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St. Louis Fed President James Bullard said he'd favor successive rate hikes at the upcoming March, May and June meetings, rather than a 50bps hike in March. "The point of this is to get better positioned right now and in coming months, and then we will be able to assess, at that point, whether we need to do more or not," he said.

"We are going to be have to be more nimble, faster, better at reacting to inflation data and other developments as we go through this year," Bullard said. "It's going to be a more data-dependent environment."

Bullard added he'd like to start the balance sheet runnoff in Q2, and "that the runoff can be faster than it was last time around." "We are cognizant of the inflation issue, we're moving on the policy rate, but we're also going to move on the balance sheet so we're not that far from reaching neutral if you are willing to consider both of those," he said

The latest US employment report will be released at 13:30 GMT Friday. Nonfarm payrolls likely cooled because of the Omicron wave and a negative print cannot be ruled out. That said, the most important metric for the Fed is wage growth, as that will decide how many rate increases are needed to hammer inflation. As for the dollar, the playbook may be to fade the initial negative reaction if payrolls disappoint. 

Tight jobs market

The US labor market has recovered at a stunning pace. Even the Fed chief admitted last week that the jobs market is tight, highlighting the record number of job openings in the economy and the record number of people quitting their jobs in search of higher salaries and other benefits.

Labor force participation is the only dark spot, as it remains lower than before the pandemic. There’s a big debate about whether that will change - if the people that retired in 2020 are ever coming back. Of course, this is a longer-term question that doesn’t matter much for markets in the short-term as the Fed generally focuses on the unemployment rate.

Another even more crucial variable for the Fed is wage growth. With inflation so hot already, Fed officials worry that it could spill over into wage negotiations, fueling a wage-price spiral that keeps feeding inflationary pressures even after the supply chain normalizes.

This means wage growth is seen as the canary in the coal mine, telling the Fed where inflation will be in the future and hence guiding policy changes. In other words, wage growth is the single most important factor at this stage of the economic cycle.

Weak payrolls, strong wages? 

This is going to be a weird report. Nonfarm payrolls are forecast to have risen by 150k in January, which would keep the unemployment rate unchanged at 3.9%. However, there might be some room for disappointment.

The Bureau of Labor Statistics collects the data for these surveys during the second week of each month. In January, this was the week when covid cases peaked amid the Omicron outbreak. If someone was out sick during this week and was not getting paid sick leave, they would be counted as unemployed in the jobs survey. 

Hence, this could artificially skew the nonfarm payrolls number lower this month. Also arguing for a weak NFP print are jobless claims, which rose dramatically during the survey week from a month ago. This implies we could even see a negative payrolls number.

On the bright side, wage growth might be strong. Forecasts suggest average hourly earnings accelerated to 5.2% in yearly terms from 4.7% previously, something supported by business surveys like the Markit PMIs that pointed to “soaring wage bills” as companies competed to attract workers.

Fade the downside? 

In the markets, the initial reaction in the dollar might be negative in case the nonfarm payrolls print is indeed disappointing. Yet any dollar weakness may not last long, as a soft print wouldn’t represent the true state of the labor market - only a statistical quirk.

Indeed, Fed officials like Thomas Barkin have already said they would view any disappointment in this report as a temporary setback given the covid numbers during the month. That would be especially true if wages are solid. As such, this could be a case of the dollar dipping on the news, before recovering in the following hours. 

Taking a technical look at dollar/yen, a pullback could encounter immediate support near the 50-day moving average currently at 114.35. A violation would turn the focus towards the 113.45 zone.

On the upside, the first target for the bulls may be the 115.50 region, a break of which could open the door towards the five-year high of 116.35.

OPEC and its allies will gather on Wednesday in a scheduled meeting to assess conditions in the oil market and decide on further supply increases. Crude prices are pinned at the highest in more than seven years and the roaring start to 2022 is definitely captivating enough for producers to raise output at a faster pace. Despite that, producers may stick to their initial plan, delivering only a modest boost as doubts remain about whether spare capacity will be enough to commit to meaningful increases.  

Oil prices attractive for a sharper output hike

OPEC+ oil exporters are expected to follow the script and raise their output by 400,000 barrels a day for March as part of a plan which aims to gradually recover the lost supply of 9.7 million bpd or 10% of global demand that was removed two years ago in the face of the Covid-19 crisis. But producers may have every reason to ramp up their output faster than previously proposed. Unlike other covid variants, omicron did little to dent energy demand, while heavy snowfalls around the globe further bolstered the need for fuel, sending the international benchmark Brent price above the $90.00/barrel and the West Texas Intermediate (WTI) as high as $88.81/barrel.

With oil prices driving the inflation storm and central banks seeking adjustments in their policies to cool the price acceleration before it permanently spreads to other sectors and ruins the economic recovery, oil exporters could ideally fill the excess demand and contribute to the inflation fight by raising their production volumes.

OPEC+ to stick to initial plan

Yet, the decision could be more complicated than it seems. Although the omicron wave proved less deadly, it is still transmitting more rapidly than others, forcing a bulk of workers to isolate themselves. As a result, key OPEC+ countries such as Russia and Nigeria have been struggling to keep pace with their allowed increases, delivering output below-target over the past few months. Specifically, analysts believe that Russia’s monthly increases will not be able to exceed 60,000 bpd in the first half of 2022 due to a decline in drilling compared to its required amount of 100,000 bpd. Technical issues and the lack of investment have been a headache as well, while local military attacks in Libya further tightened OPEC+ deliveries.

Reuters’ data have recently shown that the OPEC+ group was 800,000 bpd below its quota target last year, missing billions of dollars in revenue, which could otherwise be distributed to the less fortunate members for investment. January’s miss was even larger than the one in December, a survey indicated.

Hence, although the attractive prices and the rosy 2022 outlook from several financial institutions, which foresee crude prices surging to $100/barrel, would theoretically induce OPEC producers to open their taps so as to also limit competition from US shales, the tight spare capacity could play down the scenario of higher production increases for now, especially as the boiling political tensions across the Ukrainian border are currently threatening even existing supply arrangements.

WTI crude

If OPEC+ oil exporters repeat the gradual increase of 400,000 bpd at a time when global economic activity asks for a stronger boost, WTI crude could crawl up to $90.00/barrel. A sharper ascend could stabilize around the resistance line at $92.00 before the $94.15 barrier comes on the radar.

In the event oil producers stress the need for a sharper increase, WTI could initially seek support around the nearby floor of $86.23. Failure to rebound here and an extension below the $85.00 round level would question the bullish trend in the market, bringing the $83.00 – $82.00 territory next on the radar. Yet, in the broad picture, the positive trajectory may stay in place as long as the price trades above the $62.00 level.

Key Highlights

• NZD/USD started an upside correction from 0.6530.
• A major bearish trend line is forming with resistance near 0.6670 on the 4-hours chart.
• EUR/USD and GBP/USD recovered above 1.1250 and 1.3500 respectively.
• The US ISM Manufacturing Index declined from 58.8 (revised) 57.6 in Jan 2022.

NZD/USD Technical Analysis

The New Zealand Dollar declined heavily from well above 0.6850 against the US Dollar. NZD/USD even traded below the 0.6700 support level before the bulls appeared.

Looking at the 4-hours chart, the pair traded as low as 0.6529. There was a close below the 0.6700 pivot level, the 100 simple moving average (red, 4-hours), and the 200 simple moving average (green, 4-hours).

It is now correcting losses and trading above 0.6580. It even moved above the 23.6% Fib retracement level of the downward move from the 0.6890 swing high to 0.6529 low.

An immediate resistance is near the 0.6640 level. The first major resistance is near the 0.6670 zone. There is also a major bearish trend line forming with resistance near 0.6670 on the same chart. Any more gains could send the pair towards the 50% Fib retracement level of the downward move from the 0.6890 swing high to 0.6529 low at 0.6700.

If there is no upside break above 0.6670, the pair could start another decline. An immediate support is near the 0.6580 level. The next major support is near the 0.6550 level, below which it could test 0.6500.

Fundamentally, the US ISM Manufacturing Index for Jan 2022 was released yesterday by the Institute for Supply Management (ISM). The market was looking for a decline from 58.7 to 57.5 in Jan 2022.

The actual result was mixed, as there was a drop in the US ISM Manufacturing Index to 57.6. The last reading was revised up from 58.7 to 58.8.

Looking at EUR/USD, the pair started a recovery wave above 1.1200 and 1.1250. Similarly, GBP/USD recovered above the 1.3500 resistance zone.

Economic Releases

• Euro Zone CPI for Jan 2022 (YoY) (Prelim) - Forecast +4.4%, versus +5.0% previous.
• Euro Zone Core CPI for Jan 2022 (YoY) (Prelim) - Forecast +1.9%, versus +2.6% previous.

• AUDUSD reversed from support zone
• Likely to rise to resistance level 0.7150

AUDUSD currency pair recently reversed up with the daily Bullish Engulfing the support zone lying between the round support level 0.7000 (previous monthly low from the start of December) and the lower daily Bollinger Band.

The upward reversal from this support are stopped the earlier minor impulse wave 3 of the impulse wave (3) from

Given the strength of the aforementioned support zone – AUDUSD can be expected to rise further toward the next resistance level 0.7150 (former support from the start of January).

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EURGBP has returned below its horizontally entwined 50- and 100-period simple moving averages (SMAs) following its fresh bounce at two-year low levels, which was curbed by the upper Bollinger band around 0.8359. The descending 200-period SMA is defending the bearish outlook, while the drifting 50- and 100-period SMAs are backing a sideways trend.

In addition, the static Bollinger bands have yet to disperse and thus infer that volatility has dropped, which could be a sign that a bigger price move could be around the corner. The short-term oscillators are mixed, reflecting opposing messages in momentum. The MACD remains north of the red trigger line and is toying with the zero threshold. On the other hand, the RSI has nudged below the 50 level, while the stochastic oscillator retains a negative charge, both promoting downward price action.

In the negative scenario, initial downside friction could occur at the mid-Bollinger band at 0.8331. Then the 0.8304-0.8312 support base formed by troughs recording two-year low levels could be challenged. If this hardened floor fails to dismiss bearish pressures, the price may slide toward the critical 0.8276-0.8294 support section, which was shaped by the December 2019 and February 2020 troughs. Should this boundary not act as an upside defence, the price could then target the 0.8248 low, identified back in July 2016.

Otherwise, if buyers re-emerge around the mid-Bollinger band and drive the pair over the 100- and 50-period SMAs at 0.8345 and 0.8349 respectively, resistance may then emanate from the upper Bollinger band at 0.8359 until 0.8374. Should buying interest endure, the descending 200-period SMA at 0.8386 could try to impede advances from gaining pace. However, if the price propels past the 200-period SMA, upside momentum could then come under the microscope as the bulls tackle the 0.8416-0.8431 resistance border.

Summarizing, EURGBP is exhibiting a neutral-to-bearish tilt below the 200-period SMA at 0.8386 and the 0.8416-0.8431 ceiling of the recent sideways market. A dive below 0.8276-0.8294 could significantly reinforce the bearish outlook, while a jump north of the 0.8416-0.8431 barrier is necessary to boost optimism in the pair.

USDCAD has marked yet more higher highs and higher lows since mid-January as bullish forces linger. Moreover, the 50-period simple moving average (SMA) is closing the gap with the 200-period SMA, and if the former manages to cross above the latter, it would reinforce the case of a sustained bullish outlook.

Short-term momentum indicators are reflecting a mixed picture as the RSI is hovering slightly above its 50 neutral mark. However, the MACD is found below its red signal line despite being in positive territory, which indicates that the positive momentum might be losing steam.

Should the bulls maintain control, the December support at 1.2763 might be the first line of resistance, before buyers shift their attention towards the 1.2796 hurdle. A decisive move above the latter could mark yet another higher high, strengthening the pair’s positive momentum, which could send the price to test its 1.2812 and 1.2834 obstacles, consecutively.

On the flip side, initial support might be found at the 200-period SMA currently at 1.2693 before sellers eye the region which includes 1.2654 level and the 50-period SMA currently at 1.2646. A break below the latter could intensify selling pressures, opening the door towards the December support at 1.2620. Crossing below this point, sellers might then target the 1.2563 obstacle.

In brief, the short-term outlook for the pair is cautiously bullish. For sentiment to change, buyers would need to break below the 50-period SMA.

January ISM manufacturing index fell to 57.6, just beating market expectations for 57.5. This marked a 1.2 percentage point decrease from the December reading of 58.8.

New orders decreased by 3.1 percentage points to 57.9, while new export orders increased by 0.1 percentage points to 53.7.

The backlog of orders sub-index came in at 56.4, falling 6.4 percentage points from December's 62.8 print.

The production index pulled back 1.6 percentage points to 57.8, while the employment index rose 0.6 percentage points to 54.5.

The supplier deliveries sub-index fell to 64.6 points from 64.9 in December. The sub-index continues to reflect difficulties in meeting deliveries due to production issues related to the pandemic.

14 of 18 manufacturing industries reported growth in January. Growth was led by Apparel, Leather & Allied Products; Furniture & Related Products; Miscellaneous Manufacturing, Nonmetallic Mineral Products; and Machinery.

Key Implications

The expansion rambles on and the manufacturing sector posted another month of gains in January. Amid ongoing supply chain issues and yet another wave of COVID-19 infections a slight deceleration was expected, but the sector proved resilient overall.

The start of 2022 offered plenty of room for missteps as the Omicron variant spread, but the increase in new orders is a testament to the resilience of demand. Just as important, supply chains are showing continued signs of healing, as the supplier delivery sub-index continues to fall (indicating that delivery times are lengthening at a slower pace). As this most recent wave wanes, this momentum should be carried into February, helping to ease the bottlenecks that have become characteristic of the economic recovery.

The British pound is up for a third straight day, as GBP/USD has rebounded after last week’s sharp losses. The pair is trading just above the 1.35 level in the North American session.

BoE expected to raise rates

Financial markets are predicting that the BoE will hit the rate trigger at Thursday’s policy meeting. A rate hike would mark the first back-to-back rate rises since 2004. This scenario seems a virtual certainty, with a rate hike priced in at almost 90 per cent.

The primary drivers behind a rate hike are the surge in inflation and the strength of the labour market. The markets are hawkish about a rate hike since the BoE appears to have underestimated how quickly inflation would rise and unemployment would fall. Following in the footsteps of the Federal Reserve, the BoE has acknowledged that inflation may prove to be more persistent than previously anticipated. Even though a rate hike has been priced in, if the BoE does follow through and raise rates, the pound could get a boost, especially if the MPC vote in favour of a hike is unanimous.

What happens after March?

The Federal Reserve is poised to raise rates for the first time in three years, with a lift-off at the March meeting a virtual certainty. After that, it seems anyone’s guess. Fed Chair Jerome Powell left guidance unclear at last week’s FOMC meeting, and said that the Fed was still undecided on the likely course of monetary policy this year. If the Fed is undecided about policy, it’s no wonder that the markets are in the dark as to how many rate hikes to expect. The forecast for the number of rate hikes we’ll see in 2022 ranges from 3 to 7, with speculation that the Fed could hike rates at every meeting this year if needed. If inflation remains red-hot despite several rate hikes, it’s likely that the Fed will implement additional hikes until inflationary pressures ease.

GBP/USD Technical Analysis

• GBP/USD has support at 1.3314 and 1.3232
• 1.3522 is under pressure in resistance. Above, there is resistance at 1.3648