.8% Q/Q, the same pace as in Q3. Growth was mainly driven by final consumption expenditure (5.9% Q/Q). Government consumption rose 0.9% Q/Q. Gross fixed capital formation was 2.1% higher. Exports fell 0.8% in Q4, mainly due to gas and oil while imports increased 2.6%. Despite strong fundamentals, the Norwegian krone since September was caught in a weakening trend against the euro. The Norges Bank kept a gradual tightening approach. At the January meeting it left its policy rate unchanged at 2.75%, but signaled an additional step of 25 bps in March. Strong demand and persistent high inflation (Jan 7.0% Y/Y) leave the door open for additional steps post March. After a brief NOK rebound over the previous week (post ‘hawkish’ Riksbank), the krone fails to extend gains (EUR/NOK 10.9175).

Daily Pivots: (S1) 131.97; (P) 132.65; (R1) 133.77; More...

USD/JPY's rise from 127.20 short term bottom is in progress. Intraday bias stays on the upside for 38.2% retracement of 151.93 to 127.20 at 136.64, even as a correction to the decline from 151.39. On the downside, break of 131.49 minor support will turn intraday bias neutral again first.

In the bigger picture, prior 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.

Daily Pivots: (S1) 0.9159; (P) 0.9196; (R1) 0.9255; More...

Outlook in USD?CHF remains unchanged and intraday bias stays neutral. On the upside, firm break of 0.9289 resistance will confirm short term bottoming at 0.9058, and bring stronger rise to 0.9407 resistance. On the downside, however, sustained break of 0.9058 will resume larger decline from 1.0146 instead.

In the bigger picture, rise from 0.8756 (2021 low) has completed at 1.0146, well ahead of 1.0342 long term resistance (2016 high). Based on current downside momentum, fall from 1.0146 should be a medium term down trend itself. Next target is a test on 0.8756 low. Strong support should be seen there to bring rebound. Still, further decline will be expected as long as 0.9407 resistance holds, in any case.

Daily Pivots: (S1) 1.2107; (P) 1.2187; (R1) 1.2256; More...

GBP/USD's decline today and break of 1.2029 minor support suggests that fall from 1.2446 is resume. Intraday bias is back on the downside for 1.1960 support first. Break will target 1.1840 support. Overall, price action from 1.2445 are seen as a corrective pattern, break of 1.2269 will suggest that such pattern has finally completed.

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) 1.0694; (P) 1.0749; (R1) 1.0791; More...

Focus is back on 1.0654 temporary low in EUR/USD with today's fall. Firm break there will resume the corrective fall from 1.1032 to 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. On the upside, firm break of 1.0803 minor resistance will turn bias back to the upside for retesting 1.1032 high instead.

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.

Dollar might finally be committing to a rally after stronger than expected retail sales data. Consumer markets appeared to remain robust despite persistently high inflation. Talks of a higher terminal rate for Fed is also growing. On the other hand, Sterling was knocked down earlier today after lower than expected CPI reading, in particular against Euro and Swiss Franc, which were the second and third strongest for the day. Yen is not performing too well considering widening yield gap with US and Europe, but selloff someone slowed against others.

Technically, AUD/USD would be a focus leading up to tomorrow's Australia job data. Current development suggests that correction from 0.7156 is ready to resume. Break of 0.6854 will target 38.2% retracement of 0.6169 to 0.7156 at 0.6779. Strong support could be seen from 0.6721 to bring rebound. However, it might start to feel a bit vulnerable should tomorrow's data disappoints.

In Europe, at the time of writing, FTSE is up 0.09%. DAX is up 0.52%. CAC is up 0.99%. Germany 10-year yield is down -0.001 at 2.439. Earlier in Asia, Nikkei dropped -0.37%. Hong Kong HSI dropped -1.43%. China Shanghai SSE dropped -0.39%. Singapore Strait Times dropped -1.13%. Japan 10-year JGB yield rose 0.0027 to 0.507.

US retail sales up 3.0% mom in Jan, ex-auto sales rose 2.3% mom

US retail sales rose 3.0% mom to USD 697B in January, above expectation of 1.7% mom. Ex-auto sales rose 2.3% mom to USD 565B, above expectation of 0.9% mom. Ex-gasoline sales rose 3.2% mom to USD 637B. Ex-auto, gasoline sales rose 2.6% mom to USD 506B.

Total sales for the November through January period were up 6.1% yoy from the same period a year ago.

Eurozone industrial production down -1.1% mom in Dec, EU down -0.4% mom

Eurozone industrial production declined -1.1% mom in December, worse than expectation of -0.8% mom. Production of intermediate goods fell by -2.8%, durable consumer goods by -1.4%, non-durable consumer goods by -1.0% and capital goods by -0.4%, while production of energy grew by 1.3%.

EU industrial production dropped -0.4% mom. Among Member States for which data are available, the largest monthly decreases were registered in Ireland (-8.5%), Luxembourg (-5.2%) and Lithuania (-4.0%). The highest increases were observed in Denmark (+13.5%), Portugal (+4.1%) and Hungary (+3.8%).

Eurozone goods exports rose 9.0% yoy in Dec, imports rose 8.7% yoy

Eurozone goods exports rose 9.0% yoy to EUR 238.7B in December. Goods imports rose 8.7% yoy to EUR 247.5B. Trade deficit came in at EUR -8.8B. Intra-Eurozone trade rose 9.4% yoy to EUR 212.8B.

In seasonally adjusted term, exports dropped -4.6% mom to EUR 239.7B. Imports dropped -2.9% to EUR 257.9B. Trade deficit widened from November's EUR -14.4B to EUR -18.1B, larger than expectation of EUR -16.0B. Intra-Eurozone trade dropped from EUR 233.5B to EUR 230.9B.

ECB de Cos: Recent inflation data are somewhat encouraging

ECB Governing Council member Pablo Hernandez de Cos said, "recent data on euro area inflation and some of its key determinants are somewhat encouraging, but the overall situation still requires caution".

But he added that the evidence so far was very preliminary. Careful monitoring is required in some areas, including residual pass-through of inflation shocks, and the symmetry of pass-through of energy price declines to core inflation and wages, as well ass the effects of Chinese reopening.

"All these will have to be assessed as part of the full projections exercise under way in the run-up to our March meeting," De Cos said.

UK CPI slowed more than expected to 10.1% yoy in Jan

UK CPI slowed from 10.5% yoy to 10.1% yoy in January, below expectation of 10.3% yoy. CPI core slowed from 6.3% yoy to 5.8% yoy, below expectation of 6.2% yoy.

The largest downward contribution to annual inflation came from transport (particularly passenger transport and motor fuels), and restaurants and hotels, with rising prices in alcoholic beverages and tobacco making the largest partially offsetting upward contribution to the change.

Also released, RPI came in at 0.0% mom, 13.4% yoy, versus expectation of 0.1% mom, 13.2% yoy. PPI input was at -0.1% mom, 14.1% yoy, versus expectation of 0.2% mom, 14.7% yoy. PPI output was at 0.5% mom, 13.5% yoy, versus expectation of 0.1% mom, 14.4% yoy. PPI core output was at 0.6% mom, 11.1% yoy, versus expectation of 0.7% mom, 11.9% yoy.

RBA Lowe: I don't think we're at the peak of interest rate yet

RBA Governor Philip Lowe said in a Senate hearing, "I don't think we're at the peak (on interest rate) yet, but how far we have to go up I don't know." He noted that inflation, which is currently sitting at 7.8%, was still "wage too high". Unemployment would need to rise before there were any major changes to inflation.

"I understand why some people focus on the risks on the one side, but we've got to be attentive to the risk from higher inflation," Lowe warned. "It's corrosive for the economy. And all the evidence is if inflation stays high for too long, expectations adjust and that leads to higher interest rates and more unemployment.."

"The risks are two sided, and we're trying to navigate our way through a narrow path."

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0694; (P) 1.0749; (R1) 1.0791; More...

Focus is back on 1.0654 temporary low in EUR/USD with today's fall. Firm break there will resume the corrective fall from 1.1032 to 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. On the upside, firm break of 1.0803 minor resistance will turn bias back to the upside for retesting 1.1032 high instead.

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.

Economic Indicators Update

US retail sales rose 3.0% mom to USD 697B in January, above expectation of 1.7% mom. Ex-auto sales rose 2.3% mom to USD 565B, above expectation of 0.9% mom. Ex-gasoline sales rose 3.2% mom to USD 637B. Ex-auto, gasoline sales rose 2.6% mom to USD 506B.

Total sales for the November through January period were up 6.1% yoy from the same period a year ago.

Full release here.

It has been a disastrous session for AUD/USD, which has plunged 1.26% and is trading at 0.6899.

Lowe says more hikes coming

RBA Governor Philip Lowe faced a grilling from Australian lawmakers earlier. Higher rates and high inflation have caused a cost-of-living crisis and the RBA has been heavily criticised for the sharp rate-tightening cycle.

Lowe confirmed that more rate hikes were on the way due to the need to curb inflation. Lowe warned that the battle against inflation was paramount, saying high inflation could lead to an increase in inflation expectations which would result in higher rates and more unemployment. Inflation is running at 7.8%, the highest level in over 40 years, which Lowe said was “way too high”. Australia will release employment data on Thursday. The economy is estimated to have created 20,000 new jobs in January, following a decline of 14,600.

The US will release January retail sales later today. Headline retail sales is expected to rebound with a 1.8% gain while core retail sales is forecast to rise 1.1%. Both releases came in at -1.1% in December, so a strong showing would be bullish for the US dollar. The markets have been dovish about the Fed’s rate policy on the assumption that the economy is weakening, but the blowout employment report and an inflation release that was higher than expected have forced investors to rethink expectations that the Fed will pivot and cut rates later this year. A strong retail sales report would support the Fed’s hawkish stance of “higher for lower” and possibly a higher terminal rate than previously expected.

AUD/USD Technical

• AUD/USD is testing support at 0.6962. Below, there is support at 0.6846
• 0.7036 and 0.7143 are the next resistance lines

UK inflation falls but remains above 10%

The British pound is sharply lower on Wednesday. In the European session, GBP/USD is trading at 1.2069, down 0.88%.

UK inflation continues to fall, although it clearly has a long way to go. January’s inflation dropped to 10.1%, down from 10.5% in December and below the consensus of 10.3%. The core rate dropped to 5.8%, down from 6.3% in December and lower than the consensus of 6.2%. These numbers offer room for a bit of optimism, as does the drop in wage growth on Tuesday. Still, inflation is a bumpy road that will feature highs and lows and market participants would be wise not to make decisions based on one release. With headline inflation still in double digits, the Bank of England will have to continue raising rates, with the most likely scenario being a 25-basis increase at the Mar. 22 meeting.

In the US, inflation in January ticked lower to 6.4%, down from 6.5% but higher than the forecast of 6.2%. It was a similar story for the core rate, which dropped from 5.7% to 5.6% and was above the forecast of 5.5%. Inflation is still falling but the trend may be stalling, which will provide support for the Federal Reserve’s hawkish stance.

After the US inflation release, several Fed members reiterated the “higher for longer” theme. Fed members Barkin, Logan and Harker all had a similar message that the Fed would likely raise rates if inflation did not fall fast enough. The Fed has projected a federal funds rate of 5% to 5.5% by the end of the year, but given the strong economy and high inflation levels, there have been forecasts of a terminal rate as high as 6%.

GBP/USD Technical

• 1.2180 has strengthened in resistance as GBP/USD is down sharply. 1.2304 is the next resistance line
• 1.2071 and 1.1947 are providing support