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The latest monthly employment, CPI and retail sales readings are due out of the United Kingdom on Tuesday, Wednesday and Friday, respectively, at 07:00 GMT. The pound is looking somewhat neutral lately as the Bank of England was hawkish, but not hawkish enough at its last meeting.  The data will therefore likely be vital in reviving some bullish momentum for sterling as central banks race to remove accommodation from liquidity-fuelled economies.

Not hawkish enough? 

When the Bank of England lifted rates earlier this month, it surprised markets as four Monetary Policy Committee members voted for a 50 basis points increase instead of 25 basis points. However, while it’s almost certain the BoE will raise interest rates at least a few more times in its upcoming meetings, the rate hike path becomes a little less clear moving towards the end of the year and into 2023. According to the Bank’s forecasts, there’s a risk inflation will undershoot the 2% target in three years’ time even if energy prices were to remain at current levels.

This implies that policymakers don’t see the Bank Rate peaking very high, which puts the pound at a disadvantage compared to currencies like the US dollar as there’s a strong likelihood the Federal Reserve will end up raising borrowing costs well above UK ones. Another dampener for sterling has been Governor Andrew Bailey’s preference to move in 25bps increments – a view that Chief Economist Huw Pill also shares. Thus, as long as the MPC remains split 50-50, Bailey, who has the casting vote, is unlikely to side with the more hawkish members.

A tight labour market

However, although there’s a sizeable downside risk to inflation if the energy crisis were to dissipate soon, there are equally upside risks to the price outlook in the UK. One of those risks is from the tight labour market.

Jobs growth in the UK is expected to have slowed in the three months to December, while the unemployment rate is projected to have stayed unchanged at 4.1%. Investors will also be looking at the wage growth figures as well as the more up-to-date claimant count measuring the change in number of job seekers on unemployment benefits in January. Average weekly earnings are forecast to have risen by 3.9% year-on-year, decelerating from the 4.2% pace in November.

Economic activity was constrained by the Omicron wave in both December and January so stronger-than-expected showings in jobs and wage growth during the period could boost bets of more aggressive rate hikes by the BoE over the next few months.

Too early to get excited about slowing inflation

Moving on to the more crucial CPI numbers, there might be some signs that UK inflation has started to peak. The headline consumer price index is projected to have held steady at 5.4% y/y in January. Core CPI is forecast to have continued to edge up, though, rising to 4.3% y/y from 4.2% in December.

If headline inflation does appear to moderate, it is likely to be only a temporary reprieve as energy bills are set to soar in April when electricity providers will be able to charge much higher prices following the UK regulator’s decision to raise the price cap.

Finally, retail sales are expected to have bounced back in January following a 3.7% plunge in December. Retail sales probably recovered by 0.6% month-on-month, which wouldn’t be enough to make up for the prior month’s drop but would nevertheless point to an improving picture for consumption.

Pound stumbles as tightening race gets crowded

Money markets are currently pricing in around six additional 25-bps rate increases for the rest of the year so a solid set of data could push up those odds even further. However, with many expecting the Fed to hike almost seven times, there might be limited upside for sterling.

Pound/dollar has managed to hold above its descending trendline despite the greenback’s extreme choppiness of late. A fresh data-driven bull run could bring the critical $1.37 level into scope, which not only coincides with the 200-day moving average, but also the 50% Fibonacci of the May-December 2021 downtrend.

However, should the incoming releases disappoint, a pullback towards the January low of $1.3355 is possible, which would result in a breach of both the descending trendline as well as the 50-day moving average.

In the bigger picture, cable needs to surpass the January top of $1.3748 if it is to switch to a more bullish outlook. But with Bailey favouring a measured response to fighting inflation, the pound may not gain much additional bullish traction unless the CPI prints for January and beyond come in significantly hotter than expected.

EUR/GBP is in a precarious place now. Things could turn ugly very quickly for the currency pair.

EUR/GBP is in a precarious place now. Since October last year the pair, for the most part, has been confined to a wide range between 0.91390 and 0.83079. The rangebound nature of a cross-currency exchange rate like EUR/GBP is to be expected. But in recent months the pair has drifted lower forming a clean downward channel.

Then on the 3 February, EUR/GBP experienced some aggressive price action. After snapping to a low 0.82852 after the last BoE meeting proved more hawkish than most expected, EUR/GBP quickly shoot back up to a high of 0.84169 on more hawkish comments from the ECB meeting.

At that time, this sent a clear sign that even marginally hawkish comments from the ECB trump more tangible action from the BoE. In the days after the central bank meetings, however, the pair has lost much of its ECB gains, in part due to comments from ECB speakers talking down the potential for an earlier than expected interest rise.

EUR/GBP vs. 2-year yield spreads

Much of the EUR/GBP’s future will depend on UK and euro data, what their respective central bankers have to say and how that shifts relative yields. Tensions in the Ukraine are another factor to consider, which could impact the EUR more than GBP. Nevertheless, the technical overlay paints a conflicting message.

On the one hand, the long-term rectangular range implies that EUR/USD should experience a continuation of the upward trend between November 2015 and October 2016. Likewise, we haven’t really seen the upper band of trend channel support tested three times, which would give greater confidence of a larger move downwards at this juncture. EUR/GBP could easily bounce back to the middle of its long-term range.

EUR/GBP daily chart

EUR/GBP's current position, on the other hand, is nevertheless telling. If we see EUR/USD break to the downside it would potentially represent a significant revaluation. The size of the rectangular range of EUR/GBP has been sizable at 0.08271, which could be the potential losses it faces. Where that to be the case, EUR/USD could fall to a low of 0.74808, should April 2016’s resistance area of 0.80987 fail to turn to support.

The Euro extends a steep fall into second day, following Friday’s 0.7% drop that completed a Doji reversal pattern on a daily chart.

Bears emerged below the daily cloud base (1.1316) and cracked pivotal Fibo support at 1.1308 (50% retracement of 1.1121/1.1494 rally), with firm break here to add to negative signals and open way for deeper drop.

Weakening technical studies on daily chart (fading bullish momentum / MA’s turned to bearish setup / south-heading RSI below neutrality territory) support the action, but further signals needed to confirm.

Upticks are expected to offer better selling opportunities while the action stays below broken Fibo at 1.1352 (38.2%) with repeated close below here to maintain bearish stance.

Only return and close above 10DMA (1.1382) would neutralize and signal an end of pullback.

Res: 1.1352; 1.1369; 1.1382; 1.1406.
Sup: 1.1300; 1.1264; 1.1221; 1.1209.

In a WSJ interview, Kansas City Fed Esther George said that with inflation at at 7.5% in January, and the benchmark interest a rate near zero, Fed's policy is "out of sync". But she said it's too soon to say if Fed should hike by 50bps in March. She also hasn't form a view on how much interest rate has to go up this year.

"What we have to do is be systematic," George said. "It is always preferable to go gradual…Given where we are, the uncertainties around the pandemic effects and other things, I'd be hard-pressed to say we have got to get to neutral really fast."

"If we get to March and the data says we should be talking about that [a half-point rate increase], I'm sure that will be in play, but I'm not sure that is the answer, per se, to how we get there," George added.

She also dismissed the idea of holding an emergency FOMC meeting to raise interest rate. "I don't know that I'd call the markets reacting to data an emergency here, because frankly, in my own forecast of looking where inflation was moving, the print was not a surprise," she said.

• Warnings of imminent Ukraine invasion send markets into a tailspin
• Stocks tank, dollar and yen advance, oil breaks higher, gold shines
• Meanwhile, speculation about emergency Fed action is running wild

Ukraine conflict 

Geopolitical tensions have returned to haunt financial markets. The US president called on all American citizens to leave Ukraine immediately on Friday, citing the threat of a Russian invasion that could begin at any moment. It is still unclear how much of this is political grandstanding as the White House may be trying to put Russia under the global spotlight to deter military action.

Nonetheless, market participants took the warning seriously, which sparked a classic flight to safety. Stock markets tanked as investors slashed their exposure to riskier assets and sought shelter in safe havens, driving gold prices to three-month highs.

Bullion has displayed remarkable resilience to fading central bank liquidity and soaring bond yields this year, essentially defying gravity thanks to demand for geopolitical hedges. The heated rhetoric has also been a blessing for oil prices, which rose to fresh seven-year highs amid fears of an energy crisis in case Western sanctions cripple exports from Russia.

Euro suffers, dollar and yen shine

In the FX arena, the euro came under heavy fire as traders priced in the collateral damage from a potential conflict at the Eurozone’s doorstep and the spillover effects from spiraling energy prices. This is already a huge problem in Europe as consumers are being squeezed by rising electricity bills.

The Russian ruble got eviscerated too despite the spike in oil prices. On the opposite side of the risk spectrum, the US dollar and the Japanese yen shined bright as traders looked for protection from the storm.

Beyond defensive flows, speculation around what the Fed will do next has also put the wind back in the dollar’s sails, after another scorching hot US inflation print sent bond markets scrambling to price in aggressive rate increases.

Six and a half rate hikes are now priced in for the year, the probability of a 50 basis points move in March has gone through the roof, and there is all kinds of speculation about an emergency Fed meeting being called this week.

What’s next

Global markets are at the mercy of politics for now and whether the Ukraine crisis evolves into a kinetic war is what matters most. The German Chancellor will head to Kiev today in an attempt to defuse the situation, so the diplomatic effort continues.

On the bright side, there’s so much geopolitical risk premium priced into most assets right now that if the situation de-escalates peacefully, the ensuing relief rally could be rather powerful. The next few sessions could be gloomy as the fog of war descends on financial markets, but the trading playbook generally says to fade war concerns.

Indeed, equity markets have had everything thrown at them lately - from rising Fed bets to war threats - and have escaped with only minor injuries. The volatility will likely continue as investors learn to live without endless liquidity, but with the economy still in good shape and buybacks going strong, the market is unlikely to crash either. The turbulence might even be a gift to investors with long time horizons.

As for today, we will hear from ECB President Lagarde at 16:15 GMT.

Markets are generally staying in risk-off mode today as there is no sign of de-escalation in Russia-Ukraine situation. Nikkei tumbled sharply by -616.49 pts, or -2.23%, to close at 27079.59.

Near term bearishness in Nikkei remains after rejection by 55 day EMA. The choppy decline from 30795.77 is in progress for retesting 26044.52 low. But, the major line of defense is at 38.2% retracement of 16358.9 to 30795.77 at 25280.61. We'd expect strong support from there to bring rebound.

However, the rejection by 55 week EMA is also a medium term bearish sign, which argues that the fall from 30795.77, as a correction to the up trend from 16358.19, might last longer than originally expected. Indeed, sustained break of 25280.61 could send Nikkei further to the zone between 50% retracement at 23576.98 and 61.8% retracement at 21873.34 before bottoming.

EURUSD has successfully weighed on the 50-day simple moving average (SMA) - coupled with the mid-Bollinger band - and growing bearish pressures have now clearly pushed below 1.1323, crushing buyers’ efforts to breach the 1.1500 barrier. The longer-term falling 100- and 200-day SMAs are endorsing the eight-month descent from the 1.2266 peak, while the 50-day SMAs’ bounce has softened, indicating that the rally from the near 20-month low of 1.1120 has been curbed.

The short-term oscillators are reflecting that negative momentum is gaining pace. The MACD, in the positive zone, is falling towards its red trigger and zero lines, while the dipping RSI has pierced into the bearish region. The stochastic oscillator is exhibiting a strong negative charge and the %K line has nudged into oversold territory, implying negative price action may intensify further.

If sellers retain the reins, the pair may encounter initial downside friction some distance lower around the 1.1200 border, before the lower Bollinger band at 1.1151 and the near 20-month trough of 1.1120 are challenged. If the lower Bollinger and key trough fail to halt declines from accelerating, the price could then target the 1.0986-1.1017 support band, moulded by the inside swing highs over the mid-April until mid-May 2020 period.

In the event buyers regain control and lift the price back above the immediate 50-day SMA and mid-Bollinger band, they may meet fortified resistance at the 1.1400 hurdle, where the descending 100-day SMA, at 1.1410, has neared. Should buying interest increase further, the price may overstep these obstacles and aim for the critical resistance barricade that exists from 1.1500 until 1.1553. Conquering this boundary too could reinforce upside momentum, encouraging buyers to reel in the 1.1608 high before tackling the 200-day SMA overhead at 1.1649.

Summarizing, EURUSD’s neutral-to-bearish bias is looking set to intensify. A dive in the pair deepening significantly below the 50-day SMA could confirm this, while a break below the 1.1120 trough would restart the broader decline. That said, for convincing bullish developments to return, the price would need to steer north of the 1.1683-1.1762 barrier.