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After gaining ground over three straight sessions, the Japanese yen has paused on Monday, as it trades around 113.80.

Markets eye BoJ inflation gauge

Inflation indicators continue to garner attention in Japan, which is showing inflationary pressures after years of deflation. December core CPI climbed 0.5% y/y, just shy of the 0.6% forecast. Inflation is being driven by higher fuel costs and a weak yen, but a 53% reduction in mobile phone fees in December curbed the CPI gain. If the mobile phone fees are taken out of the equation, core CPI rose close to 2%, which is the BoJ’s inflation target. On Tuesday, Japan releases BoJ Core CPI, the bank’s preferred inflation indicator.

The central bank is following closely the rise in inflation, with the BoJ minutes from the December meeting indicating that members discussed the increase in CPI due to the rise in producer prices. The uptrend is inflation is a new development in Japan, but the bank is unlikely to shift away from its ultra-accommodative policy or raise rates anytime soon. BoJ Governor Haruhiko Kuroda has said that a rise in inflation that does not include higher wage growth is not sustainable, which sounds very much like the ‘transient inflation’ phrase that Fed Chair Jerome Powell was using until recently.

It’s a busy economic calendar in the US, highlighted by the FOMC meeting on Wednesday. With inflation running at its highest level in almost 40 years, the Fed is under pressure to raise rates and the markets have priced in a 70% likelihood a rate hike in March. The Fed will likely signal that a rate hike is imminent, and the markets have priced in four rate hikes this year. Goldman Sachs sent out a note on Saturday saying that its baseline forecast stands at four hikes, but the surge in inflation could push the Fed to respond with even more rate hikes this year.

There has also been some speculation that the Fed might depart from incremental hikes of 0.25% and announce a 0.50% rise in rates. This would provide a ‘double punch’ of curbing inflation and sending the markets a strong message in order to restore credibility, which has taken a hit from some market participants that feel that the Fed has been too slow in its response to surging inflation.

USD/JPY Technical

• There is resistance at 115.54, followed by 116.88
• There is support at 113.18 and 112.16

The massacre of cryptocurrencies continues today as Ethereum resumes recent steep fall and hit as low as 2198.70 so far. The fall from 4863.75 is still in progress to 161.8% projection 4863.75 to 3439.00 from 4126.20 at 1820.95, which is below 2000 and above 1715.62 low. Considering deeply oversold condition in daily RSI, some support should be seen below 2000 to bring an overdue rebound. But in any case, break of 2927.20 support turned resistance is needed to indicate bottoming. Otherwise, risk will still stay on the downside.

Bitcoin also drops to as low as 33019 so far. Daily RSI is deeply oversold while BTC is close to 29261 support. There should be signs of bottoming ahead. But still, break of 39636 support turned resistance is needed to indicate bottoming, or risk will stay heavily on the downside. The more bearish scenario is not favored yet, but bitcoin could extend the down trend from 68986 to 100% projection at 25023 if it couldn't defend 30k handle.

Sterling is on the verge of breaking down as risk-off sentiment intensifies into European session. EUR/GBP's break of 0.8377 resistance now suggests that a short term bottom is formed at 0.8304 on bullish convergence condition in 4 hour MACD, just ahead of a key long term support level 0.8276 (2019 low). It's way too early say that EUR/GBP is staging a bullish trend reversal. But at least, there is room for more rise back to 55 day EMA (now at 0.8423).

GBP/USD's fall from 1.3748 accelerates down today. Break of 1.3489 support, and sustained trading below 55 day EMA (now at 1.3504) will indicate that rebound from 1.358 has completed at 1.3748. That would also argue that whole decline from 1.4248 is not complete. Or at least, GBP/USD could extend lower to have a retest on 1.3158 low.

GBP/CHF is also accelerating downwards. Fall from 1.2606 is seen as a falling leg in the whole pattern from 1.3070. Deeper decline is expected as long as 1.2427 support turned resistance holds. GBP/CHF should be heading to 1.2134 support and beyond.

Bundesbank said in the monthly report that Germany's real GDP grew by 2.7% in 2021, not enough to compensate the -4.50% contraction in 2020. It added, "setbacks caused by the pandemic and bottlenecks on the supply side dampened the recovery in the past year."

Overall, prices was at an above-average rate of 3.2% in 2021. The factors driving up inflation are "also having an effect into the new year." Bundesbank added, "the rate at the beginning of 2022 is likely to remain extraordinarily high....In addition, due to the significant rise in market quotations for natural gas, the corresponding end customer tariffs will be raised significantly."

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The Australian dollar is in negative territory to start the week. AUD/USD is down about one percent since Thursday as the pair remains under pressure ahead of the Australian CPI release on Tuesday. In the European session, AUD/USD is trading at 0.7147, down 0.38% on the day.

CPI could have RBA implications

It should be an interesting start to the trading week as Australia releases key inflation data in the Tuesday Asian session. Employment data for December was better than expected, as the economy created 64.8 thousand jobs, above the consensus of 4.3.3 thousand. The unemployment rate fell sharply to 4.2%, down from 4.6%. The consensus for CPI for Q4 stands at 1.0%, after a gain of 0.8% in Q3. If this forecast is accurate, inflation would rise to 3.1% YoY, which would be just above the RBA’s target band of 2%-3%.

What are the implications for the RBA? The central bank did not expect unemployment to improve as quickly as it has, and a CPI gain of 1.0% or higher will put further pressure on bank policy makers to consider a rate hike. The markets have priced in a rise in the cash rate later in the year, but RBA Governor Philip Lowe has repeatedly stated that he won’t raise rates until unemployment has fallen to 4% and wage growth rises to 3%. Unemployment is close to that requirement, but wage growth is only at 2.2% and is unlikely to hit 3% until 2023.

It is entirely possible that the RBA is willing to let inflation continue to rise but will hold off on a rate hike until wage growth is at or close to 3%. I would therefore urge caution if Tuesday’s CPI reading is strong – the Australian dollar is likely to rebound, but I would be careful not to get up in any rate hike fever. At the same time, a robust CPI reading could result in the RBA ending its bond-buying scheme at the February meeting.

AUD/USD Technical

• AUD/USD is putting pressure on support at 0.7138. Close by, there is support at 0.7101, protecting the round number of 0.7100
• There is resistance at 0.7245 and 0.7315

• Stock market rout deepens amid Fed and Ukraine worries, but US futures point to rebound
• Dollar and gold edge up, euro see-saws on mixed PMIs
• Fed meeting and major earnings to likely dictate market sentiment

Markets still jittery but selloff eases

Wall Street just had its most bruising week since the onset of the pandemic in March 2020 and it could get even rockier for stocks in the coming days. The Federal Reserve is poised to give a formal nod to liftoff on Wednesday and the earnings season is about to heat up with a host of major names set to report this week. Meanwhile, tensions between the West and Russia over Ukraine show no sign of easing, adding to the market angst as a conflict could potentially deepen the global energy crisis.

The S&P 500 (-1.9%) closed below its 200-day moving average on Friday for the first time since June 2020, while the Nasdaq Composite (-2.7%) plunged to levels last seen in June 2021. The selloff for the Dow Jones (-1.3%) remained much more contained as the index continued to benefit from the value-to-growth rotation.

Is the Fed getting ready for 50-bps hikes?

This week’s events could determine whether this rotation becomes a longer-term shift. Although the Fed is not expected to announce any policy changes this week, investors are nervous about the pace of policy normalization for the rest of the year. With some traders beginning to price in a half-point rate hike, there is a growing fear that the Fed will move too aggressively to rein in soaring inflation.

Nevertheless, Treasury yields slipped again on Monday. The long end of the curve has seen the steepest pullback. That could partly be a sign that investors are worried Fed policy will become too tight and are therefore less optimistic about the long-term growth prospects of the US economy. But it could also be down to rising safe-haven demand for government bonds amid the increased frictions on the Ukrainian border.

Gold climbs as Russia and Ukraine edge towards conflict

After several rounds of diplomacy, there’s been no progress in diffusing the heightened hostilities between Russia and Ukraine. With both the US and UK withdrawing some embassy staff from Ukraine, there is a real threat of an imminent Russian invasion.

Gold headed higher on Monday on the back of the geopolitical tensions, with fresh Houthi missile attacks on Saudi Arabia and the United Arab Emirates further boosting the flight to safety.

The precious metal was last up 0.4% to trade around $1,840/oz. The Japanese yen was also in demand, appreciating against all of its major peers, while the US dollar was slightly firmer.

Euro finds support in not-so-bad PMIs

The euro was choppy at the start of the week as the flash PMIs for January painted a mixed picture of the Eurozone economy. French PMIs disappointed badly but Germany’s figures beat the top estimates. On the whole, however, it appears that the Eurozone economy continues to expand despite some Omicron restrictions. A bigger concern for Europe is if the energy crisis were to escalate should there be a war in Ukraine.

The single currency was off its lows in mid-morning European trade to stand around $1.1325. The pound fared a little worse as the UK’s PMIs declined in January. Traders will be keeping an eye on the happenings in Downing Street this week as the inquiry into the ‘partygate’ scandal is due to be published at some point in the next few days.

But the worst performer so far today is the Australian dollar, slipping 0.5%, followed by the New Zealand dollar, which came under pressure from fresh Covid curbs being announced yesterday by Prime Minister Jacinda Ardern.

Is a rebound in store for Wall Street?

In equity markets, a mixed session in Asia failed to shore up shares in Europe, which slumped not long after the open. The troubling headlines about Ukraine could be dampening the mood in Europe as US futures indicate an easing in the selloff.

Netflix shares crashed more than 20% on Friday but the Q4 earnings could yet turn Wall Street’s fortunes around as several big tech and other major US companies will announce their latest results this week, starting with IBM after today’s market close.

EURUSD continues to exhibit a lack of directional impetus, drifting between the 50-day simple moving average (SMA) at 1.1310 and the mid-Bollinger band at 1.1345. The falling SMAs are defending the broader downtrend that started from the 1.2266 peak.

Currently, the Bollinger bands are suggesting feeble volatility in the pair confined to the lower and upper Bollinger bands of 1.1247 and 1.1442 respectively. Furthermore, the short-term oscillators are indicating that guiding forces are absent, confirming that directional momentum has diminished. The MACD and RSI are flirting with their neutral thresholds at zero and 50 respectively, while the stochastic %K line, which is in oversold territory, is not signalling a definitive directional charge.

If sellers drive the price beneath the 50-day SMA at 1.1310, a reinforced zone of support between the nearby 1.1271 and 1.1234 lows could impede a price drop. However, dipping lower, the price may then encounter the 1.1146-1.1200 support foundation, extending back to the end of March 2020. Should this base, which includes the 17-month trough of 1.1185, fail to mute negative tendencies from snowballing, the price could dive for the 1.0986-1.1017 support border, which has held from the April-May 2020 period.

In the positive scenario, buyers would need to step above the mid-Bollinger band at 1.1345 and over the 1.1400 handle to tackle the key resistance zone between the upper Bollinger band at 1.1442 and the 100-day SMA at 1.1466. Should profound upside pressures unfold beyond the 1.1482 high and conquer the 1.1500-1.1553 critical resistance obstacle, the 1.1608 barrier could come into play.

Summarizing, EURUSD maintains a neutral-to-bearish tone below the 100-day SMA and the 1.1500-1.1553 resistance border. That said, for the sideways trajectory in the pair to dissolve, the price would need to start with a break either below the 1.1234-1.1271 area or above the 1.1400 hurdle.

UK PMI manufacturing dropped form 57.9 to 56.9 in January, below expectation of 57.9. PMI Services ticked down from 53.6 to 53.3, well below expectation of 55.0. PMI Composite dropped from 53.6 to 53.4. All three indexes were at their 11-month low.

Chris Williamson, Chief Business Economist at IHS Markit, said: "A resilient rate of economic growth in the UK during January masks wide variations across different sectors. Consumer-facing businesses have been hit hard by Omicron and manufactures have reported a further worrying weakening of order book growth, but other business sectors have remained encouragingly robust."

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Eurozone PMI Manufacturing rose from 58.0 to 59.0 in January, above expectation of 57.5, a 5-month high. PMI Services dropped from 53.1 to 51.2, below expectation of 52.2, 1 9-month low. PMI Composite dropped from 53.3 to 52.4, a 11-month low.

Chris Williamson, Chief Business Economist at IHS Markit said: "The Omicron wave has led to yet another steep drop in spending on many consumer-facing services at the start of the year, with tourism, travel and recreation especially hard hit. However, so far the overall impact on the wider economy appears relatively muted, and most encouraging is the further easing of manufacturing supply chain delays despite the renewed virus wave. Not only has the alleviating supply crunch helped factories boost production, but cost pressures in manufacturing have also moderated.

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Germany PMI Manufacturing rose from 57.4 to 60.5 in January, above expectation of 57.0, a 5-month high. PMI Services also rose from 48.7 to 52.2, above expectation of 48.0. PMI Composite rose form 49.9 to 54.3, a 4-month high.

Phil Smith, Economics Associate Director, at IHS Markit said: "January's flash PMI numbers came in comfortably above consensus to show a surprisingly resilient performance from the German economy at the start of the year... Manufacturing is expected to stage a recovery in 2022 as supply bottlenecks ease... January's services numbers, showing activity recovering slightly after the decline at the end of last year, were another positive surprise... Still, rising costs remain a concern for businesses, with the survey data showing that input prices are continuing to rise sharply and on multiple fronts."

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