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A chaotic trading session yesterday saw a couple of major price levels broken. Crude oil fell below the $100pb support, the EURUSD sank below 1.03, Cable slipped below 1.20, gold tanked to $1763 an ounce, and the US 2-year yield exceeded the 10-year yield. The common denominator for most of the price action was the mounting recession fears and investor panic.

Crude: The $100 pivot

The barrel of US crude took a decent dive yesterday, and broke the $100 psychological support as the recession fears weighed on demand prospects, and shifted the market attention from too little supply, to potentially too little demand.

Oil is slightly up this morning, near the $100 resistance, but the market rhetoric shifts from buying the dips to selling the tops. The next downside target is set at $93, the 200-DMA, then to $85, my year-end target.

Cherry on top. There is news that officials in Shanghai are mass testing again, following a surge in cases in the past two days.

ECB is the Eurozone’s biggest headache

European stocks are on the chopping block as the European companies deal with the Ukrainian war, a worsening energy crisis, the rising inflation, and a central bank that’s unable to give the right treatment to the member states, as it is stuck between a rising inflation and the risk of triggering a renewed debt crisis in the Eurozone.

European futures point at a positive start this morning, but gains remain fragile.

The EURUSD trades below the 1.0250 at the time of writing. The euro bulls are deserting the market on the idea that the European Central Bank (ECB) will not get to the right speed for raising its rates, without sending the peripheral yields through the roof and triggering a renewed debt crisis.

The ECB will likely have the biggest test of its recent history. Yes, the ECB went through debt crisis in the past and managed to keep the eurozone together. But this time, the bank faces a higher level of complication: the rapidly rising inflation, and the emergency to bring it down doesn’t buy time for the ECB.

On the contrary, the longer the ECB waits, the lower the euro will be, And the softer euro will, in return, worsen inflation. It’s a toxic spiral.

As per the EURUSD, all eyes are now set to parity. And indeed, if the ECB doesn’t change its mind for a 50bp rather than a 25bp at this month’s meeting, the pair could fall below parity. A scenario of catastrophe for the European economy.

On the other hand, the euro-swissy extends losses below parity on the back of diverging central bank views. The Swiss National Bank (SNB) became more hawkish to fight inflation, and the ECB’s hawkishness is either not enough, or not credible. Therefore, the franc should continue appreciate against the single currency, but the SNB will certainly step in and buy some euros to prevent the franc from getting too strong against the euro.

BoJo loses two important figures

Boris Johnson lost two important figures for its cabinet yesterday, including Rishi who said ‘they can’t carry on like this’, referring to the illegal parties, the sexual abuse allegations, etc.

The political turmoil in the UK certainly added to the selling pressure on the sterling, however the reason why Cable slipped below the 1.20 mark was a booming US dollar, across the board.

The dollar index rallied to a fresh 20-year high and flirted with the 107 mark.

Daily Pivots: (S1) 1.2887; (P) 1.2986; (R1) 1.3127; More...

Intraday bias in USD/CAD remains neutral for the moment. On the upside, break of 1.3077 and sustained trading above 1.3022 fibonacci level will carry larger bullish implications, and bring up trend resumption. Next target is 100% projection of 1.2005 to 1.2947 from 1.2401 at 1.3343. On the downside, break of 1.2818 minor support will bring deeper fall to 1.2516 support instead.

In the bigger picture, focus stays on 38.2% retracement of 1.4667 (2020 high) to 1.2005 (2021 low) at 1.3022. Sustained break there should confirm that the down trend from 1.4667 has completed after defending 1.2061 long term cluster support. Further rise would then be seen towards 61.8% retracement at 1.3650. However, rejection by 1.3022 will maintain medium term bearishness.

Daily Pivots: (S1) 0.6742; (P) 0.6818; (R1) 0.6875; More...

Intraday bias in AUD/USD remains neutral as range trading continues. Strong support could still be seen from 0.6756/60 cluster support to complete the whole correction from 0.8006, and bring rebound. On the upside, above 0.6918 resistance will indicate short term bottoming, and turn bias back to the upside for 0.7282 resistance. However, sustained break of 0.6756/60 will carry larger bearish implication and target 0.6461 fibonacci level next.

In the bigger picture, price actions from 0.8006 are seen as a corrective pattern to rise from 0.5506 (2020 low). Strong support is expected from 50% retracement of 0.5506 to 0.8006 at 0.6756 to complete the pattern. This coincides with 100% projection of 0.8006 to 0.7105 from 0.7660 at 0.6760. However firm break of 0.6756/60 will raise the chance of bearish reversal and target 61.8% retracement at 0.6461.

Daily Pivots: (S1) 135.48; (P) 135.92; (R1) 136.31; More...

Intraday bias and USD/JPY remains neutral at this point. On the downside, break of 134.25 support will confirm short term topping at 136.99. Considering bearish divergence condition in daily MACD, 136.99 might be a medium term top too. Intraday bias will be back on the downside for 131.34 support resistance turned support. Nevertheless, firm break of 136.99 will resume larger up trend to 100% projection of 114.40 to 131.34 from 126.35 at 143.29.

In the bigger picture, current rally is seen as part of the long term up trend from 75.56 (2011 low). Next target is 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, which is close to 147.68 (1998 high). This will remain the favored case as long as 126.35 support holds.

Daily Pivots: (S1) 0.9618; (P) 0.9662; (R1) 0.9730; More...

Intraday bias in USD/CHF remains neutral and outlook is unchanged. On the upside, break of 0.9731 will argue that the consolidation from 1.0063 has completed and bring stronger rally back to retest 1.0063 high. However, another fall below 0.9493 will dampen this view and target 0.9459 resistance turned support.

In the bigger picture, down trend from 1.0342 (2016 high) should have completed with three waves down to 0.8756 (2021 low) already. Rise from 0.8756 is likely a medium term up trend of its own. Next target is 1.0237/0342 resistance zone. This will remain the favored case as long as 0.9471 resistance turned support holds. However, sustained break of 0.9471 will extend long term range trading with another falling leg.

Daily Pivots: (S1) 1.0406; (P) 1.0435 (R1) 1.0452; More...

Intraday bias in EUR/USD remains on the downside at this point. Current down trend should target 1.0090 long term projection level. On the upside, above 1.0358 minor resistance will turn intraday bias neutral and bring consolidations first. But recovery should be limited below 1.0614 resistance to bring another fall.

In the bigger picture, the break of 1.0339 long term support (2017 low) indicates resumption of whole down trend from 1.6039 (2008 high). Next target is 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090. Sustained break there will pave the way to 100% projection at 0.8694. In any case, outlook will stay bearish as long as 1.0786 resistance holds, in case of recovery.

Daily Pivots: (S1) 1.1862; (P) 1.1993; (R1) 1.2088; More...

Intraday bias in GBP/USD remains on the downside as medium term down trend is in progress. Next near term target is 100% projection of 1.2666 to 1.1932 from 1.2405 at 1.1671. Break could prompt further acceleration to 161.8% projection at 1.1217. On the upside, break of 1.2164 minor resistance will delay the bearish case and turn intraday bias neutral first.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.3103).

Recession fear is currently the main theme in the markets, with Euro and Sterling hardest hit in the currency markets. Canadian Dollar is somewhat a distant third weakest, as dragged down by oil prices. Nevertheless, Aussie and Kiwi are relatively resilient. Yen and Dollar are at par in strength for now. But they could soon decide which one would be the runner winner. Also, some focuses will turn to US ISM services and FOMC minutes today. But overall sentiment will remain the key driver in the markets.

Technically, one focus is now on 134.25 minor support in USD/JPY. Break of this level is the first sign that 136.99 is a medium term top on bearish divergence condition in daily MACD. In this case, USD/JPY should have a deeper correction back into 126.35/131.34 support zone. If happens, that would be a signal of a larger, broad based come back of Yen, after being sold of for nearly the whole of the first half of the year.

In Asia, at the time of writing, Nikkei is down -1.04%. Hong Kong HSI is down -1.88%. China Shanghai SSE is down -1.48%. Singapore Strait Times is down -0.04%. Japan 10-year JGB yield is up 0.328 at 0.251. Overnight, DOW dropped -0.42%. S&P 500 rose 0.16%. NASDAQ rose 1.75%. 10-year yield -0.08 to 2.809.

BoE Tenreyro: QT won't have material impact on economy

BoE MPC member Silvana Tenreyro said "I wouldn't expect the effect of the unwind, of QT (quantitative tightening), to have a material impact on the economy. So far our experience with the beginning of the shrinking of the portfolio is consistent with that."

"We have been shocked by the biggest shock imaginable. Not only the pandemic but the build up to the war, the war itself, new waves of Covid affecting supply. These are called shocks because they are not anticipated. They are deviations from the model," she noted.

"Even if it would have been possible to predict the evolution of the pandemic, the war and so on I would not have thought we would have struck a materially different policy. Policy has to address the trade off."

WTI oil breaches 100, heading to 93 and below

Oil prices tumbled sharply this week, together with some commodities, on as recession fears mounted. WTI crude oil price have briefly breached 100 handle and remains soft.

Technically, the fall in oil price is not a surprise. Decline from 124.12 is seen as the third leg of the corrective pattern from 131.82. For now, as long as 55 day EMA (now at 110.15) holds, more downside is expected to 93.47 support, and possibly through 55 week EMA (now at 91.22).

Nevertheless, strong support should be seen at around 85.92 resistance turned support, which is close to 100% projection of 131.82 to 94.37 from 124.12 at 85.77 to complete the correction.

Looking ahead

Germany factory orders, Eurozone retail sales and UK PMI construction will be released in European session. Later in the day, US ISM services and FOMC minutes will take center stage.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.1862; (P) 1.1993; (R1) 1.2088; More...

Intraday bias in GBP/USD remains on the downside as medium term down trend is in progress. Next near term target is 100% projection of 1.2666 to 1.1932 from 1.2405 at 1.1671. Break could prompt further acceleration to 161.8% projection at 1.1217. On the upside, break of 1.2164 minor resistance will delay the bearish case and turn intraday bias neutral first.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.3103).

Economic Indicators Update

Oil prices tumbled sharply this week, together with some commodities, on as recession fears mounted. WTI crude oil price have briefly breached 100 handle and remains soft.

Technically, the fall in oil price is not a surprise. Decline from 124.12 is seen as the third leg of the corrective pattern from 131.82. For now, as long as 55 day EMA (now at 110.15) holds, more downside is expected to 93.47 support, and possibly through 55 week EMA (now at 91.22).

Nevertheless, strong support should be seen at around 85.92 resistance turned support, which is close to 100% projection of 131.82 to 94.37 from 124.12 at 85.77 to complete the correction.

BoE MPC member Silvana Tenreyro said "I wouldn't expect the effect of the unwind, of QT (quantitative tightening), to have a material impact on the economy. So far our experience with the beginning of the shrinking of the portfolio is consistent with that."

"We have been shocked by the biggest shock imaginable. Not only the pandemic but the build up to the war, the war itself, new waves of Covid affecting supply. These are called shocks because they are not anticipated. They are deviations from the model," she noted.

"Even if it would have been possible to predict the evolution of the pandemic, the war and so on I would not have thought we would have struck a materially different policy. Policy has to address the trade off."