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ECB Governing Council member Martins Kazaks said yesterday, "in the next two meetings I think we can still do quite large steps" on interest rates.

"Of course the steps may become smaller as necessary as we find the level appropriate to bring the inflation down to 2%," he added.

"Currently I would see that at the February and March meetings we will have significant rate increases," he said.

Key Highlights

• GBP/USD started a downside correction from the 1.2450 zone.
• A key bearish trend line is forming with resistance near 1.2080 on the 4-hours chart.
• EUR/USD corrected lower from the 1.0735 level and declined below 1.0620.
• The US ISM Manufacturing Index could decline from 49.0 from 48.5 in Dec 2022.

GBP/USD Technical Analysis

The British Pound started a fresh decline from well above the 1.2400 level against the US Dollar. GBP/USD declined below the 1.2200 support zone to move into a short-term bearish zone.

Looking at the 4-hours chart, the pair even declined below the 1.2000 level. There was a close below the 1.2050 level, the 100 simple moving average (red, 4-hours), and the 200 simple moving average (green, 4-hours).

The pair traded as low as 1.1900 and recently started a minor upside correction. The pair climbed above the 1.2000 level, but there are many hurdles on the upside.

On the upside, an initial resistance is near the 1.2080 level. There is also a key bearish trend line forming with resistance near 1.2080 on the same chart. The next major resistance may perhaps be near 1.2150.

A clear move above the 1.2150 resistance might start a steady increase. In the stated case, GBP/USD may perhaps rise towards the 1.2200 level or even 1.2250.

On the downside, there is a key support at 1.1950. The main support is now forming near the 1.1900 level. A downside break below the 1.1900 zone might trigger another drop. The next major support sits near the 1.1800 level. Any more losses might open the doors for a move towards the 1.1650 support zone.

Looking at EUR/USD, the pair struggled to clear the 1.0735 resistance zone and started a short-term downside correction.

Economic Releases

• Germany’s Services PMI for Dec 2022 - Forecast 49.0, versus 49.0 previous.
• Euro Zone Services PMI for Dec 2022 – Forecast 49.1, versus 49.1 previous.
• US ISM Manufacturing Index for Dec 2022 – Forecast 48.5, versus 49.0 previous.
• FOMC Meeting Minutes.

Markets

Today counts as the real first trading year of the year with UK and US investors returning from New Year festivities. Only Japanese markets remained closed. German December inflation figures were the main dish. Regional numbers throughout the day served as an indicator for the national number, released in European afternoon. It explains the early market move. German inflation declined more than expected on a monthly basis (-1.2% M/M) with the Y/Y-reading down from 11.3% to 9.6%. The monthly fall is almost completely due to government support to help pay households’ gas bills. Food prices on the other hand continued to increase at the end of 2022. Last week’s Spanish inflation numbers showed a similar phenomenon: headline inflation rising by 0.1% M/M, but the Y/Y headline outcome down to 5.6% (from 6.7%). Spanish core inflation on the other hand set a new record high from 6.3%Y/Y to 6.9%. This divergence between headline and core inflation will be a theme in the first months of the year. Despite today’s market reaction, investors shouldn’t be mistaken: core inflation is the needle in the ECB’s compass and the reason why Lagarde and co delivered their hawkish 50 bps rate hike back in December. Strong German labour market data today also add to the central bank’s normalization/tightening case. Whatever the theory, markets today embraced the bigger-than-hoped for drop in headline inflation. German yield cede 4.8 bps (2-yr) to 11.7 bps (30-yr). The German 10-yr yield tested the previous cycle high at 2.53% around the turn of the year. Changes on the US yield curve are even slightly bigger (in a catch-up move) with yields 7.1 bps (2-yr) to 14.2 bps (10-yr) lower. The single currency faced a moment of weakness in the European session with EUR/USD losing more than one big figure intraday. The pair fell from 1.067 to 1.052, the lowest level since mid-December, before rebounding to 1.0570. EUR/GBP declines from 0.8850 to 0.88. Stock markets have a second strong session straight with main indices gaining over 1% in Europe and opening 0.5% to 1% stronger in the US.

With national Spanish and German inflation numbers pointing to a below-consensus EMU figure on Friday, market focus will now shift to the US with FOMC Minutes, ADP employment, payrolls and ISM’s for both manufacturing and non-manufacturing all printing between Wednesday and Friday. We see scope for a market reaction especially in case of stronger numbers given market thinking on the February Fed meeting. The market is split between a second consecutive 50 bps rate high (25%) or a new downshift to 25 bps (75%).

News Headlines

Turkish inflation slowed substantially in December. The monthly rise in prices slackened to 1.18%. Given a big 13.58 M/M rise in the last month of 2021, this difference caused a huge base effect, easing December 2022 Y/Y inflation to 64.27% from a 84.39% rise in November and a cycle top of 85.51% in October. The decline in headline inflation was also slightly bigger than expected. Core inflation eased sharply to 51.93% from 68.9%. PPI inflation declined 0.24% M/M to reduce the Y/Y reading to 97.72%. The positive base effect likely stays in play for the January inflation. At the same time, the decline might slow as the government prepared substantial fiscal support going into the presidential elections that are to take place in June this year. The Turkish lira showed a mixed picture today, losing modest ground against the dollar (USD/TRY 13.73) but gaining against a broadly weaker euro (EUR/TRY 19.80).

Bulgarian President Rumen Radev gave Nikolay Denkov of the formal ruling party (We Continue the Change) a chance to form a new government. The nomination of Denkov came as the biggest group in Parliament, the center right GERB party, failed to form a government after winning the Parliamentary elections on October 02 last year. However, analysts see only a slim chance for Denkov to be able to form a government. If the a third attempt also fails to from a new government, the president will have to dissolve Parliament with the ongoing political stalemate resulting in new snap elections in spring.

Following a hawkish ECB in December, market participants may be eagerly awaiting the preliminary Euro area inflation numbers, due out on Friday at 10:00 GMT, as they try to assess whether more 50 basis points worth of rate hikes are indeed warranted. Will the data confirm the ECB’s aggressive stance? And how may the euro react?

Appearing in a hawkish suit

At its last meeting for 2022, the European Central Bank raised interest rates by 50bps after delivering two consecutive triple hikes in September and October. Though the slowdown was generally expected, at the press conference following the decision, President Lagarde appeared surprisingly hawkish. “Anybody who thinks this is a pivot for the ECB is wrong,” she said, adding that interest rates are likely to continue being raised at a 50bps pace for a period of time. That Bank also laid out a plan to start unwinding its bond holdings from March, another step towards tighter policy.

Another 50bps hike is almost fully priced in

Just the next day, the preliminary PMIs for the month, despite staying in contractionary territory, improved by more than expected, with the surveys pointing to a reduced loss of orders, improving supply conditions, lower price pressures and an uplift in business confidence. Commenting on the flash data, the chief business economist at S&P Global Market Intelligence said that “While the further fall in business activity in December signals a strong possibility of recession, the survey also hints that any downturn will be milder than thought likely a few months ago.”

Combined with more hawkish remarks by ECB policymakers in the aftermath of the meeting, the PMIs may have prompted investors to believe that another 50bps hike at the February gathering is a nearly done deal. It is worth mentioning that on New Year’s Eve, President Lagarde noted that wages are growing faster than previously expected, something the Bank must prevent from adding to already-elevated inflation, while a few days earlier, ECB member Klaas Knot said that until July, the Bank would achieve a decent pace of tightening through half percentage point rises.

Inflation to slow but stay elevated

Friday’s data is expected to show that Eurozone’s headline harmonized index of consumer prices slowed further to 9.7% y/y in December from 10.1%, while the core rate is forecast to have ticked down to 6.5% y/y from 6.6%.

With underlying inflation not expected to have cooled much, the decent slide in the headline rate may be partly owed to the slide of the yearly change in oil prices. That change may turn negative in February or March as the war-related rally is thrown out of the year-on-year calculation, which could drag headline inflation even lower. However, should underlying inflation stay at levels more than triple the ECB’s objective, policymakers may have no other choice than keep delivering more double hikes. Despite their latest slowdown, producers’ prices remain extremely high, supporting the view that core consumer prices could stay elevated for longer.

Euro may be destined to trade north

Even if the euro corrects lower due a further slide in headline inflation, a still-elevated underlying metric could keep the losses limited and short-lived. Combined with a 70% probability for a further slowdown in Fed rate hikes to 25bps at its upcoming gathering and bets of nearly two quarter-point cuts by the end of the year, expectations that the ECB will continue with double hikes may result in a rebound in euro/dollar.

From a technical standpoint, the pair is trading above a prior downtrend line taken from the high of February 10, above a shorter-term upward sloping line drawn from the low of September 28, and above both the 50- and 200-day exponential moving averages (EMAs). Despite the strong setback on Tuesday, this keeps chances for a rebound well on the table.

With no clear catalyst to justify the strengthening of the dollar on Tuesday, the bulls may be tempted to re-enter the action from near the 1.0435 territory. Even if that zone breaks, they may have another opportunity at around 1.0200. A potential rebound could result in another test within the key resistance zone between 1.0715 and 1.0800, the break of which could add to the bullish narrative and may allow advances towards the peak of March 31, at around 1.1175.

Flipping the coin, should underlying inflation in the Euro area start easing fast, the euro could come under selling interest on speculation that the ECB may further scale down its rate increments. Euro/dollar could fall even more if the ECB is seen as turning more dovish than the Fed. The move signaling that the bears are back in control may be a break back below parity. Such a dip would take the pair below the short-term uptrend line and may initially target the 0.9870 zone. If that line doesn’t hold, the pair could fall to 0.9725, or even all the way down to its 20-year low of 0.9535, hit on September 28.

Daily Pivots: (S1) 1.0613; (P) 1.0704; (R1) 1.0757; More...

EUR/USD drops sharply today but stays above 1.0481 resistance turned support. Intraday bias remains neutral first. On the downside, break of 1.0481 will confirm short term topping, on bearish divergence condition in 4 hour MACD. Deeper fall would be seen back to 1.0289 support and below. On the upside, however, firm break of 61.8% projection of 0.9729 to 1.0481 from 1.0289 at 1.0754 will pave the way to 100% projection at 1.1041.

In the bigger picture, focus stays on 38.2% retracement of 1.2348 (2021 high) to 0.9534 at 1.0609. Rejection by 1.0609 will suggest that price actions from 0.9534 medium term bottom are developing into a corrective pattern. Thus, medium bearishness is retained for another fall through 0.9534 at a later stage. However, sustained break of 1.0609 will raise the chance of trend reversal and target 61.8% retracement at 1.1273.

Daily Pivots: (S1) 0.9213; (P) 0.9238; (R1) 0.9272; More...

USD/CHF rebounds notably today and break of 0.9341 resistance suggests short term bottoming at 0.9199, on bullish convergence condition in 4 hour MACD. Intraday bias is back on the upside for 55 day EMA (now at 0.9473). For now, rise will stay mildly on the upside as long as 0.9199 support holds, in case of retreat.

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 might be a medium term down trend itself. Sustained break of 61.8% retracement of 0.8756 to 1.0146 at 0.9287 will pave the way to 0.8756. In any case, risk will stay on the downside as long as 0.9545 resistance holds.

Daily Pivots: (S1) 130.50; (P) 130.79; (R1) 130.96; More...

Intraday bias in USD/JPY remains on the downside for the moment. Current decline from 151.93 is in progress. Firm break of 61.8% projection of 148.44 to 133.61 from 138.16 at 128.99 could trigger downside acceleration to 100% projection at 123.33. For now, outlook will remain bearish as long as 134.49 support holds, in case of recovery.

In the bigger picture, a medium term top was in place at 151.93. Sustained trading below 55 week EMA (now at 131.65) would raise the chance of bearish trend reversal. Deeper fall would be seen to 61.8% retracement of 102.58 to 151.93 at 121.43. This will now remain the favored case as long as 55 day EMA (now at 137.54) holds.

Daily Pivots: (S1) 1.2016; (P) 1.2065; (R1) 1.2096; More...

GBP/USD's decline from 1.2445 resumed today by breaking through 1.1991. Intraday bias is back on the downside. Firm break of 55 day EMA (now at 1.1925 will target 38.2% retracement of 1.0351 to 1.2445 at 1.1645 next. However, strong rebound from 55 day EMA, followed by break of 1.2124 resistance, will argue that the pull back from 1.2445 has completed, and turn bias back to the upside for retesting this high.

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. This will remain the favored case as long as 55 day EMA (now at 1.1916) holds.

Dollar rises broadly in the early part of European session for now apparent reason. Risk sentiment is so far positive with rallies in major European indexes and US futures. US benchmark yield is actually falling. There is also no follow through buying in the greenback after lower than expected Germany inflation reading. Sustainability of Dollar's rise should be closely monitored. For now, Yen is the second strongest, followed by Sterling. Kiwi is the worst followed by Aussie. Euro and Canadian are mixed.

Technically, NZD/USD's fall from 0.6512 resume by breaking through 0.6229 support. Deeper decline is now expected as long as 0.6372 resistance holds, to 38.2% retracement of 0.5511 to 0.6512 at 0.6130. At the same time, some attention would on whether AUD/USD would follow through 0.6628 support.

In Europe, at the time of writing, FTSE is up 1.21%. DAX is up 0.71%. CAC is up 0.45%. Germany 10-year yield is down -0.066 at 2.386. Earlier in Asia, Hong Kong HSI rose 1.84%. China Shanghai SSE rose 0.88%. Singapore Strait Times dropped -0.17%. Japan was still on holiday.

UK PMI manufacturing finalized at 45.3 in Dec, took a further turn for the worse

UK PMI Manufacturing was finalized at 45.3 in December, down from 46.5 in November, a 31-month low. S&P Global noted that production and new orders fell at faster rates, leading to accelerated job losses. Selling price and input cost inflation eased.

Rob Dobson, Director at S&P Global Market Intelligence, said: "The UK manufacturing downturn took a further turn for the worse at the end of the year. Output contracted at one of the quickest rates during the past 14 years, as new order inflows weakened and supply chain issues continued to bite. The decline in new business was worryingly steep, as weak domestic demand was accompanied by a further marked drop in new orders from overseas.

China Caixin PMI manufacturing fell to 49.0, infections expected to explode in short term

China Caixin PMI Manufacturing fell from 49.4 to 49.0 in December, below expectation of 49.3. Caixin added that production declined further albeit at a slower rate. Steeper fall was seen in new orders. But business confidence improved to 10-month high.

Wang Zhe, Senior Economist at Caixin Insight Group said: "Covid outbreaks rapidly spread across China in November, causing a number of macroeconomic indicators to fall sharply and adding to pressure on the economy. On Dec. 7, China announced 10 new measures to further optimize Covid containment. In the short term, infections are expected to explode, which will severely interfere with production and everyday life. How to effectively coordinate Covid controls with economic and social development has once again become a crucial question."

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2016; (P) 1.2065; (R1) 1.2096; More...

GBP/USD's decline from 1.2445 resumed today by breaking through 1.1991. Intraday bias is back on the downside. Firm break of 55 day EMA (now at 1.1925 will target 38.2% retracement of 1.0351 to 1.2445 at 1.1645 next. However, strong rebound from 55 day EMA, followed by break of 1.2124 resistance, will argue that the pull back from 1.2445 has completed, and turn bias back to the upside for retesting this high.

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. This will remain the favored case as long as 55 day EMA (now at 1.1916) holds.

Economic Indicators Update