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Daily Pivots: (S1) 1.0696; (P) 1.0728; (R1) 1.0747; More...

EUR/USD is staying in consolidation above 1.0668 and intraday bias remains neutral. Correction from 1.1032 short term top could still extend lower. Break of 1.0668 will target 38.2% retracement of 0.9534 to 1.1032 at 1.0463. Nevertheless, firm break of 4 hour 55 EMA (now at 1.0804) will bring retest of 1.1032 high instead.

In the bigger picture, current development suggests that 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.

Price actions in Asian session remain indecisive. Euro is staying as the worst performer today, weighed down by cross selling against Swiss Franc and, to a lesser extent, Sterling. Aussie and Kiwi are the stronger ones but overwhelmed by the Franc. Dollar and Yen are mixed for now awaiting further guidance from risk sentiment. US stocks closed lower overnight as consolidations continued while major Asian indexes are mixed.

Technically, overall price actions suggest that Dollar's near term rebound isn't over yet. But, to have more sustainable rally, USD/CHF will have to break through 0.9287/9 resistance zone decisively to confirm short term bottoming at 0.9058. USD/JPY will also have to break through 132.89 to resume the rebound from 127.20. Otherwise, rise in the greenback elsewhere could remain half-hearted.

In Asia, at the time of writing, Nikkei is down -0.13%. Hong Kong HSI is up 1.00%. China Shanghai SSE is up 0.97%. Singapore Strait Times is down -0.78%. Japan 10-year JGB yield is up 0.0017 at 0.498. Overnight, DOW dropped -0.61%. S&P 500 dropped -1.11%. NASDSAQ dropped -1.68%. 10-year yield dropped -0.021 to 3.653.

Fed Waller: I am prepared for a longer fight to get inflation down

Fed Christopher Waller said in a speech that while some believe that inflation will come down quite quickly this year, "I'm not seeing signals of this quick decline in the economic data".

"I am prepared for a longer fight to get inflation down to our target," he added.

"Though we have made progress reducing inflation, I want to be clear today that the job is not done," Waller said.

"It might be a long fight, with interest rates higher for longer than some are currently expecting. But I will not hesitate to do what is needed to get my job done."

Fed Kashkari: We need to do more to bring labor market into balance

Minneapolis Fed President Neel Kashkari said yesterday, "there's not yet much evidence, in my judgment, that the rate hikes that we've done so far are having much effect on the labor market."

"We need to bring the labor market into balance so that tells me we need to do more," he added.

He noted that Fed will likely need to raise interest rates to around 5.4% in order to bring inflation down to the 2% target.

BoC minutes: The bar for additional rate increases now higher

BoC published a minutes-like document yesterday for the first time to improve transparency. The minutes noted, "members were in broad agreement that, going forward, it would be appropriate to pause any additional tightening to allow economic developments to unfold."

"The bar for additional rate increases was now higher". Also, the council "would need an accumulation of evidence to determine whether further rate increases would be required." Yet, it was important to be clear about the "conditionality" of the pause, and the Governing Council "would be prepared to raise the policy rate further if these upside risks materialized."

Looking ahead

EU economic forecasts will be a major focus today. Meanwhile, US will publish jobless claims on a Thursday as usual.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.0696; (P) 1.0728; (R1) 1.0747; More...

EUR/USD is staying in consolidation above 1.0668 and intraday bias remains neutral. Correction from 1.1032 short term top could still extend lower. Break of 1.0668 will target 38.2% retracement of 0.9534 to 1.1032 at 1.0463. Nevertheless, firm break of 4 hour 55 EMA (now at 1.0804) will bring retest of 1.1032 high instead.

In the bigger picture, current development suggests that 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

Silver ended cycle from 9.1.2022 low as a 5 waves impulse Elliott Wave structure. Up from there, wave (1) ended at 20 and pullback in wave (2) ended at 17.97. The metal extends higher in wave (3) towards 24.54 and pullback in wave (4) ended at 22.98. Final leg higher wave (5) ended at 24.6 which completed wave ((1)) in higher degree. Pullback in wave ((2)) is in progress to correct cycle from 9.1.2022 low in 3, 7, or 11 swing before the rally resumes.

Internal subdivision of wave ((2)) is in progress as a zigzag Elliott Wave structure. Down from wave ((1)), wave 1 ended at 23.4 and wave 2 ended at 23.598. The metal extends lower in wave 3 towards 22.13 and rally in wave 4 ended at 22.427. Final leg wave 5 ended at 22.03 which completed wave (A). Wave (B) rally is now in progress as a zigzag structure in lesser degree. Up from wave (A), wave A ended at 22.53 and dips in wave B ended at 22.19. Expect the metal to extend higher in wave C of (B) and rally to fail below 24.6 for another leg lower in wave (C). Near term, as far as pivot at 24.6 high stays intact, expect rally to fail in 3, 7, or 11 swing for further downside.

Silver 60 Minutes Elliott Wave Chart

Key Highlights

• AUD/USD is attempting an upside correction from the 0.6850 support.
• It is facing resistance near 0.7000 and 0.7020 on the 4-hours chart.
• EUR/USD might continue to move down towards 1.0620.
• The US initial jobless claims could increase from 183K to 190K.

AUD/USD Technical Analysis

The Aussie Dollar declined from the 0.7150 resistance against the US Dollar. AUD/USD even traded below the 0.7000 level before the bulls appeared.

Looking at the 4-hours chart, the pair traded as low as 0.6855 before it started an upside correction. There was a move above the 0.6880 and 0.6900 levels. The pair even settled above the 200 simple moving average (green, 4-hours).

On the upside, the pair is facing resistance near the 0.7000 barrier and the 100 simple moving average (red, 4-hours). It is close to the 50% Fib retracement level of the downward move from the 0.7157 swing high to 0.6855 low.

The next major resistance is near the 0.7050 level. A clear move above the 0.7050 resistance might start a steady increase towards the 0.7120 resistance zone.

Any more gains could open the doors for a move towards the 0.7180 level. The next key hurdle is near 0.7200, above which the pair could climb towards the 0.7250 resistance zone.

If there is no move above 0.7000, the pair might resume its decline. An immediate support is near the 0.6920 level. The next major support is near the 0.6850 zone. If there is a downside break, the pair could decline towards the 0.6760 level.

Looking at crude oil price, there was a decent recovery wave and the price was able to climb above the $76.50 resistance zone.

Economic Releases

• German Consumer Price Index for Jan 2023 (YoY) – Forecast +8.9%, versus +8.6% previous.
• German Consumer Price Index for Jan 2023 (MoM) – Forecast +0.9%, versus -0.8% previous.
• US Initial Jobless Claims - Forecast 190K, versus 183K previous.

BoC published a minutes-like document yesterday for the first time to improve transparency. The minutes noted, "members were in broad agreement that, going forward, it would be appropriate to pause any additional tightening to allow economic developments to unfold."

"The bar for additional rate increases was now higher". Also, the council "would need an accumulation of evidence to determine whether further rate increases would be required." Yet, it was important to be clear about the "conditionality" of the pause, and the Governing Council "would be prepared to raise the policy rate further if these upside risks materialized."

Full minutes here.

Fed Christopher Waller said in a speech that while some believe that inflation will come down quite quickly this year, "I'm not seeing signals of this quick decline in the economic data".

"I am prepared for a longer fight to get inflation down to our target," he added.

"Though we have made progress reducing inflation, I want to be clear today that the job is not done," Waller said.

"It might be a long fight, with interest rates higher for longer than some are currently expecting. But I will not hesitate to do what is needed to get my job done."

Full speech here.

Minneapolis Fed President Neel Kashkari said yesterday, "there's not yet much evidence, in my judgment, that the rate hikes that we've done so far are having much effect on the labor market."

"We need to bring the labor market into balance so that tells me we need to do more," he added.

He noted that Fed will likely need to raise interest rates to around 5.4% in order to bring inflation down to the 2% target.

ECB Governing Council member Klaas Knot said, "I consider it highly unlikely that the March hike will be our endpoint."

"If underlying inflation pressures do not materially abate, maintaining the current pace of hikes into May could well remain warranted," he added.

He also noted that ECB's focus "has shifted from energy, headline inflation to breaking underlying inflation." It will take "some time before core inflation slows down."

"Once we see a clear and decisive turn in underlying inflation dynamics, I therefore expect us to move to smaller steps," he said. "But absent such a turn, the ECB will continue to stay the course on its steady pace upwards, in pursuit of price stability."

Following last week’s robust US data, the dollar surged against all its major counterparts, gaining the most against the risk-linked currencies aussie and kiwi. Investors revised up their expectations with regards to the Fed’s future course of action, admitting for the first time that they were probably wrong in pricing in a lower peak in interest rates and around 50bps worth of rate cuts later this year. Does this mean that the US dollar is staging a solid comeback?

Dollar laggard among majors on Fed pivot view

Since September 28, when it hit a more-than-twenty year high, the greenback has been suffering against all the other major currencies. It still holds the last place, even following Friday’s surprisingly upbeat economic releases, losing the most ground against the pound, the euro and the aussie.

This was due to market participants adopting the view that, with inflation slowing down faster than estimated, the Fed may not raise rate as high as it has itself projected and that it may be forced to push the cut button later this year; and all this despite policymakers adamantly sticking to their guns that interest rates will rise to slightly above 5% and that no rate cuts are on their playbook for this year.

At the latest meeting, Fed Chair Powell reiterated that same view but added that the disinflationary process has started and that if inflation comes down faster, that will be incorporated into their policy. So, with inflation consistently missing estimates lately, market participants became more confident that the Fed may soon admit that rate reductions could be possible towards the end of the year, and thereby added to their dollar short positions.

Dollar shines on robust jobs and ISM data

However, the dollar took a 180-degree spin on Friday and rebounded strongly against all its counterparts, after the US employment report showed that the economy added an astounding 517k jobs in January, with the unemployment rate hitting a more than a 53-1/2-year low of 3.4%. On top of that, just after the jobs data, the ISM non-manufacturing PMI rebounded strongly back into expansionary territory, adding to hopes that the US economy may eventually avert a recession.

The massive buying of the dollar following Friday’s numbers confirms the notion that the market pays more attention to data rather than to Fed communication. Even when the Fed was sounding ultra-hawkish, the market was not listening. But after the data, they were pricing in a terminal rate of around 5.12%, more or less in line with the Fed’s median projection of 5.15%, while they saw only one quarter point rate cut later this year.

Is the king back?

Does this mean that the dollar is back? That it reclaimed its throne as a king? What supports the case for some further recovery in the short run, may be that the dollar has fallen much steeper than the US Treasury yields due to Fed pivot bets, so when something points in the other direction, the currency may have some room to cover. Nonetheless, even if it strengthens a while longer, calling for a long-lasting recovery sounds premature at the moment. After all, just on Wednesday, Fed Chair Powell reiterated his disinflation remarks, prompting market participants to add back some rate-cut points.

Also, with more crucial data coming out next week, any further recovery may be at risk. On Tuesday, the inflation data is expected to show that both the headline and core CPI rates continued to decline, and with the y/y change in oil prices dipping further in the negative territory, the headline CPI rate may fall more than the core. This could revive speculation about a lower peak in US interest rates as well as more rate cuts for later this year. US Treasury yields may come under renewed pressure and thereby the dollar could be sold again. The currencies that may take the most advantage of a potential downtrend continuation in the greenback are the euro, the aussie and the yen.

Getting the ball rolling with the common currency, the first reason is because the ECB is still expected to continue hiking more aggressively than the Fed, even after Friday’s stellar data, and the second is hopes that the Euro area is on track to avoid recession.

As for the aussie, the RBA turned hawkish again at its latest meeting, removing from its guidance the wording that they are not on a “pre-set course’ and instead emphasizing the need to continue with rate hikes moving forward. A potential increase in risk appetite due to investors’ potential repricing after the CPIs could also help the risk-linked currency, whose tanks are also receiving fuel from the reopening of the Chinese economy.

Last but not least, with wages in Japan accelerating strongly, speculation that the BoJ may eventually need to abandon its yield curve control may soon resurface, which will result in further narrowing between the Treasury and JGB yields and thereby translate into a lower dollar/yen.

More upside surprises may be needed

Now, in the case that the CPIs surprise to the upside and retail sales for January rebound (also scheduled to be released next week), investors may price out more basis points worth of rate reductions. The dollar may gain, and perhaps perform best against the Canadian dollar. Despite being a risk-linked currency, the Loonie gained the least against the greenback since its bearish reversal, perhaps due to the subdued oil prices. The BoC’s decision to signal that it may not hit the hike button again could also weigh on the Canadian currency should incoming data add credence to that view.

Dollar Index still in a downtrend

From a technical standpoint, the dollar index rallied after posting a false break out below the key support zone of 101.50. That said, it met resistance near the 50-day EMA on Tuesday, slightly above the key zone of 103.45, which provided support between December 14 and 30. This keeps the index in a downtrend.

Even if the recovery continues for a while longer, the bears may jump back into the action from near the 200-day EMA or the 105.50 zone marked by the high of January 6. If they are strong enough to take the action back below the 101.50 zone, they may dive towards the 99.35 barrier, or towards the 97.65 zone, which provided strong support between March 10 and 30.

The move signaling that the bulls have stolen all the bears’ swords may be a recovery above 105.50. The index will be back above both the 50- and 200- EMAs, encouraging advances towards the 107.90 zone, marked by the high of November 21. Slightly higher lies the inside swing low of October 27 at 109.45, which could provide resistance should the 107.90 zone fail to.