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ECB Governing Council member Francois Villeroy de Galhau said "we will have good news on headline inflation because energy prices are going down,"

But on interest rates, he said President Christine Lagarde's earlier 50bps guidance is "still valid". He added that it's too early to speculate on the size of March rate hike.

Also, Villeroy emphasized, "we must stay the course in battle against inflation", adding, he "cannot say where the terminal rate will be but should be there by the summer."

The British Pound started a fresh increase above the 1.2220 resistance zone against the US Dollar. The GBP/USD pair climbed above the 1.2250 resistance zone to move into a positive zone.

The pair even settled above the 1.2250 level and the 50 hourly simple moving average. It is now consolidating near the 1.2280 level, with an immediate resistance at 1.2290.

The first major resistance is near the 1.2300 level. If there is a clear upside break above the 1.2300 resistance, the pair could rise steadily towards the 1.2350 level in the near term. The next major resistance sits near 1.2420 on FXOpen.

On the downside, the first major support is near the 1.2265 level. The main support is forming near the 1.2250 level. A break below the 1.2250 support could push the pair towards the 1.2200 support.

The FTSE 100 pushes higher as financial stocks roar. On the daily chart, the index has gone parabolic after breaking last year’s top of 7670. The RSI’s double top in the overbought area may lead to a slowdown in the momentum. The bearish RSI divergence on the hourly chart corroborates the possibility of exhaustion. 7810 is the first support to see whether the bulls can sustain their bids at these fresh high levels and push to 7900. A bearish breakout could trigger broader profit-taking and possibly mean reversion towards 7730.

The New Zealand dollar rallies as overall risk appetite grows. The pair has consolidated its recent gains above the former resistance at 0.6350. The choppy rise reveals a lack of momentum as the price inches towards the supply zone around 0.6460. Its breach could pave the way for a bullish continuation above 0.6510. Otherwise, the bears may take over in the near term. 0.6330 is an area of congestion and its break would shake some buyers out and send the kiwi to the latest daily low at 0.6190.

The Canadian dollar steadied after inflation eased more than expected in December. From the daily chart’s perspective, the pair is still in a prolonged consolidation between 1.3230 and 1.3800. A bounce off the daily support at 1.3320 may lead to a narrower range. A close above the immediate hurdle at 1.3450 would attract more intraday interests and carry the price to the support-turned-resistance at 1.3560. Stiff selling could be expected from there to the previous swing high of 1.3660 as range trading lives on.

Markets

Bond yields on both sides of the Atlantic rose a few basis points before separate news reports killed off the advance abruptly. The culprit in the US was an awful Empire manufacturing, plunging to the lowest level since mid-2020 on slumping new orders and stalled hiring. US short-term yields ended the day 2-2.8 bps lower. Yields at the long end of the curve revisited intraday lows after the release but closed about 4 to 5 bps higher still eventually. On European soil, a Bloomberg story was responsible for German yields declining between 5.6 bps (30y) and 10.9 bps (2y), outperforming vs swaps by a 1 to 2 bps. Sources to the news agency said ECB policymakers are considering a slower pace of rate hikes from the March meeting on. A 50 bps move in February is still seen as most likely. They added a slowdown in the tightening shouldn’t be viewed as the ECB going soft on its mandate. Nevertheless, if that’s the case it is a less hawkish approach than president Lagarde outlined at the December meeting. The euro paid in cash. EUR/USD aborted its attack on recent highs around 1.087 and dropped to 1.078 even as the dollar himself again traded unconvincingly. DXY’s (trade-weighted dollar) bottoming out continued but no more than that. EUR/GBP tanked below 0.88 with a pinch of sterling strength present too. It followed a solid labour market report with near-record wage growth keeping the pressure on the BoE.

The Bank of Japan held a closely watched meeting this morning but the mountain brought forth a mouse. It kept rates steady at -0.1% and stuck to its YCC program to keep the 10y fixed at 0% with a 50 bps range. Some expected the BoJ to further widen the allowed deviation given the ongoing inflationary and, even more so, market pressures. The BoJ raised inflation forecasts to 1.8% at the end of the horizon with risks tilted to the upside but clearly considered it insufficient for further policy tweaks. The yen takes a heavy beating as bets on a hawkish twist unwind. USD/JPY surges from 128.12 to 130.75. Japanese equities are the star performer though, adding up to 2.5%. Bond yields in the area tumble 4-11.1 bps with the 10y taking the lead in the decline. Moves spill over to US Treasuries. Cash yields drop 2.7-6.6 bps.

US retail sales are due later today. They are expected to have further declined m/m in December. There’s probably more scope for a US/core bond yield reaction in case of a negative surprise given yesterday’s disappointing Empire manufacturing and general sentiment vs central banks following the ECB and BoJ news. The dollar in such a case could stay under pressure but with yesterday’s Bloomberg story, EUR/USD’s upside turned more limited. 1.0942 strengthened as a resistance. Sterling extends gains this morning following a CPI-beat. Headline inflation eased from 10.7% to 10.5% as expected but monthly dynamics were stronger than consensus (0.4% m/m vs 0.3%). Moreover, core price growth stabilized at 6.3%, defying expectations for a decline to 6.2%. EUR/GBP falls towards 0.8769. First meaningful support kicks in at 0.8721.

News Headlines

IMF deputy managing director Gopinath subtly changed the organization’s rather pessimistic view at the World Economic Forum in Davos. Recall that IMF managing director Georgieva in a NY address warned that a third of the global economy will be hit by recession this year, calling 2023 a “tougher” year than 2022. Gopinath still referred to the “tough” year with inflation still too high and central banks staying on course with interest rates to tackle the problem, but she also stressed an expected improvement in the second half of the year, stretching into 2024. Lower energy prices and the Chinese economic reopening triggered an extremely bullish start to the year with markets disagreeing on the central bank part of the story. German Chancellor Scholz in an interview with Bloomberg also spread optimism by vowing that Germany will go into a recession.

Slovakia’s interim PM Heger in a statement announced that snap elections in the fall appear to be the most realistic scenario at the moment. Regular elections were scheduled for February 2024. Heger’s administration collapsed in December. Attempts to gain a majority since losing that no-confidence vote, failed: “With today, I consider all attempts to establish a new 76 (majority) to be closed,” he said. To trigger snap elections, parliament needs to shorten their term which may happen at next week’s opening session (Jan 24).

At the post meeting press conference, BoJ Governor Haruhiko Kuroda said, "We don't need to further expand the band around our yield target.... It's been not long since we decided on our measures in December. It will likely take some more time for the measures to start having an effect in fixing market function. With our flexible market operations, however, we expect market function to improve ahead... YCC is, therefore, likely to be sustainable."

"Uncertainty regarding Japan's economy is very high. It's necessary to support the economy with our stimulus policy, to ensure companies can raise wages. By maintaining ultra-easy policy, we will strive to achieve our price target stably and sustainably accompanied by wage hikes," he noted.

"Unlike in the past, we expect wages to rise quite a bit, when listening to comments from the business and labour union executives," Kuroda said. "The pace of wage hikes is accelerating. But this is something we haven't seen in the past... So we're not 100% sure (whether) wages will indeed rise."

UK CPI rose 0.4% mom in December, matched expectations. In the 12 months, CPI slowed from 10.7% yoy to 10.5% yoy slightly below expectation of 10.6% yoy. CPI core was unchanged at 6.3% yoy, below expectation of 6.6% yoy. RPI rose 0.6% mom, 13.4% yoy, below expectation of 1.0% mom, 13.9% yoy.

ONS said: "The largest downward contribution to the change in both the CPIH and CPI annual inflation rates between November and December 2022 came from transport (particularly motor fuels), clothing and footwear, and recreation and culture, with rising prices in restaurants and hotels, and food and non-alcoholic beverages making the largest partially offsetting upward contributions."

Full release here.

The Bank of Japan (BoJ) kept its below-zero interest rate and its faltering yield curve control policy unchanged. No-action sent the Japanese 10-year yield tumbling by up to 14 bp – that’s almost a 30% plunge. The dollar-yen spiked above the 131.50 level, losing more than 2.50% against the greenback.

The BoJ revised its GDP lower for this year, but kept its inflation forecast unchanged at around the 3%. And yet, the producer price inflation in Japan spiked above the 10% in December.

It feels like the BoJ doesn’t want to face the reality, and isn’t acting according to the market’s needs.

Anyway, I think that traders will continue defying the BoJ’s YCC strategy and try to break its back, but we will likely see more volatility in the yen, as the policymakers keep fighting the market – perhaps not to lose face?

On the currency front, we can’t rule out the possibility of an advance above the 133 level, the minor 23.6% Fibonacci retracement on Oct to January retreat. The negative trend in USDJPY will remain intact below the 136 level, the major 38.2% retracement level.

Yen selloff supports the dollar index

If the yen changes direction, the impact on the dollar index will also be felt – and it will be positive.

The dollar index is stronger this morning.

The EURUSD is below the 1.08 mark, and could extend losses toward the 1.0630, the lower end of the actual positive trending channel.

And yet, the ZEW data released yesterday showed that investor expectations for the German economy jumped to the highest level in almost a year and German Chancellor Olaf Scholz said that he is sure Germany will avoid recession this year, thanks to China's reopening and growing confidence that the energy-price squeeze is easing.

And now that the Euro-area economy is performing better than many anticipated in the face of record inflation and the energy crisis, the European Central Bank (ECB) is expected to raise the rates by 50bp in February and in March, and by another 25bp in May or in June. That should throw a floor under the euro weakness and may not let the euro slide too low against the dollar.

Across the Channel, Cable does particularly well, since Britain revealed a near-record pace of 6.4% in wages growth between September and November year on year. The latter will unlikely ease the anger of those striking for a better pay – headéine inflation in Britain came in at 10.5% in December, as core inflation didnt ease as expected - dwarfing the near-record pay rise. The latest numbers will only force the Bank of England (BoE) to deliver yet another rate hike next month to avert a further wage-price spiral. And that’s positive for sterling.

S&P500 struggles finding buyers above 4000

Confusion and lack of direction best described yesterday’s sentiment in the US.

US futures were pointing at a negative start, then turned higher in early trading as we heard a lot of talk about "green shoots" and "bright spots" in the economy when Chinese Vice Premier talked in Davos yesterday saying that he expects China's economy to return to normal this year.

The S&P 500 shortly traded above the 4000 level, but reality soon hit the fan with mixed earnings from Goldman and Morgan Stanley, and brought the top sellers in.

And the top sellers kept selling into the 4000 level to the end of the session. Finally, the index closed the session 0.20% lower, spot on the 2022’s down-trending channel top and above the critical 200-DMA.

But the first set of earnings doesn’t support a sustainable move above that 200-DMA level.

If we dive into the latest bank earnings, Goldman Sachs and Morgan Stanley earnings were mixed. Golman reported a 69% drop in Q4 profit as the slump in deal-making and its wealth management business weighed on Q4 results. Goldman shares closed the session almost 6.50% lower.

Morgan Stanley was also hurt by weakness in deal-making, but the wealth management and trading revenue grew. The shares closed almost 6% higher.

Note that Morgan Stanley set aside $85 mio for credit losses compared to only $5 mio a quarter ago, as proof that the bank is not optimistic about what’s to come this year, either. Therefore, the 6% rally was certainly a bit exaggerated.

Market movers today

Today's focus will be on hard data from the US as we get the December PPI, retail sales and industrial production. Retail sales is the most important number, as it will be the first piece of hard data for December and will give us a sense of whether the sharp slowdown illustrated by the ISM services actually took place.

UK inflation for December out today will also be an important input ahead of Bank of England's rate decision at the beginning of February. Expectations are for further eased price pressure with headline to print 10.5% from earlier 10.7%. Also underlying inflation is expected to continue lower.

In euro area, we get the final HICP data for December, which includes more details than the flash print. On central bank calendar, ECB's Villeroy and Fed's Bostic and Harker are scheduled to speak. The Fed will also release its Beige Book.

The 60 second overview

Bank of Japan: Bank of Japan decided to keep monetary policy unchanged at its meeting overnight. The market had speculated another hike of the cap over 10Y yields could come and was left disappointed, which triggered a rally in USD/JPY above 131. We stick to our view that a policy rate hike to 0% and another hike in the yield curve control target awaits in Q2 23.

ECB: In light of the improved growth and inflation outlook, ECB sources reported yesterday that policymakers are starting to consider a slower pace of rate hikes than President Lagarde indicated in December. While the 50bp hike in February she signalled remains likely, the prospect of a smaller 25bp increase at the following meeting in March is gaining support according to officials. The news added to the European fixed income rally, with implied ECB peak rate pricing now down to 3.3% from 3.5% earlier, while EUR/USD returned below 1.08.

European economy: The euro optimism got another boost yesterday, after German ZEW expectations showed a larger than expected rebound in January, turning positive for the first time since Russia's invasion of Ukraine. The German economy has been holding up better than feared, thanks to a range of tailwinds from mild weather to a large order backlog and easing supply bottlenecks in industry. ZEW signals that the recent rebound in leading indicators could persist into Q1, suggesting that the European recession could actually be milder and shorter than we have previously anticipated. That said, the assessment of current economic conditions remains at more depressed levels and we still think challenging times await the German economy in 2023, as energy worries remain, order books are emptying and consumers will face another year of real income losses. Higher interest rates have already started to cool construction and housing market activity and downside risks remain also for the labour market. Stepped up investments in infrastructure, digitalisation and the green transition as well as positive spill-over effects from Chinese pent-up demand are upside risks to the outlook. But the German growth model remains in an adjustment phase and until the energy crisis is truly resolved, Germany is unlikely to return as the euro area's economic powerhouse anytime soon.

FI: Yesterday, European bond yields and interest rates declined significantly in the afternoon on the back of comments from ECB officials that stated that ECB would hike 50bp in February and then slow down to 25bp in March and ending with a terminal rate of 3.25%. The officials stated that the comments were "anonymous" and normally the market would ignore these kind of statements. However, this was apparently coming from ECB sources and thus the market reacted much more than usual, as this is clearly a dovish comments.

This morning Bank of Japan did not change their monetary policy and 10Y JGBs rallied 10bp.

FX: Broad EUR weakness following yesterday's ECB sources story, hinting that 25bp increments might be the way to go beyond the February meeting. EUR/USD fell almost a full big figure on the story but notably we are also seeing relative EUR weakness against Scandies as well. USD/JPY rallies back above 130 again on Bank of Japan's decision to keep monetary policy unchanged.

Credit: The Credit market is still seeing significant new issue activity which takes most of the attention. Spreads saw only small changes with iTraxx Xover 4bp wider at 411bp. Main was 1bp wider at 79bp.