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Market bulls have endless optimism this year, it is amazing. Whether it is funded or not, is yet to be seen.

Because the major market action happens against the Federal Reserve (Fed), and its claim that it will take the rates higher than 5% and keep it there and not cut it before the year ends, there is not much consensus.

Some see ‘the recent move higher in front-end rates is supportive of the notion that the Fed may remain restrictive for longer than expected’ but that ‘the equity market is refusing to accept this reality’ (JP Morgan). While some think that the bear market is over, and that ‘healthy balance-sheets at both the corporate and consumer level suggest a subdued level of systemic risk, meaning the catalyst for an extended market downturn is largely absent’ (Wells Fargo).

I don’t necessarily see a solid funding for an extended rally in the markets, unless we have fundamentally good news.

And slowing inflation is the type of fundamentally good news that I am looking for.

Because slower inflation doesn’t only mean a healthier economy and less pain for the future, but it means that the Fed could indeed soften the tone as the policy rate approaches the 5% level, and a weakening pressure on borrowing costs could give a loving hand to the stocks and bonds.

The problem is, nothing is less sure than the idea that we will see a sufficiently soft inflation report from the US today.

A few indicators point at a certain uptick in inflation in January figures, as

• Energy and commodity prices were up for the first three weeks of the year, though they gave a part of gains, January prices were impacted by higher energy and commodity prices.
• The prices of used cars in the US unexpectedly rose in January.
• The rapid fall in inflation since last summer was due to the retreat in energy and second-hand car prices, but also due to the easing tensions on supply chains and falling transportation costs post-pandemic. But nowadays, warehouses and distribution centers are reportedly pushing rates higher. According to a CNBC news, US storage prices went up 1.4% over the month and nearly 11% over the year, and that could apply some fresh pressure on consumer prices.

What we know is, there will be a point where inflation will be harder to pull lower, than it has been when the CPI was flashing above 9%.

Where is that point, is anybody’s guess. But as the CPI numbers move lower, it may be difficult to see big chunks of easing.

For today, the expectation is that the US headline CPI may have slowed to 6.2% in January, from 6.5% printed a month earlier, on a yearly basis. The core inflation is seen going down to 5.5% from 5.7% from a month earlier.

On a monthly basis, core inflation is seen stable around 0.4%, while headline inflation is seen ticking higher from 0.1% to 0.5%.

A sufficiently soft, or ideally a softer-than-expected CPI read today should give an additional boost to the equity bulls and push the S&P500 to fresh highs in the actual positive trend.

A stronger inflation read, on the other hand, could easily bring the Fed hawks back to the marketplace and send the S&P5600 tumbling. The next key support stands at 4030, the minor 23.6% retracement level on October to February.

In the FX

The US dollar has seen a crowd of sellers above the 50-DMA. A strong inflation data could finally send the dollar index sustainably above its 50-DMA, while a soft reading will be a good reason to sell the rebound.

The EURUSD continues its own struggle around the 50-DMA. The EU raised its growth forecast generously from 0.3% to 0.9% for this year. All member states will grow except from Sweden.

But but… Germany and Austria will still suffer two straight negative quarters while Italy will feel the pain during the first three quarters.

It’s not brilliant. But at least it doesn’t get on the way of rate hikes expectations from the European Central Bank (ECB).

In Japan, Kazuo Ueda has been nominated as the next Bank of Japan (BoJ) governor. There are rumours that the new BoJ leader could scrap the YCC policy. The yen was better bid in Tokyo, but the US CPI data is probably what will determine the short-term direction both in EURUSD and the USDJPY.

What do we really, really want?

What everyone wants to see is a soft US CPI figure, a softer US dollar, strong equities, improved bonds, and stronger other currencies.

What everyone fears however is a figure that’s not convincingly softer.

The only sure thing is, the CPI days are known for their high intraday volatility.

Market movers today

Today's market highlight will be the US CPI print for January. We forecast core CPI at 0.4% m/m, which is on the upper end of consensus forecasts. An upside surprise to 0.5% m/m or above would mark a clear upturn in the broader underlying inflation pressures and could take EUR/USD another leg lower (read more in Research US - Soft landing to no landing?, 9 February). We will also hear from Fed's Harker and Williams later today.

In the UK the jobs report for December is on the agenda. Although Bank of England has signalled it is nearing the end of its hiking cycle, a still tight labour market and sticky wage pressure could keep it from pausing just yet.

In Norway and Denmark GDP figures for Q4 2022 will be released.

The 60 second overview

Fed survey shows drop in wage expectations: The monthly New York Fed survey of consumer expectations showed a drop in median expectations for income growth to 3.3% from 4.6% suggesting that wage pressures may be easing. 1-year inflation expectations were unchanged at 5.0% while the 3-year inflation expectations dropped from 2.9% to 2.7%. It is a slightly better picture than what the survey from University of Michigan showed on Friday, where 1-year inflation expectations increased a bit. However, the probability of losing a job dropped to 12.0%, still below the pre-pandemic average around 14.5% and in line with other indicators showing a robust employment picture.

US and China weigh meeting in Munich: US and China consider a meeting between Secretary of State Anthony Blinken and China's top foreign diplomat Wang Yi at the side lines of the Munich Security Conference starting on Friday. It would be the first face-to-face meeting since the shoot-down of the alleged Chinese 'spy balloon' 10 days ago. While a meeting would likely be tense, it would be positive to see a willingness to resume dialogue from both sides. It is still unclear if a meeting will be put in place, though. US Deputy Secretary of State Wendy Sherman yesterday said that "we are open to dialogue when it is in our interest to do so and we believe the conditions are right".

Fed Vice Chair Lael Brainard to be top adviser for Biden: A source close to the White House reports that Brainard has been picked to head the National Economic Council in the Biden administration, leaving a new open seat in an influential role at the Fed.

NATO says Russian offensive is under way: NATO Chief Jens Stoltenberg yesterday backed reports that a major new Russian offensive had begun with the city of Bakhmut under heavy shelling. "We see how they are sending more troops, more weapons, more capabilities," Stoltenberg said. Defence ministers from several NATO countries will meet in Germany on Tuesday to discuss possible further military aid.

Equity optimism returned yesterday with indices in Europe and US cruising higher before close. No surprise to see the group of cyclical growth companies leading advances on a day when sentiment slowly but steadily improved during the day. Investor positioning has changed a lot in the first six weeks of 2023 but the pain trade is still higher as it takes time for people to leave the expectation of a near-term recession. In US Dow +1.1%, S&P 500 +1.1%, Nasdaq +1.5% and Russell 2000 +1.2%. Asian markets are catching this morning with most market higher while European and US futures are slightly lower.

FI: Global rates were mostly range trading through the day, amid a few central bank comments. The 10y point ended broadly unchanged on the day across European jurisdictions. Markets added more tightening on ECB pricing which is now priced to a peak policy rate at 3.65% from currently 2.5%. Generally curves bear flattened, with the 2y ending 2bp higher at 2.77% (Germany). The EC followed the general upward revisions from market participations of growth outlook in the euro area by 0.6pp to 0.9% for 2023 - and lower inflation by 0.5pp to 5.6%.

FX: Overnight, Kazuo Ueda has been nominated new head of Bank of Japan, and the Yen strengthens somewhat on the back of this news. The USD is weakening slightly in anticipation of today's US CPI report, which should stake out direction both for FX but also risk near-term. EUR/USD once again above 1.07 and Scandies gaining a tad as well.

Nordic macro

Norwegian GDP growth was much stronger than expected towards the end of last year. Although we expect it to slow in December, with mainland GDP falling 0.2% m/m, this would still give solid growth of 0.7% q/q for Q4. That said, it will be worth keeping an eye out for any revisions of previous data, as these can sometimes change the picture quite considerably.

In Sweden, Riksbank governor Erik Thedéen will speak at a seminar on the current economic situation and monetary policy. Given that the minutes will not be released until 20 February, he will have to stick to the official script from last week's MPR. That said, the market will likely be attentive to any flash comments from the seminar.

Welcome to a very important US CPI day, which is widely expected as numbers can give us more clarity about what's the FED going to do next. Will they look for more hikes, even to 50bp if data disappoints, or will inflation come even lower, and they are done with hikes soon? No one knows the answer at this point, but what we know is that the corrective drop on EURUSD looks incomplete and that we are waiting on A-B-C formation.

Notice that EURUSD pair came sharply down since start of February following FED, ECB and BoE policy decisions. We can see a strong sell-off through the rising trendline support when the price accelerated lower after good US jobs data reported for January. From an Elliott wave perspective we see that drop as an impulse so ideally there will be more weakness coming. However, we will be tracking only a three-wave drop, an A-B-C structure; currently still in subwave wave (B) so more weakness can be seen after the rally back to 1.08 resistance.

If you want more detailed outlook on USD and other markets, make sure to check our video below.

https://www.youtube.com/watch?v=5CJplx_ZsxA

In January, UK payrolled employees rose 0.3% mom or 102k. Comparing with the same month a year ago, payrolled employees rose 2.6% yoy or 768k. Median monthly pay rose 6.8% yoy. Claimant count dropped -12.9k, versus expectation of 9k rise.

In the three months to December, unemployment rate came in at 3.7%, 0.1% higher than the three-month period. Employment rate was at 75.6%, 0.2% higher than the previous three-month period. Economic inactivity rate was at 21.4%, 0.3% lower than the previous three-month period. Average earnings excluding bonus was up 6.7% 3moy, above expectation of 6.5%. Average earnings including bonus was up 5.9% 3moy, below expectation of 6.2%.

Full release here.

Daily Pivots: (S1) 1.3311; (P) 1.3345; (R1) 1.3366; More....

Intraday bias in USD/CAD remains neutral and outlook is unchanged. The choppy decline from 1.3704 might still extend lower, but strong support is expected to 1.3224 key support to bring rebound. On the upside, above 1.3519 resistance will confirm short term bottoming, and turn intraday bias back to the upside for retesting 1.3704 resistance. However, decisive break of 1.3224 would carry larger bearish implication.

In the bigger picture, as long as 1.3222 cluster support (38.2% retracement of 1.2005 to 1.3976 at 1.3223) holds, larger up trend from 1.2005 (2021 low) is still expected to resume through 1.3976 high at a later stage. However, firm break of 1.3222/3 will indicate that the trend might have reversed. Deeper fall would be seen to next cluster support at 1.2726 (61.8% retracement at 1.2758).

Daily Pivots: (S1) 0.6913; (P) 0.6944; (R1) 0.6996; More...

Intraday bias in AUD/USD remains neutral first. On the downside, break of 0.6854 will resume the correction from 0.7156 to 38.2% retracement of 0.6169 to 0.7156 at 0.6779. On the upside, break of 0.7010 will turn bias back to the upside for retesting 0.7156 high instead.

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.

Daily Pivots: (S1) 131.48; (P) 132.19; (R1) 133.14; More...

USD/JPY failed to break through 132.89 resistance and retreated, and intraday bias is turned neutral first. On the upside, break of 132.89 will resume whole rebound from 127.20 short term bottom. Further rally should then be seen to 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 129.79 will bring retest of 127.20 low instead.

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) 0.9170; (P) 0.9215; (R1) 0.9239; More...

Intraday bias in USD/CHF remains neutral for the moment. On the upside, firm break of 0.9287/9 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 now be expected as long as 0.9407 resistance holds, in any case.

Daily Pivots: (S1) 1.2064; (P) 1.2108; (R1) 1.2184; More...

Range trading continues in GBP/USD and intraday bias remains neutral. Further decline is still mildly in favor. On the downside, break of 1.1960 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. On the upside, though, break of 1.2192 will resume the rise from 1.1960 to retest 1.2445/6.

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) 1.0677; (P) 1.0704; (R1) 1.0751; More...

EUR/USD recovered after edging lower to 1.0654 and intraday bias is turned neutral again. On the downside, break of 1.0654 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, above 1.0790 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.