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GBPUSD came under fresh selling pressures after its rebound off 1.3000 touched the 20-day simple moving average (SMA) and the 1.3200 round level, with the price decelerating to an intra-day low of 1.3119 on Tuesday. The pair is also struggling to preserve strength above the 23.6% Fibonacci retracement of the 1.1409 - 1.4248 up leg at 1.3163.

The fast Stochastics have pivoted southwards near their 80 overbought level, reflecting fading buying interest. However, with the RSI maintaining its upward trajectory within the bearish region and the MACD, although negative, hovering comfortably above its red signal line, hopes for an upside reversal could persist for a bit longer, especially if the 1.3100 mark manages to add strong footing under the price.

If the above scenario materializes, the pair may re-challenge the 20-day SMA and the 1.3200 number. A successful penetration at this point could send the price towards the 1.3315 barrier, while higher, the 50-day SMA at 1.3390 and the 1.3420 level could be another hurdle. Nevertheless, the bearish trajectory in the broad picture may not face any risks unless the rally extends beyond the 200-day SMA at 1.3578 and the downward-sloping channel.

Should the 1.3100 floor collapse, the door would open for the 1.3000 level. Additional declines from here would worsen the negative outlook below the bearish channel, bringing the 1.2850 handle and the 50% Fibonacci of 1.2820 next into view. Falling lower, the sell-off may take a breather somewhere near 1.2670, which was last active during the April – September 2020 period.

In brief, GBPUSD maintains a bearish outlook in the short-term picture despite last week’s upside reversal. That said, traders may not engage in new selling activities unless the price dives below 1.3100. 

EUR/USD

The euro lost ground against the dollar, and during the early hours of today`s trading, the pair tested the level at 1.0983. A successful violation of this level could easily lead to new losses and could deepen the decline towards the important support at 1.0900. The first target for the bulls is the zone at 1.1044, which is now acting as resistance, followed by the upper level at 1.1126. Today, an increase in trading activity can be expected around the speech of ECB`s Christine Lagarde at 13:15 GMT.

USD/JPY

The positive sentiment remained unchanged and the dollar appreciated against the yen. At the time of writing this analysis, the Ninja is hovering under the resistance zone at 119.96 and the expectations are for a new attack on the mentioned zone. A successful breach here could easily continue the rally and could head the price towards the levels at around 120.50. If the bears enter the market, then a potential future correction could be limited to the support zone at 119.29. A violation of the lower target at 118.84, on the other hand, would easily deepen the decline and could pave the way for a test of the level at 118.37.

GBP/USD

Yesterday’s attack on the resistance at 1.3191 was not successful and the Cable consolidated under the mentioned zone. A new assault attempt from the bulls could be a highly probable scenario, but only a confirmed breach could strengthen the positive expectations for the future path of the pair and could lead to a rally towards the zone at 1.3269, followed by the upper target at 1.3354. If the bears prevail, then a violation of the first support at 1.3099, followed by a subsequent breach of the lower level at 1.3050, could lead to a change in the current sentiment of market participants and could easily pave the way for a test of the major level at 1.2997.

EUGERMANY40

Neither the bears nor the bulls managed to gain enough momentum and lead the German index out of the zone between 14062 and 14502. The price is holding positions around the current level at 14322 and only a successful breach of one of the borders could signal for the future direction of the index. A violation from the buyеrs could continue the recovery and could easily head the EUGERMANY40 towards a test of the zone at 14382. If the bears take control and breach the support at 14062, then they could lead the price towards the next target at 13573, a violation of which could strengthen the negative expectations of the market participants.

USD30

The American index erased some of its recent gains, and at the time of writing, the price is hovering above the support zone at 34397. If the bears manage to breach the mentioned level, then their next target could be found at the zone at 34096, followed by the lower support at 33779. If the buyers re-enter the market instead, then a new attack on the resistance at 34804 would be the most probable scenario and a successful violation of this level could easily lead to a test of the important zone at 35000.

ECB Vice President Luis de Guindos said today, "we can so far dismiss the possibility of stagflation because even in the weakest scenario we are looking at growth of around 2% in 2022."

De Guindos also said higher energy prices are pushing inflation to record high. However, There is no indication that inflation expectations are becoming "deanchored".

Markets

A further rise in oil prices and Fed’s Powell’s updated ‘forward guidance’ only a few days after last week’s policy meeting put interest rate markets on red alert yesterday. The rise in oil prices initially kept inflation expectations under upward pressure, especially in Europe. At the same time US yields were already upwardly oriented, inspired by hawkish comments from Fed governors Bostic and Bullard.

At an appearance before the National Association for Business Economics, Powell clearly flagged that these hawkish intentions are drawing ever more support within the FOMC. The Fed Chair stopped just short of formally announcing a 50 bps rate hike at the May meeting. ‘If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so’. On how far the rate hike cycle should go, he said ‘If we determine that we need to tighten beyond the common measures of neutral and into a more restricted stance, we will do that as well’!

The message for interest markets was unambiguous. The US yield curve sharply bear flattened with yields jumping between almost 18 bps for the 2-y and 5-y; 13.9 bps for 10’s and 9.7 bps for the 30-y. The move was mainly driven by a sharp rise in real yields. However, (10-y) inflation expectations (TIPS) almost immediately reversed an intraday decline (+1.9 bps)! Markets now are discounting an implied policy rate of 2.0%-2.25% at the end of the year (six meetings left).

European yields extended an intraday uptrend mainly driven by higher inflation expectations, resulting in a bear steepening (Bunds 2-y + 5.4 bps; 10 & 30-y + 9.7 bps). The impact on markets outside the bond markets again was much more moderate.

US equites reversed opening gains but closed with modest losses (S&P -0.04%; Nasdaq -0.4%). On FX markets, the dollar evidently outperformed, but the gains were again not excessive. EUR/USD drifted further south to close at 1.102 (vs 1.1051 on Friday). USD/JPY finished at 119.47 (from 119.17). UK interest rate market also again changed their mind after last week’s dovish BoE rate hike, with yields rising up to 14 bps (10-y). Sterling rebounded (EUR/GBP close 0.8366)
 
This morning’s reaction in Asian markets to the hawkish Fed speak remains constructive. The prospect of additional (mainly fiscal) help (cf infra) supports especially Japanese markets. The dollar and US rates are decisively upwardly oriented. Later today, the eco calendar is thin. However, there is again a very long list of Fed and ECB speakers, including Villeroy, Lagarde, de Guindos and chief economist Lane. For the German 10-y yield, the 0.58% October top is coming on the radar. Dollar gains are modest but look rather sustained. EUR/USD breaks below the 1.10 barrier, suggesting potential retracement back to 1.0806. Or will ECB speakers also adapt their forward guidance?

News Headlines

Japanese daily newspaper Sankei Shimbun reports that Japan’s government and ruling coalition are preparing to draw up additional economic stimulus worth more than ¥10tn to offset the rising price of crude oil and other commodities as well as support small businesses. Potential measures include extending subsidies for gas and other fuel beyond end March and subsidies to dampen the impact of food prices. Another newspaper suggests that planned handouts for pensioners could be extended to younger people as well. On the monetary front, BoJ governor Kuroda stressed again that it is too early to discuss any monetary easing exit. The combination of monetary & fiscal expansion, surging oil prices and rising global interest rates is hurting the yen extremely badly. USD/JPY this morning crosses above 120 for the first time since early 2016. Key resistance (2015 top) stands at USD/JPY 125.86.

China’s Xinhua news agency reported that the cabinet of PM Li Keqiang called for the adoption of monetary policy tools to sustain credit expansion at a stable pace. According to the report, the Chinese government doubles down on last week’s pledge to support the economy and markets. The statement doesn’t specifically mention a reserve requirement rate cut, but zooms in fiscal support including about 1tn yuan of tax refunds for smaller firms. The yuan trades in the defensive since early March with USD/CNY again somewhat firmer this morning near 6.3650.

CAD/JPY's rally accelerates again today and hits as high as 95.68. Further rise is expected as long as 94.34 minor support holds. Next near term target is 161.8% projection of 87.42 to 92.16 from 89.21 at 96.87 next. Below 93.34 minor support will bring consolidations, but retreat should be contained above 92.16 resistances turned support to bring up trend resumption.

Also, noted that the up trend from 73.80 could either be a leg inside the pattern from 68.38, or the start of a long term up trend. Hence, 106.48 high is the next medium term target.

The price of crude oil held steady in the overnight session as supply concerns remained. The biggest issue is the ongoing crisis in Ukraine, which has pushed western countries to place sanctions on Russia. Russia produces over 12 million barrels per day and sells more than 8 million of them internationally. In a report published last week, the IEA estimated that oil supply will decline by 3 million barrels per day in April. Another concern is that Houthi rebels have been bombing key terminals in Saudi Arabia in the past few days. They have even vowed to continue their attacks, which will lead to more supply challenges.

US stocks were relatively mixed on Monday after experiencing a strong rally last week. The Dow Jones index fell by 150 points while the S&P 500 index dropped by 0.1%. The tech-heavy Nasdaq 100 index also retreated slightly. The main concern is that negotiations between Russia and Ukraine have not made progress. As a result, there are worries that the crisis will lead to more supply chain disruptions and a higher cost of doing business. Also, there are concerns about the hawkish Fed statement. In a speech at the National Association for Business Economics, Powell warned that higher rates were necessary to counter inflationary pressures.

The currencies market will be muted today since there are no important scheduled events. The only major event will be a speech by Christine Lagarde of the European Central Bank (ECB). Still, the statement will likely have no impact on the euro because the stance of the ECB is already known. Like the Fed and the BOE, the bank has turned hawkish and reduced the size of asset purchases. There will be speeches by central bank officials like SNB’s Thomas Jordan, Fed’s Philip Lane, and RBA’s Philip Lowe.

EURUSD

The EURUSD pair has been in a narrow range in the past few days. It remains below the important resistance level at 1.1138, which was the highest level last week. It is also slightly above the ascending trendline shown in yellow. This signals that the pair has formed what looks like an ascending triangle pattern. It is also along the 25-day and 50-day moving averages. Therefore, the pair will likely remain in this range today.

GBPUSD

The GBPUSD pair tilted upwards in the overnight and Asian session as demand for the sterling rose. It is trading at 1.3200, which is the highest it has been since Wednesday last week. The pair has risen above the 25-day and 50-day moving averages while the MACD has moved above the neutral level. It has also formed an inverted head and shoulders pattern and moved over the 23.6% Fibonacci retracement level. Therefore, the pair will likely keep rising as bulls target the resistance at 1.3325.

USDCAD

The USDCA pair dropped to the lowest level since January 27 as demand for the Canadian dollar rose. On the four-hour chart, the pair has moved below the important support at 1.2586. It has also dropped below the 25-day moving average while the money flow index has dropped to the oversold level. Therefore, the pair will likely continue dropping in the next few days.

Jerome Powell wants to see the US interest rates rise faster. At a speech titled ‘Restoring Price Stability’ yesterday, Powell told the National Association for Business Economics that there could be a 50-bp hike in May, and at subsequent sessions, if the Federal Reserve (Fed) officials conclude that it’s more appropriate to move faster.

And it will probably be more appropriate for the Fed to move faster, as inflation will certainly continue spiking toward fresh multi-decade highs given that the latest numbers don’t even factor in the war-led surge in oil and commodity prices, and the Covid-led restriction measures that add an additional pressure on the global supply chain crisis.

Powell is now playing with an open hand, as he doesn’t necessarily rock the boat with surprise hawkish moves which would get investors to dampen their assets faster than necessary. And a panicked market is not the ideal environment to hike rates.

Activity on fed funds futures hint that the probability of a 50-bbp hike stands near 65%, hinting that there is more to be priced in for the Fed hawks.

Still, the US 2-year yield could hardly rise faster, and the spread between the 2 and the 10 year is about to turn negative. A yield curve inversion is interpreted as a sign of a coming recession, although UBS warns that a recession started on average 21 months after a curve inversion – ranging between 9 and 34 months, and that the S&P500 stocks returned an average of 8% in the 12 months following the inversion of a 2-10 year yield.

Market reaction to Powell’s hawkish speech was contained. The stocks in New York sold off as a kneejerk reaction, but almost erased all losses with a late session rebound, as investors thought that higher rates would be less toxic for companies than higher inflation in longer run. Yet gains remain vulnerable to macroeconomic and geopolitical pressures, and the risk of rapid selloffs remains on the table as uncertainties loom, energy prices continue rising and boosting the inflation expectations and the Fed hawks.

Oil rallies, again

Energy and commodity stocks remain ideal for hedging, one of the biggest gainers in the US session yesterday was Marathon oil, which rallied 8.5% as US crude gained more than 7% and is up by another 2.5% to $115pb at the time of writing. The next natural target for the bulls stands at the latest resistance of $130pb, if cleared will revive the speculation of a further advance toward the $150pb mark.

The major drivers of the latest rally are an attack on Saudi facilities on Sunday and the EU’s consideration of an embargo on Russian oil. The biggest risk of sanctioning the Russian oil is to lose the Russian gas along with it, and the Russian gas stands for about 40% of the European gas imports. But as Qatar agreed to work on supplying Germany with LNG, the idea that the EU could walk away from the Russian oil became more realistic.

European gas futures tanked 8% yesterday, as gas supply via Ukraine remains good for now, and the American LNG stocks are jubilating with the European efforts to scrap whatever comes from Russia. Chesapeake gained more than 3% yesterday, as Antero resources jumped 3.5%, EQT near 5% and Range Resources more than 1%.

On the index level, the FTSE was the only winner yesterday in Europe as energy companies pushed the index higher with BP and Shell gaining more than 4% each. FTSE futures outperformed the US and European peers in the overnight trading session on the back of firmer oil and commodity prices and cheaper sterling.

Daily Pivots: (S1) 156.63; (P) 157.08; (R1) 157.77; More...

Intraday bias in GBP/JPY remains on the upside with focus on 158.19 resistance. Decisive break there will confirm resumption of whole up trend from 123.94. Next target is 61.8% projection of 136.96 to 158.19 from 150.95 at 164.07. On the downside, below 156.32 minor support will delay the bullish case and turn intraday bias neutral first.

In the bigger picture, up trend from 123.94 (2020 low) should still be in progress, and notable support from 55 week EMA affirms medium term bullishness. Next target is 61.8% retracement of 195.86 to 122.75 at 167.93. This will now remain the favored case as long as 148.94 support holds.

Daily Pivots: (S1) 131.36; (P) 131.66; (R1) 131.94; More....

Intraday bias in EUR/JPY remains on the upside at this point and outlook is unchanged. Corrective pattern from 134.11 might have completed at 124.37 already. Further rise should be seen to retest 133.13/134.11 resistance zone first. Decisive break there will resume larger up trend. However, break of 130.69 minor support will mix up the near term outlook and turn intraday bias neutral first.

In the bigger picture, medium term outlook remains neutral for now. Price actions from 134.11 are so far still seen as a corrective pattern. That is, rise from 114.42 (2020 low) is in favor to resume at a later stage. But before that, the corrective pattern from 134.11 could still extend further, sideway or downward. In the latter case, break of 124.37 will target 61.8% retracement of 114.42 to 134.11 at 121.94.

Daily Pivots: (S1) 0.8346; (P) 0.8381; (R1) 0.8401; More...

Intraday bias in EUR/GBP remains neutral and outlook is unchanged. On the upside, above 0.8456 will target 0.8476 structural resistance first. Firm break there will carry larger bullish implication and target 0.8598 resistance next. However, on the downside, break of 0.8315 minor support will retain near term bearishness, and bring retest of 0.8201 low.

In the bigger picture, the down trend from 0.9499 is expected to continue as long as 0.8476 resistance holds. Sustained trading below 0.8276 support will argue that the whole up trend from 0.6935 (2015 low) has reversed. Deeper fall should be seen to 61.8% retracement of 0.6935 to 0.9499 at 0.7917 next. However, firm break of 0.8476 will indicate medium term bottoming at least. Focus will be back on 55 week EMA (now at 0.8523) for more evidence of bullish reversal.