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Daily Pivots: (S1) 115.20; (P) 115.41; (R1) 115.77; More...

Intraday bias in USD/JPY remains neutral as range trading continues. Overall, consolidation pattern from 116.34 is still extending. On the upside, break of 115.68 will resume the rebound from 113.46 to retest 116.34 high first. On the downside, break of 114.14 should extend the consolidation with another falling leg through 113.46 support.

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.

Market jitters keep volatility faint and dollar remains glued on back foot  

The US 10-year yield deflated to 1.927% today keeping the reserve currency bid, with the dollar index near the lower end of its recent range at 95.40, which provided US stock futures with freshly welcomed buoyancy for a test of the latest peaks following their deep corrections from all-time highs.

Nonetheless, market sentiment is still looking light awaiting additional volatility from the upcoming US inflation event.

The US economy remains robust with healthy consumption feeding economic growth. Full employment is expected to be on the horizon and average hourly earnings have improved, nourishing wage growth. The latter makes things tricky for the Fed as it doesn’t want extra factors in their economic blueprint to boost inflation when they are trying to put a cap on it.

Thus, investors’ focus remains centred around Thursday’s US CPI data, which will reveal whether historic levels of inflation persisted in January. The CPI rate is forecasted to rise to 7.3% from 2020’s ending rate of 7.0% y/y. The headline monthly figure excluding food and energy is expected to tick lower to 0.5% from December 2021 of 0.6%.

How could markets digest the data

One narrative is that inflation globally has been boosted by the energy crisis. Oil has extended its rally that began at the start of December 2021 throughout January with WTI oil futures recording a $93.15 per barrel peak, which may tip the scale towards a US CPI result that is rather elevated or stronger.

The question is how much will a high inflation figure underpin the dollar? Clearly, should inflation prove to remain hot, the domino effect of this is a vigilant Fed with a home run March hike.

However, is this already somewhat priced in? Looking back, the hawkish stance reiterated in the last FOMC meeting gave the dollar some legs after the Fed confirmed its move to post-pandemic policy, without lift-off in rates.

Moreover, less government spending as the road to normalization unfolds in 2022 has a lot of analysts expecting the pace of the US economy will begin to hamper especially if the Omicron variant disappears into the mist.

Furthermore, across the globe, it is apparent that some central banks are ahead of others on the interest rate theme as their recoveries move at different paces. What is key lately, is that central banks like the Reserve Bank of Australia (RBA) and the ECB last week, which were adamant that interest rates would likely rise in 2023 have now sent more hawkish tones to markets that unexpected higher levels of inflation may entail earlier action, and this may in a way offset some of the greenbacks expected boost in tomorrow’s US CPI release.

One thing is for sure, the Fed is likely to do as much as possible to avoid inflation lingering into the year.

Forex arena looks firm against soft dollar

Today euros weakness faded as it held above the $1.1400 handle crawling higher to $1.1440 as markets ignored President Lagarde’s attempts to offset heightened ECB tightening expectations. A frail dollar may have played a part, also aiding the pound and the antipodean currencies. The pound touched $1.3585, while the aussie creeped up to $0.7180 and the kiwi $0.6690.

Gold is around $1,825/oz and WTI oil futures are holding a recent drop above the $89.00 per barrel mark, as investors questioned tensions in the East and the resumption of Iran nuclear talks.

FOMC Member Bowman is due to talk at 15:30 GMT, while US crude oil inventories will also be released at that time.

Bank of Canada’s Governor Macklem is then scheduled for 17:00 GMT, at which some minor movements in markets could surface as simultaneously, FOMC Member Mester is speaking about the economic outlook and monetary policy at an online event hosted by the European Economic and Financial Centre.

The US 10-year Treasury auction is scheduled to follow at 18:00 GMT.

• Oil traders await weekly EIA data
• Drawdown in Cushing inventories may return prices to recent highs
• Persistently elevated inflation may force central banks into more aggressive stance
• Concerns over hawkish central bankers could roil markets further

Oil prices are cooling further from recent multi-year highs following the EIA’s raised forecasts for US production this year and next, which they forecast should peak at a record 12.6 million barrels per day in 2023. Positive developments surrounding Iran nuclear talks are also helping to put the brakes on oil’s recent rally. Yet, Brent is keeping its head above $90/bbl for the time being, while US crude is trading just below that psychologically important mark.

Oil benchmarks still find themselves in a supportive environment, one that features robust global demand, falling inventories, and lingering supply constraints, while geopolitical risk premiums are being added to the commodity’s bullish drivers. Tuesday’s API figures, which pointed to a surprise drawdown of over two million barrels last week, helped limit the recent drop in prices.

Markets are expecting an overall build in today’s release of US crude inventories of 1.5 million barrels, though the whisper number suggests an increase of just 238,000. However, oil prices will likely be more sensitive to the figures for crude stockpiles in Cushing, which have fallen for four consecutive weeks. Overall, the official EIA data must uphold the notion of a tightening market which may then restore oil to the multi-year highs of late.

Higher-than-expected US CPI may spark more volatility

The rally in oil prices has provided major fodder for inflationary pressures, which in turn has forced central banks to adopt a more aggressive monetary policy stance. The Bank of England has already pulled the trigger on back-to-back rate hikes, while the European Central Bank and the Federal Reserve have recently made hawkish pivots, with a view to reining in liquidity and raising interest rates.

Thursday’s release of the January US CPI is set to grab the market spotlight this week. Headline inflation is expected to come in at 7.3% year-on-year, while the core print which strips out food and energy costs, is forecasted to come in at 5.9%. Both of these figures, if confirmed, would mark their highest readings since 1982, showcasing the beast that central bankers must tame.

Investors and traders have been trying to get used to the prospects of a steeper ramp-up in policy tightening this year, hence the wild swings in various asset classes along the way. Markets remain exposed to the shifting sands in the outlook for US monetary policy until they can get a firmer grasp on the Fed’s path forward for the reduction in its balance sheet and interest rates hikes. Although positive surprises in the remaining US corporate earnings may offer some measure of relief over the immediate term, equity markets could still be roiled by the next major selloff in US Treasuries, with tech and growth stocks particularly at risk.

Daily Pivots: (S1) 1.3516; (P) 1.3540; (R1) 1.3572; More...

Intraday bias in GBP/USD remains neutral and outlook is unchanged. On the upside, break of 1.3627 will resume the rebound to 1.3748 resistance. Firm break there will revive the bullish case that correction from 1.4248 has completed with three waves down to 1.3158. Further rally should then be seen to retest 1.4248 high. On the downside, however, break of 1.3356 will bring retest of 1.3158 low.

In the bigger picture, as long as 38.2% retracement of 1.1409 to 1.4248 at 1.3164 holds, up trend from 1.1409 (2020 low) is still in progress. On resumption, next target will be 38.2% retracement of 2.1161 to 1.1409 at 1.5134. Nevertheless sustained break of 1.3164 will argue that whole rise from 1.1409 has completed and bring deeper fall to 61.8% retracement at 1.2493.

Dollar trades broadly lower again today, as pressured by generally positive risk-sentiment. Yen is following as the next weakest. Canadian Dollar is also soft as WTI crude oil is struggling below 90 handle. On the other hand, Australian Dollar and New Zealand Dollar are trading broadly higher. Sterling and Swiss Franc are mixed for now. The US economic calendar is empty today. Investors will likely hold their bet until tomorrow's US CPI release.

Technically, focus is now back on 1.1482 key resistance in EUR/USD. As noted before, sustained break there will at least confirm medium term bottoming at 1.1120, and raise the chance of bullish trend reversal. Further rally should then be seen to 38.2% retracement of 1.2348 to 1.1120 at 1.1589 next. If this happens, attention will also be on whether EUR/GBP would break through 0.8467 temporary top, and whether EUR/CHF would break through 1.0602 temporary top, to confirm underlying strength of Euro.

In Europe, at the time of writing, FTSE is up 0.71%. DAX is up 1.59%. CAC is up 1.51%. Germany 10-yaer yield is down -0.044 at 0.223. Earlier in Asia, Nikkei rose 1.08%. Hong Kong HSI rose 2.06%. China Shanghai SSE rose 0.79%. Singapore Strait Times rose 0.54%. Japan 10-year JGB yield rose 0.0003 to 0.208.

Fed Bostic: Let data shows if 25bps or 50bps hike is appropriate

Atlanta Federal Reserve President Raphael Bostic said today on CNBC, "in terms of hikes for the interest rates, right now I have three forecast for this year. I'm leaning a little towards four, but we're going to have to see how the economy responds as we take our first steps through the first part of this year."

"For me, I'm thinking very much of a 25-basis-point perspective," he said. "But I want everyone to understand that every option is on the table, and I don't want people to have the view that we're locked into a particular trajectory in terms of how our rates have to move over time. We're really going to let the data show us to what extent a 50 basis point or 25 basis point move is appropriate."

BoE Pill: A case can be made for measured rather than activist approach to policy decisions

BoE Chief Economist Huw Pill said in a speech even though the voted for a 25bps hike last week, "given the inflationary pressures we currently face, I can certainly understand why colleagues on the MPC voted for a 50bp hike".

But, "a case can be made for a measured rather than activist approach to policy decisions, with a focus on more persistent developments in the data that have lasting implications for the outlook for price stability," he said.

"That is what I would label a 'steady handed' approach to monetary policy. Even if it does not provide guidance in all circumstances, I hope it can help explain why I voted for a 25bp hike – rather than something larger – last week."

Bundesbank Nagel: ECB interest rates could rise this year

In a Die Zeit interview, new Bundesbank President Joachim Nagel said, "if the (inflation) picture does not change by March, I will advocate normalizing monetary policy." "The first step is to end net bond purchases during 2022," he said. "Then interest rates could rise this year."

Nagel also expects inflation in Germany to rise "significantly" above 4% in 2022. He warned that the economic costs of acting too late on inflation are significantly higher than acting early.

BoJ Nakamura: Conditions not fallen into place for modifying monetary policy

BoJ board member Toyoaki Nakamura said, "I don't think conditions have fallen into place for Japan to modify monetary policy." He warned, "if we raise interest rates now or before wages pick up, we would be taking away from companies money that would otherwise have been used to raise pay."

He added, "we'll patiently maintain our ultra-easy monetary policy until wages begin to rise sustainably."

"For companies, what's most important is for currency rates to move stably. If the dollar/yen moves within the current range (of around 103-115), that will make it easier for companies to make business decisions," he added.

Australia Westpac consumer sentiment dropped to 100.8, elevated pressures on finances

Australia Westpac-Melbourne Institute consumer sentiment dropped -1.3% to 100.8 in February, down from 102.2. The "economy, next 12 months" sub-index increased by 2.4% and the "economy, next 5 years" sub-index was up by 1.5%.

However, the "finances vs a year ago" sub-index slumped by -9.2% (more than reversing the surprise 7.5% lift in January) while the "finances, next 12 months" sub-index fell by -1.5% to be down by -4.3% since December.

Westpac said, "the most likely explanations for these elevated pressures on finances relate to: Omicron-related disruptions to activity and earnings at the start of the year; the rising cost of living; and the prospect of rising interest rates."

Also, Westpac does not expect the first rate hike by the RBA until August and it will be very interesting to observe how resilient this surprising recovery in confidence will be in the lead up to the first move."

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3516; (P) 1.3540; (R1) 1.3572; More...

Intraday bias in GBP/USD remains neutral and outlook is unchanged. On the upside, break of 1.3627 will resume the rebound to 1.3748 resistance. Firm break there will revive the bullish case that correction from 1.4248 has completed with three waves down to 1.3158. Further rally should then be seen to retest 1.4248 high. On the downside, however, break of 1.3356 will bring retest of 1.3158 low.

In the bigger picture, as long as 38.2% retracement of 1.1409 to 1.4248 at 1.3164 holds, up trend from 1.1409 (2020 low) is still in progress. On resumption, next target will be 38.2% retracement of 2.1161 to 1.1409 at 1.5134. Nevertheless sustained break of 1.3164 will argue that whole rise from 1.1409 has completed and bring deeper fall to 61.8% retracement at 1.2493.

Economic Indicators Update

BoE Chief Economist Huw Pill said in a speech even though the voted for a 25bps hike last week, "given the inflationary pressures we currently face, I can certainly understand why colleagues on the MPC voted for a 50bp hike".

But, "a case can be made for a measured rather than activist approach to policy decisions, with a focus on more persistent developments in the data that have lasting implications for the outlook for price stability," he said.

"That is what I would label a 'steady handed' approach to monetary policy. Even if it does not provide guidance in all circumstances, I hope it can help explain why I voted for a 25bp hike – rather than something larger – last week."

Full speech here.

Atlanta Federal Reserve President Raphael Bostic said today on CNBC, "in terms of hikes for the interest rates, right now I have three forecast for this year. I'm leaning a little towards four, but we're going to have to see how the economy responds as we take our first steps through the first part of this year."

"For me, I'm thinking very much of a 25-basis-point perspective," he said. "But I want everyone to understand that every option is on the table, and I don't want people to have the view that we're locked into a particular trajectory in terms of how our rates have to move over time. We're really going to let the data show us to what extent a 50 basis point or 25 basis point move is appropriate."

• Crude oil finally retreats
• Aluminium at 3-year highs
• Gold testing resistance

Crude oil finally retreats

Crude oil prices have remained under pressure after falling about 2% on Tuesday. The losses come after a strong start to the year. Until this week, prices had risen for 7 consecutive weeks. Will the buyers keep buying those dips, or have prices exceeded their fundamental values and due a correction?

Oil prices have been by far the most notable mover so far this year, as per this handy graphic by BlackRock:

Source: BlackRoack

Investors have been buying crude oil as concerns over the economic impact of omicron variant did not materialise. On top of this, the OPEC+ stuck with its plan to increase supplies by only 400k barrels per day every month, despite calls for it to do more from oil consumer nations. But the group repeatedly failed to even hit that target, which created a supply/demand imbalance. Oil prices then found further support from geopolitical risks concerns Russia and Ukraine. Meanwhile, temporary travel restrictions were lifted across most of Europe, causing investors to expect strong demand for oil in the summer as travel and tourism is likely to ramp up. Indeed, TUI has noted strong booking momentum across all markets, with new bookings for summer 2022 now above pre-crisis levels. Travellers are happy and willing to pay higher prices, after two years of disruption because of the pandemic.

But how much of that is priced in remains to be seen. But I certainly expect the supply and demand imbalance to be temporary and expect it to move back into balance in the months ahead. Against this backdrop, I doubt oil prices will spike noticeably higher from current levels.
WTI has also sold off because of technical reasons as prices retreated from THIS trend line on the weekly time frame:

Source: ThinkMarkets and TradingView.com

It is worth watching WTI closely here as a failure to hold above the $90 psychological level could trigger a bit of profit-taking and opportunistic shorting opportunities.

Aluminium at 3-year highs

Aluminium continues to find support on the dips due to tight supply and falling inventories. The main problem is the cost of electricity which has sky-rocketed, making it very expensive for smelters to operate. This is why we have seen inventories falling sharply. What’s more, China is keen to reduce pollution to improve air quality, especially during the Beijing Olympics. One of the ways to achieve that is to reduce fossil fuel consumption. Smelters, which use huge amounts of electricity generated by coal-fired power plants, have been directly hit by this. There are also reports of covid outbreaks in aluminium-producing city of Baise, in China.

Gold testing resistance

The yellow precious metal broke to a fresh weekly high today, as yields dipped back a little. But overall, yields have been going higher alongside the metal. In the US, the 10-year yield has closed in on the 2.000% level. It looks like investors happy to pile into gold, a non-interest-bearing asset, as they seek to protect their wealth against the impact of soaring inflation. Rising prices are eroding the value of fiat currencies around the world, making gold an appealing investment for many. But gold must now clear the key $1830-$1850 resistance range, if it were to make a more serious comeback.

Stock markets are making decent gains in Europe on Wednesday and US futures are also being led higher as confidence continues to build following a torrid start to the year.

It's hard to pinpoint exactly what has changed; whether it's earnings that are lifting the mood or the soothing tones of central bankers desperately trying to manage expectations. Perhaps it's simply a case of investors coming to terms with the tightening environment and feeling more comfortable with it.

Whatever the reason, investors certainly appear encouraged by the fact that the falling knife period looks to be in the rear-view mirror and we're now seeing signs of stabilization. In recent week's we've also seen periods of aggressive selling being bought into which has helped create the impression that the worst is behind us.

Of course, that could change quickly if the inflation outlook worsens, as has repeatedly been the case in recent months. And we won't have to wait long for the next hurdle on that front, with the US CPI data being keenly anticipated tomorrow.

Before then, we'll hear from Loretta Mester and Michelle Bowman from the Federal Reserve, and Huw Pill from the Bank of England. Both central banks have become far more hawkish in recent months but I expect we'll see some caution in the wording as none will want to needlessly spook financial markets.

Oil eases as talks continue

Oil prices are continuing to soften on Wednesday, as traders continue to weigh up the prospect of a nuclear deal between the US and Iran that could see more than a million barrels of oil flood the market at a time when it's very much needed. One eye will also be on the EIA inventory data after API reported a more than two million barrel drawdown on Tuesday.

WTI has slipped back below $90 but Brent is continuing to hold around there, after finding strong support over the last day or so. If US-Iran talks continue to progress, this level should come under some pressure, while a collapse of negotiations could be the catalyst that drives the price towards triple-figure territory.

Gold continues to push key resistance

Gold is relatively flat on the day but has remained well supported after registering a sixth winning day in seven. The yellow metal is once again seeing some resistance around $1,830, a break of which could open up a move towards $1,850.

Yields have softened a little over the last couple of days, especially in Europe, where policymakers are pushing back against market expectations for interest rates this year. We're still seeing 40 basis points of hikes being priced in by the end of the year which would be quite the shift. But that may be providing gold some further support in the near term.

Bitcoin recovery looking promising

The bitcoin price is easing a little again today after running into resistance around $45,500 on Tuesday. The risk relationship has become a little disconnected over the last week or so, with bitcoin appearing to front-run some of the recovery in stock markets. Risk appetite has improved this week which has coincided with some profit-taking in bitcoin. It continues to look promising though and a break of $45,500 would be another important and bullish hurdle.

Whether at Thursday’s meeting or further down the line, the Riksbank will inevitably have to become more hawkish as the impact of COVID begins to fade.

But there are a lot of moving parts to consider when the central bank meets tomorrow. Look out for two specific aspects of the decision.  

Rate path brought forward

Firstly, will the central bank revise its guidance in terms of when it will conduct its first interest rate hike? Previously, the Riksbank had indicated the first interest rate would occur at the end of 2024. But that already puts the central bank behind the curve of the BoE, Fed and possibly even the European Central Bank. So, there is every possibility that forward guidance on the first rate is brought forward to mid-2024 or even the end of 2023.

Reinvestment may matter more

Secondly, November’s minutes showed that the Riksbank has been warming to reducing the size of its balance sheet this year. So, there is every chance it announces a faster than expected reduction in asset reinvestment, either in government and/or corporate bonds. This would send a stronger signal to the market as it would solidify the possibility of an even earlier interest rate hikes.

The impact on EUR/SEK

EUR/SEK has followed an interesting path over the last two years. Aside from the exceptional move higher in March 2020, due to the Swedish krona’s high susceptibility to global risk and the low established as the Riksbank upgraded its economic growth forecasts at its last meeting in November 2021, EUR/SEK, for the most part, has been rangebound between 10.70815 and 10.1101.

The rangebound nature of EUR/SEK should not be a surprise given the economic linkages between Sweden and the euro area. But any downside reaction in EUR/SEK from the upcoming meeting will likely be temporary and limited. Global economic conditions and monetary policy have drifted from the last time the Riksbank last met. Therefore, any downside in EUR/SEK is likely to be suppressed at the 10.1101 level. However, a more hawkish central bank does increase the chance it remains closer to the bottom of its pervious range.