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You could almost hear jaw drops in Frankfurt yesterday. European inflation unexpectedly accelerated to 5.1% y/y in January, defying expectations for a base-effect driven decline. Core inflation fell by less than hoped for, to 2.3%. Euro area money markets stepped up rate hike bets ahead of the ECB meeting (today). They now discount a total of +-25 bps rate increases by the end of this year. Short-term bond rates added 1.2-2.2 bps (2y-5y German Bund) and 2.7-3.4 bps (2y-5y swap). The long end outperformed, remaining unchanged or declining 1 or 2 bps. The euro, as ever, fails to really profit from the ongoing yield increase at the front end of the curve. EUR/USD did rise to 1.1305, up from 1.1272, but mainly thanks to the dollar still correcting lower (DXY fell from 96.38 to 95.8). EUR/USD failed to settle within the upward sloping trend channel. US data disappointed (ADP -301k vs +180k expected) but left no permanent traces on markets. US yields struggled, much like they have been doing over the past few days. The curve shed up to 1.4 bps across the curve. The 2y yield extended a gentle topping out pattern near 1.20% while the 10y variant oscillates around the 1.80% pivot. Wall Street shrugged at the data and finished in the green with gains up to 1% (S&P). Futures in early trading (>2% lower in the Nasdaq) paint a completely different picture for today though after tech bellwethers Meta Platforms (Facebook parent) and Spotify delivered bleak guidance. Asian cash trading is mixed with Japan declining 1% but South Korea opens to 2% higher after a few days off. Core bonds eke out small gains. The dollar snaps a three-day decline.

It’s D-day for several central banks today, from the Czech National Bank (75 bps hike expected) over the ECB to the Bank of England. The latter is poised to deliver its first back-to-back rate hike since 2004. Hiking rates to 0.5% would trigger a natural balance sheet roll off too. The 25 bps increase is completely discounted. The key question for sterling is how aggressive the Bank of England will sound and how it sees inflation evolving based on current market policy rate expectations: will it be (more) than enough for a return to the 2% target? Markets have penciled in a total of five 25 bps moves for 2022 with a peak rate of about 1.6% in 2023. This leaves some scope for disappointment. The downside in EUR/GBP – with strong support in the high 0.82 area – should be well protected. The much higher than expected European (core) inflation piles pressure on the ECB, which meets after the BoE. We expect Lagarde to stick to the script outlined in December nevertheless, i.e. shelving PEPP in March, temporarily raising APP and refrain from interest rate hikes this year for the time being. A (verbal) policy U-turn is more likely to happen when it’s backed by new forecasts in March or June at the latest. The lack of central bank commitment will probably hurt the euro more than euro area money and bond markets. EUR/USD’s dollar-driven recovery over the recent days may soon run into resistance. 1.1186 marks the first support (Nov 2021 low).

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The Brazilian central bank (BCB) raised its key Selic rate as expected by 150 bps from 9.25% to 10.75%. The BCB pursued an aggressive tightening cycle since March last year, delivering a cumulative 875 bps rate hikes up until now. However, for its next steps, the MPC foresees as adequate at this moment a reduction in the hiking pace. It refers to the stage of the tightening cycle with the cumulative effects of the efforts made kicking in with a time lag and being visible over the relevant horizon. The BCB specially mentions 2023 when it forecasts inflation at 3.2%, just below the 3.25% target. The BCB sees its policy rate peak at 12% in H1 2022 (5% above inflation and 8.5% above the neutral rate) with and end of year forecasts for 2022 and 2023 respectively at 11.75% and 8%. The MPC stresses risks in both direction to its reference scenario. Downside (inflation) risks stem from decreasing international commodity prices (measured in BRL). Upside inflation (and country credit) risk(s) come from the government’s fiscal spending spree. USD/BRL followed the dollar correction lower of the past days, currently trading around 5.26, the strongest BRL-level since September last year.

Yesterday’s ADP data showed that the US economy lost some 300’000 private jobs in December, versus 185’000 job additions expected by analysts, but no one cared.

No one cared because first, we knew that the latest omicron wave would’ve taken a toll on the numbers, and the December weakness in the US jobs is certainly temporary. And second, there are millions of jobs available in the market, and there is nothing the Federal Reserve (Fed) could do to get people to work.

Friday’s jobs data could print a similar figure as well, but again, no one will care.

What people care about is the earnings, and inflation.

Google jumped by more than 7% yesterday to a fresh record high on the back of strong earnings. Nasdaq gained for the fourth consecutive session adding another 0.50% to its gains. The index is now above its 200-DMA for the first time in about two weeks. But don’t uncork the champagne just yet! Because the Nasdaq futures are trading more than 2% lower at the time of writing. Disappointing Facebook results, and a 23% plunge in Meta shares in the afterhours trading calls for a red session in the US.

Amazon is the last FAANG stock to announce earnings today, and the company is expected to reveal a second consecutive month of earnings decline. Ouch.

Now what, Christine?

Inflation in the Eurozone hit 5.1% in December. 51% on the back of soaring energy prices, and perhaps Christine Lagarde’s insistence in keeping the monetary policy extra loose in Europe despite the red flags that have been pointing that inflation was going to be become a big problem in Europe as well since months!

At some point in December, the Dutch natural gas futures were trading by more than six times compared to the same time last year, while the barrel of US crude advanced to $90pb. Although the European gas prices have plunged over the past couple of days as Russia boosted the gas flow from Ukraine after a very dry January due to the geopolitical tensions, energy prices remain under a decent positive pressure, which SCREAMS that inflation in Europe may not be that transitory after all!

So, all eyes are on Christine Lagarde and what she has to say at today’s press conference. Will she insist that inflation is transitory or will she finally accept the defeat, and call it a problem, in which case we will perhaps see the ECB hawks taking the reins of the market after months of a decent suppression. We will see. One thing is clear: the longer the ECB waits before taking action to tame inflation, the faster they will have to pull back support. Any hawkish commentary from the ECB today could send the EURUSD above its long-term downtrending channel, and keep it there!

Across the Channel, the discussion will likely not be as heated in the UK, as Brits will probably raise their interest rates by another 25bp for the second time at today’s meeting. Cable is pushing higher these days, partly due to the hawkish BoE expectations, but partly due to a broader downside correction in the US dollar. Although the BoE hike is mostly priced in, the sterling bulls could take advantage of a broadly soft dollar to buy any comment that would sound more hawkish than expected, in which case, the GBPUSD could consider another rise toward its 200-DMA, near 1.37, which has been tested but not broken in mid-January attempt.

OPEC moving slow is perhaps not a choice!

OPEC announced to increase output by 400’000 barrels in line with the market consensus. The market is getting increasingly thirsty, and there needs to be more pumping to satisfy the rapidly rising demand, but OPEC’s slow move is not just a question of what OPEC wants. Key oil producers already struggle boosting their production to meet the 400’000 barrels increase a day. Therefore, raising the production target when it can’t be reached would be a silly move anyway. So yes, OPEC being constrained to move slowly is a problem and the consensus is that oil prices will hit the $100pb right now.

Daily Pivots: (S1) 1.1272; (P) 1.1301; (R1) 1.1335; More...

Intraday bias in EUR/USD remains mildly on the upside for 1.1482 resistance. Firm break there will argue that a medium term bottom was formed on bullish convergence condition in daily MACD. Stronger rally would then be seen back to 1.1703 support turned resistance next. On the downside, break of 1.1233 minor support will flip bias back to the downside for retesting 1.1120 low instead.

In the bigger picture, the strength of the the decline from 1.2348 (2021 high) suggests that it's not a corrective move. But still, it could be the fourth leg of a sideway pattern from 1.0339 (2017 low), or resuming long term down trend. In any case, outlook will now stay bearish as long as 1.1482 resistance holds. Next target would be 1.0635 low. However, firm break of 1.1482 will raise the chance that whole fall from 1.2348 has completed, and turn focus back to 1.1703 resistance for confirmation.

Daily Pivots: (S1) 1.3531; (P) 1.3559; (R1) 1.3601; More...

Intraday bias in GBP/USD remains mildly on the upside for 1.3748 resistance. Firm break there will revive the case that correction from 1.4248 has completed with three waves down to 1.3158. Further rally should then be seen through 1.3833 to retest 1.4248 high. On the downside, though, below 1.3475 will turn bias back to the downside for 1.3356 support.

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.

Daily Pivots: (S1) 0.9172; (P) 0.9197; (R1) 0.9215; More....

Intraday bias in USD/CHF remains mildly on the downside and deeper fall would be seen to 0.9090 support. Firm break there will argue that choppy rise from 0.8925 has completed, and turn near term outlook bearish. Nevertheless, above 0.9250 will turn bias back to the upside for 0.9341, and then 0.9372 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.

Daily Pivots: (S1) 114.13; (P) 114.46; (R1) 114.77; More...

Intraday bias in USD/JPY remains mildly on the downside for 113.46. Corrective pattern from 116.34 is extending with another falling leg. Break of 113.46 will target 112.52 support. On the upside, above 114.88 minor resistance will turn bias back to the upside for 115.68 resistance.

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 111.07) holds.

Daily Pivots: (S1) 0.7117; (P) 0.7138; (R1) 0.7158; More...

AUD/USD's rise from 0.6966 is still in progress and intraday bias stays mildly on the upside for 0.7313 resistance. Decisive break there should confirm that 0.6991 key support was defended and turn near term outlook bullish. On the downside, below 0.7032 will bring retest of 0.6966. Sustained break of 0.6991 will resume the larger fall from 0.8006 and carry larger bearish implication.

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) 1.2646; (P) 1.2676; (R1) 1.2701; More...

USD/CAD is staying in consolidation form 1.2795 and intraday bias remains neutral first. Further rise is expected with 1.2558 support intact. On the upside, break of 1.2795 will target 1.2812 and then 1.2963 resistance. However, break of 1.2558 minor support will turn bias back to the downside for 1.2448 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) 0.8318; (P) 0.8335; (R1) 0.8345; More...

EUR/GBP is staying in range of 0.8304/8421 and intraday bias remains neutral first. Near term outlook stays bearish as long as 0.8421 resistance holds. Break of 0.8304 will resume larger down trend towards 0.8276 key long term support. However, break of 0.8421 resistance will be a sign of bullish reversal. Further rise would be seen back to 0.8598 structural resistance next.

In the bigger picture, price actions from 0.9499 (2020 high) are still seen as developing into a corrective pattern. Deeper fall could be seen as long as 0.8598 resistance holds, towards long term support at 0.8276. We'd look for bottoming signal around there to bring reversal. Meanwhile, firm break of 0.8598 will now be an early sign of medium term bottoming and bring stronger rebound. However, sustained break of 0.8276 will argue that the long term trend has reversed.

Daily Pivots: (S1) 1.5790; (P) 1.5830; (R1) 1.5880; More...

Outlook in EUR/AUD remains unchanged. With 1.5712 minor support intact, further is still mildly in favor to 1.6168 resistance. However, on the downside, break of 1.5712 support will turn bias back to the downside for 1.5559 support 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.