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In case you haven’t noticed it yet, the ECB is in full swing towards policy normalization. ECB President Lagarde acknowledged upward inflation risks at the previous ECB meeting. Executive board member Schnabel made a plea to take higher costs of home ownership into consideration when assessing inflation. For Q3 2021, she calculated that it would have added 0.6 ppt to core inflation (1.4%). Banque de France governor Villeroy doesn’t want Frankfurt’s hands to be tied for too long and calls net asset purchases to end in Q3.

ECB chief economist Lane completed the U-turn on inflation at an MNI Market News webcast yesterday. He said that it is unlikely that inflation will drop below 2% in the next two years. That’s a big head’s up to the new March inflation projections which will thus show an upgrade of the 1.8% figure for 2023 and that way warrant a different path going forward in terms of asset purchases. Lane did try to make a little nuance. He thinks that inflation will settle around the 2% target in the medium-term, which permits a gradual normalization of policy, i.e. winding down net asset purchases and getting rid of negative policy rates. For the ECB to really engage on a tightening cycle, Lane argues that there needs to be a threat that inflation will persist significantly above 2% over the medium term.

Money markets currently discount the latter scenario with a return to zero by the end of the year and a projected policy rate peak between 0.75% and 1% by the end of 2024. Our own scenario currently takes into account a 0.75% policy rate by the end of 2023.

Markets didn’t react to the symbolic Lane comments. General trends remained at play. Simply put: a fragile risk sentiment on stock markets, correcting core bonds and numbed FX markets. Main European equity indices lost up to 1% yesterday with US losses reaching up to 2.9% for Nasdaq.

US yields lost 5.2 bps to 8.4 bps with the belly of the curve outperforming the wings. The German yield curve bull steepened with yields sliding by 3.3 bps (30-yr) to 6.6 bps (2-yr). 10-yr yield spread changes vs Germany narrowed by up to 3 bps.

EUR/USD closed at 1.1361 from an 1.1373 open. Sterling continued its recent outperformance ending below EUR/GBP 0.84 for the first time since the ECB/BoE February policy meetings.

January UK retail sales this morning beat consensus. They grew by 1.9% M/M for the headline number and by 1.7% M/M for the core retail sales. The increase was driven by a pickup in spending on household goods and at garden centres. UK markets don’t react. Earlier this week, we’ve had a good labour market report and higher inflation numbers. The combination of these data keeps the BoE clearly on the normalisation path.

News Headlines

Contrary to price developments in many other countries, price rises in Japan in January remained subdued. Japan’s headline CPI eased from 0.8% Y/Y in December to 0.5% Y/Y. The closely watched measure excluding fresh food eased to 0.2% Y/Y, from 0.5%. Ex-fresh food and energy, prices even declined 1.1% Y/Y. All measures were lower than expected. Even so, Japanese inflation is expected to rise later this year as a base effect of a cut in mobile fees last year will drop out of the data. Energy prices rose 17.9% Y/Y. Even so today’s data suggest that Japanese firms remain reluctant to pass through higher input prices to end consumers. The yen eases slightly this morning. USD/JPY (115.25) regains the 115 handle after a risk-off driven setback yesterday/early this morning.

According to Reuters, a proposal to revive the 2015 nuclear deal with Iran is to work out subsequent steps that parties have to fulfil. A 20 page draft is said to include that Iran needs to halt enrichment of uranium above 5% purity. Other steps are said to include unfreezing of $7bn in Iran funds blocked at South Korean banks and the release of Western prisoners in Iran. The lifting of restrictions on the country’s oil sector would only come later in the process. As was the case in the original deal, the US would grant Iran waivers on sanctions rather than removing them all-together. The implementation of this whole process, assuming an agreement will be reached, can still take a few months. Brent oil this week eased from a top near $96.75 p/b to $92.75 currently.

Daily Pivots: (S1) 156.04; (P) 156.52; (R1) 156.96; More...

Intraday bias in GBP/JPY remains neutral for the moment. On the downside, break of 155.11 resistance should confirm rejection by 158.19 resistance. Intraday bias will be turned to the downside for 152.88 support, to extend the corrective pattern from 158.19 with another falling leg. However, on the upside, sustained break of 158.19 will resume larger up trend.

In the bigger picture, price actions from 158.19 are seen as developing into a consolidation pattern to up trend from 123.94 (2020 low). Downside should be contained by 123.94 to 158.19 at 145.10 to bring rebound. Firm break of 158.19 will resume the up trend to long term fibonacci level at 167.93. However, sustained break of 145.10 will raise the chance of trend reversal and target 61.8% retracement at 137.02.

Daily Pivots: (S1) 130.15; (P) 130.83; (R1) 131.25; More....

Range trading continues in EUR/JPY and intraday bias remains neutral. Outlook is unchanged that corrective pattern from 134.11 is extending with another falling leg. Break of 130.03 will bring deeper fall to 128.23 support first. Break will target 127.36 support and below. On the upside break of 133.13 will bring retest of 134.11 high.

In the bigger picture, price actions from 134.11 are currently seen as a consolidation pattern only. As long as 38.2% retracement of 114.42 (2020 low) to 134.11 at 126.58 holds, up trend from 114.42 is still in favor to continue. Break of 134.11 will target long term resistance at 137.49 (2018 high). However, sustained break of 126.58 will raise the chance of bearish reversal. In this case, deeper decline would be seen to 61.8% retracement at 121.94, and possibly below.

Daily Pivots: (S1) 0.8327; (P) 0.8352; (R1) 0.8371; More...

EUR/GBP's fall from 0.8476 resumed by breaking 0.8344 and intraday bias is back on the downside for retesting 0.8282 low. Sustained break of 0.8276 key long term support will carry larger bearish implication. On the upside, above 0.8401 minor resistance will turn bias back to the upside for 0.8476 resistance. Break there will resume the rebound from 0.8282.

In the bigger picture, price actions from 0.9499 (2020 high) are still seen a corrective pattern that should be contained by 0.8276 long term support (2019 low). Bullish convergence condition in daily MACD and break of 55 day EMA raises the chance that it might be completed. Sustained trading above 38.2% retracement of 0.9499 to 0.8282 at 0.8747 will affirm this bullish case. However, sustained break of 0.8276 will argue that the long term trend has reversed.

Daily Pivots: (S1) 1.5760; (P) 1.5804; (R1) 1.5850; More...

EUR/AUD's break of 1.5776 support argues that rise from 1.5559 has completed at 1.6223. Intraday bias is back on the downside for 1.5559 support first. Break there will also indicate that corrective rise from 1.5354 has completed in form of a three wave pattern. Deeper fall would then be seen back to 1.5250/5354 support zone. On the upside, above 1.6002 minor resistance will bring retest of 1.6223 resistance instead.

In the bigger picture, rise from 1.5354 is seen as the third leg of the corrective pattern from 1.5250 low. Further rise cannot be ruled out, but even in that case, strong resistance should be seen at 38.2% retracement of 1.9799 to 1.5250 at 1.6988. Larger down trend from 1.9799 is in favor to extend through 1.5250 at a later stage.

Daily Pivots: (S1) 1.0464; (P) 1.0507; (R1) 1.0531; More....

Intraday bias in EUR/CHF remains neutral for the moment. On the downside, firm break of 1.0439 should confirm rejection by 1.0623 fibonacci resistance, and bring retest of 1.0298 low. On the upside, sustained break of 38.2% retracement of 1.1149 to 1.0298 at 1.0623 will add to the case of bullish trend reversal.

In the bigger picture, a medium term bottom was formed at 1.0298 on bullish convergence condition in daily MACD. Rebound from there is still tentatively viewed part of a corrective pattern. That is, larger down trend from 1.2004 (2018) could still extend through 1.0298 to 61.8% projection of 1.2004 to 1.0505 to 1.1149 at 1.0223. However, sustained trading above 55 week EMA (now at 1.0673) will argue that the down trend is over, and bring stronger rise back to 1.1149 next.

Daily Pivots: (S1) 1.2679; (P) 1.2706; (R1) 1.2737; More...

Intraday bias in USD/CAD remains neutral as range trading continues below 1.2795. Further rally is mildly in favor with 1.2634 support intact. On the upside, break of 1.2795 will resume the rally from 1.2448 to 1.2963 resistance next. However, break of 1.2634 support will turn bias back to the downside for 1.2448 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. Break of 1.2005 will resume the down trend from 1.4667 and that carries larger bearish implications too.

Daily Pivots: (S1) 0.7153; (P) 0.7185; (R1) 0.7220; More...

Intraday bias in AUD/USD remains neutral at this point. Further rise would remain mildly in favor as long as 0.7050 support holds. Above 0.7247 will target 0.7313 resistance. Decisive break there argue that correction from 0.8006 has completed at 0.6966, after hitting 0.6991 key support. Outlook will be turned bullish for 0.7555 resistance next. On the downside, however, break of 0.7050 support will bring retest of 0.6966 low instead.

In the bigger picture, focus remains on 0.6991 key structural support. Sustained break there will argue that the whole up trend from 0.5506 might be finished at 0.8006, after rejection by 0.8135 long term resistance. Deeper decline would then be seen back to 61.8% retracement of 0.5506 to 0.8006 at 0.6461. Meanwhile, strong rebound from 0.6991 will retain medium term bullishness. That is, whole up trend from 0.5506 is still in progress.

Daily Pivots: (S1) 114.67; (P) 115.11; (R1) 115.36; More...

intraday bias in USD/JPY stays mildly on the downside at this point. Fall from 116.33 is seen as the third leg of the corrective pattern from 116.34. Deeper decline should be seen to 114.14 support, and then 113.46. On the upside, however, break of 115.86 will turn bias back to the upside for 116.34 resistance instead.

In the bigger picture, no change in the view that rise from 102.58 is the third leg of the up trend from 101.18 (2020 low). Such rally should target a test on 118.65 (2016 high). Sustained break there will pave the way to 120.85 (2015 high) and raise the chance of long term up trend resumption. This will remain the favored case as long as 55 week EMA (now at 111.21) holds.

Daily Pivots: (S1) 0.9184; (P) 0.9207; (R1) 0.9224; More....

Intraday bias in USD/CHF stays neutral at this point. Overall, further rally is mildly in favor as long as 0.9090 support holds. On the upside, break of 0.9372 will resume the choppy rally from 0.8925 to 0.9471 high. However, break of 0.9090 will turn bias back to the downside for 0.8925 support instead.

In the bigger picture, medium term outlook will be neutral at best as long as 0.9471 resistance holds. Larger down trend could still extend through 0.8756 (2021 low). However, firm break of 0.9471 will argue that the trend has already reversed and rebound the rally from 0.8756 with another impulsive move.