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Fed Governor Lisa Cook said, "data are telling a pretty clear story of a historically strong labor market, with still elevated inflation." But, Fed is "starting to seem some improvement in inflation data."

She expects that inflation will "continue falling this year and next, though progress may be uneven."

It's "appropriate now to move in smaller steps as Fed assesses cumulative impact of rate increases so far," She added. "Fed will stay the course until inflation is contained."

Overall, the path of policy rates "will depend on how quickly inflation moves towards the 2% goal."

New York Fed President John William said, that the December interest rate projection "still seems a very reasonable view of what we'll need to do this year in order to get supply and demand in balance and bring inflation down." Median projection was a peak rate of 5.1% by the end of this year.

He added that further increase of 24bps "seems like the right size". But the pace would remain dependent on incoming data. "We still have our work cut out for us."

"The Fed will watch the data to determine the path of rate rises," Williams added. "Maybe services prices stay elevated, and if that happens we'll need higher rates."

Markets

Yesterday’s interview of Fed Chair Powell at the Economic Club of Washington for sure wasn’t the game changer some had hoped for. He agreed that further rate hikes are likely (maybe even more than envisaged in the December dots), but the level and the timing of the Fed peak policy rate remains conditional to the data. US payrolls and ISM last Friday pointed to upside risks, but after recent repositioning, markets remain cautious to really prepare for a new hawkish Fed-tilt. US yield are taking a breather with changes less than 2 bps across the curve. According to the Manheim Used vehicle index, average price of US used cars rebounded 2.5% in January, potentially slowing the disinflationary dynamics. However, this (admittedly partial) evidence doesn’t move US yields. European yields also didn’t get any clear directional guidance. German yields are gaining between 1.0 bp (2-y) and 2.5 bps (10-y). The German 10-y yield is returning the upper part of the 2.0%/2.50% consolidation range that is guiding trading since the start of the year. Tomorrow’s delayed German CPI data are a next reference for European yields, even as technical issues might complicate the analysis. US and European equity indices show good resilience despite the hawkish repositioning on core interest rate markets since Friday. The peak policy rate is one factor potentially hurting risk assets. However, for equity investors it’s probably at least as important how long central banks will keep interest rates in restrictive territory. In this respect, markets still are fighting CB guidance on higher for longer. Whatever the reason, the EuroStoxx 50 gains 0.4%, and is still only about 3.0 % away from the cycle top reached end 2021. After yesterday’s somewhat remarkable post-Powell rebound, US indices open little changed. Later, plenty of Fed and ECB policymakers are still scheduled to speak. The US Treasury later today will sell $35 bln of 10-y Notes.

The pause in (US) yield markets and a still rather mild risk climate also blocked further USD gains. The DXY index eases to 103.3 (from 103.42). EUR/USD today held an extremely tight sideways pattern near the 1.0750 pivot. The yen maintains yesterday’s gain, with USD/JPY struggle not to fall below the 131 big figure. In a low volatility environment, sterling outperforms with EUR/GBP drifting back below the 0.89 handle (0.8885). The decline in the  Norwegian krone (EUR/NOK 11.03) and the Swedish krone (EUR/SEK 11.36) also took a pause, but is too early to already call a bottom. The Riksbank will announce its policy decision tomorrow morning.

News & Views

The White House Council of Economic Advisors (CEA) created a new wage measure for core non-housing services (NHS). It’s part of core inflation (together with core goods and housing services) often referred to as “supercore”. NHS are more labor intensive than the other categories with the tight labour market expected to play a meaningful role in this part of inflation. In the post-pandemic expansion, NHS average hourly earnings grew very quickly, reaching a 7% and 8% annual rate in early 2022 for all private sector and PNS (production, non-supervisory) workers, respectively. Since then, however, these series have both eased substantially and both were rising at a yearly rate of between 4.5–5%  in December. In other inflation news, the Manheim used car vehicle index unexpectedly rose by 2.5% M/M yesterday (fastest pace since Nov2021), suggesting upside risks to next week’s US core CPI reading.

The ECB published the results of Supervisory Review and Evaluation Process (SREP) for 2022. On average, banks maintained solid capital and liquidity positions, with the vast majority holding more capital than the levels dictated by capital requirements and guidance stemming from the previous SREP cycle. For the year ahead, the weighted average of Pillar 2 requirements (P2R) set by the ECB for total capital remained in line with the requirements set out in previous years, at 2% of risk-weighted assets (RWA) after 1.9% in 2022. The P2R for Common Equity Tier 1 also remained broadly unchanged for 2023, at 1.1%. The average amount of overall capital requirements and guidance in CET1 increased to around 10.7% of RWA for 2023, up from 10.4% in 2022. At the end of Q3 2022, the average amount of CET1 held by significant institutions totaled 14.7% of RWA.

Daily Pivots: (S1) 1.0676; (P) 1.0721; (R1) 1.0773; More...

Intraday bias in EURUSD stays neutral for the moment. 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 1.0822) 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.

Daily Pivots: (S1) 0.9178; (P) 0.9234; (R1) 0.9276; More...

Outlook in USD/CHF is unchanged and intraday bias stays neutral. On the upside, firm break of 0.9287 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) 130.13; (P) 131.42; (R1) 132.36; More...

Outlook in USD/JPY remains unchanged and intraday bias stays neutral. Further rally is still mildly in favor. On the upside, above 132.89 will resume the rebound from 127.20 short term bottom to 38.2% retracement of 151.93 to 127.20 at 136.64. Nevertheless, sustained break of 4 hour 55 EMA (now at 130.50) will bring retest of 127.20 low.

In the bigger picture, prior of 55 week EMA (now at 131.39) 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) 1.1975; (P) 1.2035; (R1) 1.2109; More...

Intraday bias in GBP/USD remains neutral for the moment. Fall from 1.2446, as the third leg of the corrective pattern from 1.2445, could still extend lower. Below 1.1960 will target 1.1840 support and possibly below. But downside should be contained by 38.2% retracement of 1.0351 to 1.2445 at 1.1645 to bring rebound. On the upside, firm break of 4 hour 55 EMA (now at 1.2189) will bring retest of 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.

The markets are quiet today with a light economic calendar and slow news flows. European majors are generally higher, in particular with Sterling and Euro paring some earlier losses. Commodity currencies turned softer, but Yen is the weaker one. Dollar is mixed in between. Trading could remain subdued till Friday when UK GDP and Canadian job data are released.

Technically, AUD/NZD resumed near term rally from 1.0469 as supported by the hawkish RBA rate hike. It's now pressing 61.8% projection of 1.0469 to 1.0935 from 1.0735 at 1.1023. Sustained break there could prompt upside acceleration to 100% projection at 1.1201. However, rejection by 1.1023, followed by break of 1.0885 will argue that the rebound has completed, and bring deeper fall to 1.0735 support and possibly below.

In Europe, at the time of writing, FTSE is up 0.66%. DAX is up 0.81%. CAC is up 0.47%. Germany 10-year yield is up 0.31 at 2.374. Earlier in Asia, Nikkei dropped -0.29%. Hong Kong HSI dropped -0.07%. China Shanghai SSE dropped -0.49%. Singapore Strait Times rose 0.23%. Japan 10-year JGB yield rose 0.0015 to 0.497.

More upside still in favor in sluggish ethereum and bitcoin

Crytocurrencies have been rather sluggish since the near term rebound lost momentum in late January. Yet, for now, there is no clear sign of a bearish reversal.

For Ethereum, further rally is expected as long as 1533 support holds. Current rise from 1071 is seen as the third leg of the pattern from 878.5. It might eventually turn out too be a sideway consolidation pattern. But stronger raise to 2028.9 resistance could be seen, or even further to 100% projection of 878.5 to 2028.9 from 1071.0 at 2221.4. But of course, break of 1533.0 will indicate short term topping. Further break of 55 day EMA would pave the way back to 1071 or even to 878.5.

As for Bitcoin, further rally is expected as long as 22314 resistance support holds. Rise from 15452 would target 25198. Strong resistance might be seen there to cap upside, at least on first attempt. On the downside, break of 22314 support will suggest short term topping and bring pull back to 55 day EMA.

WTI crude oil staying bearish despite strong rebound

WTI crude oil rebounded strongly yesterday, as lifted by news of outage of an oil export terminal after the earthquake in Turkey. But upside is capped below 55 day EMA, and far below 82.31 resistance.

For the near term, further decline is expected as long as 82.31 resistance holds. Price actions from 94.25 could be developing into a terminal triangle pattern, as the fifth wave of the whole down trend from 131.82.

If that's the case, WTI should continue to lose downside momentum in the next decline, as reflected in persistent bullish condition in daily MACD. The end point of the down trend could be somewhere around 61.8% projection of 124.12 to 76.61 from 94.25 at 64.88, and 62.90 long term support.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1975; (P) 1.2035; (R1) 1.2109; More...

Intraday bias in GBP/USD remains neutral for the moment. Fall from 1.2446, as the third leg of the corrective pattern from 1.2445, could still extend lower. Below 1.1960 will target 1.1840 support and possibly below. But downside should be contained by 38.2% retracement of 1.0351 to 1.2445 at 1.1645 to bring rebound. On the upside, firm break of 4 hour 55 EMA (now at 1.2189) will bring retest of 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.

Economic Indicators Update

The British pound is in positive territory on Wednesday. In the European session, GBP/USD is trading at 1.2107, up 0.47%. The pound is recovering from a nasty slide of almost 400 points, in which it dropped below the 1.20 line for the first time since Jan. 23.

Powell goes easy on the markets

The equity markets were nervous ahead of Fed Chair Powell’s remarks at an event in Washington on Tuesday. There was concern that Powell would push back against the recent rally and deliver a hawkish message, especially after the sizzling nonfarm employment report last week. Powell decided not to chastise the markets and essentially reiterated what we heard at last week’s meeting. That message is that inflation is moving lower but needs to fall much further and further rate hikes are likely needed. Powell has said more than once that the Fed policy will not be swayed by one or two economic reports, and he held true to that view by not shifting his stance due to the hot employment release. Equity markets responded positively to Powell’s message while the US dollar was slightly lower against most of the majors.

How much further will the Fed tighten? The markets have revised upwards their forecast for the terminal rate to 5.1%, up from below 5% before the NFP report. Fed Bank of Minneapolis President Neel Kashkari said on Tuesday that he expects rates to peak at 5.4%, and a Citigroup note warned that rates could go as high as 6%. The markets are still expecting a rate cut late in the year, despite Powell stating at the FOMC meeting that there were no plans to lower rates.

There are no releases out of the UK today. BoE Governor Bailey will be in the spotlight on Thursday, as he testifies at the Treasury Committee Hearings. The BoE raised rates by 0.50% last week and the markets will be all ears, looking for clues as to what the central bank has planned for the next meeting on March 23.

GBP/USD Technical

• 1.1958 and 1.1804 are providing support
• There is resistance at 1.2035 and 1.2173

WTI crude oil rebounded strongly yesterday, as lifted by news of outage of an oil export terminal after the earthquake in Turkey. But upside is capped below 55 day EMA, and far below 82.31 resistance.

For the near term, further decline is expected as long as 82.31 resistance holds. Price actions from 94.25 could be developing into a terminal triangle pattern, as the fifth wave of the whole down trend from 131.82.

If that's the case, WTI should continue to lose downside momentum in the next decline, as reflected in persistent bullish condition in daily MACD. The end point of the down trend could be somewhere around 61.8% projection of 124.12 to 76.61 from 94.25 at 64.88, and 62.90 long term support.