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Markets

Key US equity indices lost another 2% on Friday and more importantly high-level support marks. The S&P fell below the neckline of a triple top formation at 4495, suggesting more downward potential towards the October low of 4279 with the final target of the technical formation even at 4172. The tech-index Nasdaq was already in correction modus (>10% from all-time top in November), but now lost the neckline of a huge double top formation which served as resistance in H1 2021 (14175). The move lower suggests more downward potential towards 12552 (38% retracement since March 2020) and even the low 12 000 area (final target double top).

The dominant reason for this year’s risk correction is obviously the surge in real rates because of the accelerated global push towards (central bank) policy normalization.

It automatically brings us to this week’s main event: Wednesday’s FOMC policy meeting. We expect the Fed to lay the groundwork for a 25 bps March rate hike/lift-off. Abruptly ending net asset purchases (normally tapered down to zero in March) is a wildcard. We currently take into account a scenario of four consecutive 25 bps rate hikes in the US central bank’s inflation battle, before allowing for a pause once the central bank puts in motion pillar two of its normalization process: shrinking the balance sheet at stealth pace. Rapidly deteriorating inflation dynamics probably imply that risks surrounding this scenario are probably tilted to the hawkish side. This means potentially more and/or bigger rate hikes and a sooner start to winding down the balance sheet
 
Last week’s risk aversion ended the sell-off on bond markets who took up their role as safe haven assets. The US yield curve bull flattened with yields losing 2.2 bps (2-yr) to 4.5 bps (30-yr). German yields fell by around 4 bps across the curve. 10-yr yield spread changes vs Germany widened by up to 3 bps for Greece and Italy.

The trade-weighted dollar lost on points, closing at 95.64 from an 95.81 open. CHF, JPY and EUR were the main beneficiaries (in that order) from the risk-off spell. EUR/GBP was short squeezed higher to test first resistance at 0.8381 in combination with horrible December UK retail sales.

Today’s eco calendar contains January PMI numbers, but we doubt they’ll be able to steal the spotlight from risk sentiment and the approaching FOMC meeting. From the weekend, we retain comments by ECB governing council member Rehn in Handelsblatt saying that a 2023 rate hike would be the logical thing to do apart from any new economic disruptions.

News Headlines

Members of both houses of Italian Parliament and regional representatives start the potentially lengthy presidential election process today. To be appointed, a candidate needs a two-third majority in the first three rounds of the vote or a simple majority later in the process. The role of Italian President is mainly ceremonial, but the head of state controls key steps in the Italian political process including nominating the Prime Minister or dissolving parliament. PM Mario Draghi is in pole position to get the job. However, some of the parties currently supporting his government, said that Draghi leaving the post of PM would be a risk to political stability in the country. The vote is secret and some parties didn’t give public guidance. So, the outcome remains uncertain. Former PM Silvio Berlusconi this weekend stepped out of the race as a candidate for the job.

In response to questions posed by Bloomberg, Head of the National Bank of Poland Glapinski said that he wants to convince members of its MPC to take a more aggressive approach on inflation and to raise interest rates more than markets currently anticipate. The comments came after stronger than expected industrial production (16.7% Y/Y for December) and wage data (+11.2% Y/Y) on Friday. The Polish policy rate has been raised to 2.25% after four consecutive rate hikes as inflation accelerated faster than expected (8.6% Y/Y in December). Today, Polish retail sales data are scheduled for release. The zloty late on Friday reversed most of its intraday, risk-off driven losses after the Glapinski headlines hit the screens. EUR/PLN this morning trades in the 4.525 area.

Market movers today

Today's highlight will be the flash PMIs for January in the euro area, UK and US. Services activity will likely continue to be adversely affected by renewed COVID-19 headwinds, but it will be interesting to see whether the manufacturing sector is also slowing and price pressures continue to ease up.

Italy's presidential election kicks off today, but given the lack of clarity on candidates and broad public agreement among the parties, voting could well stretch over several days. There is a clear risk of political uncertainty returning over the longevity of Italy's unity government, if current Prime Minister Mario Draghi is elected as President.

Markets will also keep a close eye on the Russia-Ukraine developments. Later this week the FOMC meeting will be in market focus.

The 60 second overview

Russia Ukraine tensions: The meeting between Russian and US foreign ministers kept hopes for a diplomatic solution alive. The US has promised it will send a written response to Russian demands later this week. Over the weekend, the US foreign minister Anthony Blinken rejected pressure to immediately escalate sanctions on Russia as it would limit western options in the future. The US letter and the Russian reactions to it will be key in determining the future path of the conflict.

Natural gas prices have continued to decrease in recent days, also amid reports that China has sold LNG cargoes back to the market after it had stocked up enough supply to see it through the winter. FT meanwhile reports that the US is holding talks with Qatar and other large gas exporters to plan contingency measures in case a Russian invasion of Ukraine disrupts supplies to Europe. However, European reluctance to commit to fixed, long-term contracts and limited LNG terminal capacity could still create hurdles.

COVID-19: New cases remain extremely high in Europe and the US and moving sharply higher in some emerging markets and Japan. However, new cases seem to have peaked in the UK and US. If other countries soon follow suit, it supports our view that we are indeed at "peak restrictions". In mainland China, new cases remain record-high and although the government has eased its zero-covid policy slightly, the tolerance for local outbreaks is still very low, especially ahead of the Winter Olympics and Chinese New Year.

ECB: December minutes last week showed increasing divisions and uncertainty among the ECB Governing Council members about the inflation outlook. Over the weekend, Finland's Olli Rehn said an increase in borrowing costs in 2023 is logical, in the absence of "any new economic disruptions". Ireland's Gabriel Makhlouf is a bit more cautious, saying he does not expect any rate hikes, but noted that risks of second-round effects of inflation, such as wages rising without productivity increases, could prompt action.

Equities: The growth sell off stalled on Friday. Investors did not buy the dip, but continued to sell cyclicals rather than outright growth. S&P 500 closed down -1.9%, Nasdaq -2.7%, Dow -1.3% and Russell 2000 -1.8%. This marked the third straight week of declines (S&P -8% and Nasdaq -15% YTD). In sectors, consumer staples, real estate and utilities were most resilient, while materials, energy and financials fared the worst on Friday. In fact, the winners over the past week has not been the outright value sectors, but defensives.

FI: Global bond yields ended lower last week, with 10Y US Treasuries moving below 1.8% and 10Y German government bond ended in negative territory, after having tested the 0%-level last week. The US Treasury curve continues to flatten, as the market is expecting the Federal Reserve to move rate hikes forward and begin already in March.

FX: Scandies in the hands of risk sentiment. The FOMC meeting is the key event this week.

Credit: Last week ended on a negative tone with relatively large widening in credit spreads on Friday. The sell-off was driven by geopolitical tensions on the Russian-Ukrainian border coupled with mixed Q4 corporate earnings (i.e. Netflix and Siemens Gamesa). Itraxx main widened 1.7bp to 55.3bp while Xover widened 7.8bp to 269.5bp.

DXY:

On the H4 timeframe, prices are consolidating in a triangle pattern and are on bullish momentum. We would expect potentially further bullish continuation from our 1st support at 95.426 in line with 38.2% Fibonacci retracement towards our 1st resistance at 95.843 in line with 61.8% Fibonacci retracement. RSI is showing bullish momentum and prices are trading above our Ichimoku clouds, further supporting our bullish bias.

Areas of consideration:

• H4 time frame, 1st resistance at 95.843
• H4 time frame, 1st support at 95.426

XAU/USD (GOLD):

On the H4 chart, prices are on bullish momentum and abiding to our ascending trendline. We would watch for our intermediate level for confirmation in price action. If prices dips below our intermediate level, we would expect it to dip towards our 1st support at 1820.300 in line with 61.8% Fibonacci extension. Alternatively, prices may travel higher towards our 1st resistance at 1847.563 in line with 78.6% Fibonacci retracement. Our bullish bias is further supported by our MA 50 & 200 crosses as well as prices trading above our ichimoku cloud support.

Areas of consideration:

• 4h 1st support at 1820.300
• 4h intermediate resistance at 1829.925

GBP/USD

On the H4 chart price has recently broken out of the ascending trendline and near 1st resistance level of 1.35746 which is also 23.6% Fibonacci retracement. Price can potentially dip to the 1st support level of 1.34640 which is also 100% Fibonacci projection and 50% Fibonacci retracement. Our bearish bias is supported by the ichimoku cloud indicator as price is trading below it.

Areas of consideration:

• H4 1st resistance at 1.35746
• H4 1st support at 1.34640

USD/CHF:

In reference to last week’s analysis, price indeed dropped from 1st Resistance and approaching 1st Support @ 0.90961. On the H4 timeframe, price is abiding to a descending channel, signifying a bearish momentum. However, we can expect price to make a short-term bullish bounce from 1st Support in line with previous swing low towards 1st Resistance in line with 100% Fibonacci projection and 50% Fibonacci retracement. Our short-term bullish bias is further supported by stochastic indicator where the %K line is approaching the support level.

Areas of consideration:

• Watch 1st Support at 0.90961
• Watch 1st Resistance at 0.91809

EUR/USD :

On the H4 chart , price is abiding by the ascending trendline and is in the middle of the 1st resistance of 1.13859 which is also 38.2% Fibonacci retracement, 61.8% Fibonacci projection and 1st support level of 1.12915 which is also 161.8% Fibonacci projection. Price can potentially go to the 1st resistance level. Our bullish bias is supported by the stochastic indicator as it is near support level.

Areas of consideration

• 1st resistance at 1.13859
• 1st support at 1.12915

USD/JPY:

On the H4 timeframe, is abiding to the ascending channel on the daily, signifying an overall bullish momentum. We can now expect the price to bounce from 1st Support in line with 23.6% Fibonacci retracement towards 1st Resistance in line with 61.8% Fibonacci projection and 61.8% Fibonacci retracement. Our bullish bias is further supported by the stochastic indicator where the %K line is at the support level.

Areas of consideration:

• H4 1st resistance level 115.508
• H4 1st support level 113.982

AUD/USD:

On the H4, price is reacting within the ascending channel, signifying an overall bullish momentum. Price is approaching the 1st Support, we can expect to see price make a bullish bounce from 1st Support in line with 127.2% Fibonacci projection, 78.6% Fibonacci retracement and ascending channel support towards 1st Resistance in line with previous swing high and 61.8% Fibonacci projection. Our short-term bearish bias is further supported by the RSI indicator where it is approaching the support level.

Areas of consideration:

• H4 1st Support level 0.71724
• H4 1st resistance level 0.73091

NZD/USD:

On the H4, prices are on bearish momentum and abiding to a bearish trendline. We see the potential for a bounce from our 1st support at 0.67012 in line with 161.8% Fibonacci projection towards our 1st resistance at 0.67745 in line with 78.6% Fibonacci retracement. RSI is at a level where bounces occurred previously. Alternatively, our stop loss will be placed at our 2nd support at 0.66464 in line with 200% Fibonacci Projection.

Areas of consideration:

• H4 time frame, 1st resistance at 0.67745
• H4 time frame, 1st support at 0.67012

USD/CAD:

On the H4, with price approaching the resistance of the ichimoku cloud, we have a bearish bias that price will drop from our 1st resistance at 1.26185 which is in line with horizontal overlap resistance and 61,8% Fibonacci retracement to 1st support at 1.24604, which is in line with horizontal overlap support and 100% Fibonacci projection level. Alternatively, price may break 1st resistance structure and head for 2nd resistance at 1.26930, which coincides with horizontal overlap resistance and 61.8% Fibonacci retracement.
Areas of consideration:

• H4 time frame, 1st support at 1.24604
• H4 time frame, 1st resistance at 1.26185

OIL:

On the H4, with price moving above the ichimoku cloud, we have a bullish bias that price will rise to our 1st resistance at 90.84 which is in line with horizontal swing high resistance and 127.2% Fibonacci extension level from 1st support at 85.53, which is in line with horizontal overlap support and 32.8% Fibonacci retracement. Alternatively, price may break 1st support structure and head for 2nd support at 79.75, which coincides with horizontal overlap support and 78.6% Fibonacci retracement.

Areas of consideration:

• H4 time frame, 1st resistance of 90.84
• H4 time frame, 1st support of 85.53

Dow Jones Industrial Average:

On the H4, with price moving below the ichimoku cloud, we have a bearish bias that price will from from our 1st resistance at 34806 which is in line with horizontal overlap resistance and 23.6% Fibonacci retracement to 1st support at 34036, which is in line with horizontal overlap support and 127.2% Fibonacci extension level. Alternatively, price may break 1st resistance structure and head for 2nd resistance at 35372, which coincides with horizontal swing high resistance and 50% Fibonacci retracement.

Areas of consideration:

• H4 time frame, 1st resistance of 34806
• H4 time frame, 1st support of 34036

Daily Pivots: (S1) 153.60; (P) 154.41; (R1) 154.91; More...

Intraday bias in GBP/JPY remains on the downside at this point. Fall from 157.74 is seen as the third leg of the consolidative pattern from 158.19. Sustained trading below 55 day EMA (now at 155.20) will target 148.94 support next. For now, risk will stay on the downside as long as 157.74 resistance holds, in case of recovery.

In the bigger picture, price actions from 158.19 are currently seen as developing into a consolidation pattern to up trend from 123.94 (2020 low). Downside should be contained by 123.94 to 158.19 at 145.10 to bring rebound. Firm break of 158.19 will resume the up trend to long term fibonacci level at 167.93. However, sustained break of 145.10 will raise the chance of trend reversal and target 61.8% retracement at 137.02.

Daily Pivots: (S1) 128.58; (P) 128.95; (R1) 129.33; More....

Intraday bias in EUR/JPY remains on the downside. Current development argues that consolidation pattern from 134.11 is extending with another leg. Deeper decline would be seen to 127.36, and possibly further to 126.58 fibonacci level. On the upside, above 130.07 minor resistance will turn intraday bias neutral first. But risk will stay on the downside for now as long as 131.59 resistance holds.

In the bigger picture, price actions from 134.11 are currently seen as a consolidation pattern only. As long as 38.2% retracement of 114.42 (2020 low) to 134.11 at 126.58 holds, up trend from 114.42 is still in favor to continue. Break of 134.11 will target long term resistance at 137.49 (2018 high). However, sustained break of 126.58 will raise the chance of medium term bearish reversal. In this case, deeper decline would be seen to 61.8% retracement at 121.94, and possibly below.

Daily Pivots: (S1) 0.8332; (P) 0.8354; (R1) 0.8393; More...

Intraday bias in EUR/GBP remains neutral for the moment. Considering bullish convergence condition in 4 hour MACD, firm break of 0.8377 resistance will indicate short term bottoming. Intraday bias will be turned back to the upside for 55 day EMA (now at 0.8423). Sustained trading above there will pave the way to 0.8598 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) 1.5695; (P) 1.5756; (R1) 1.5867; More...

Intraday bias in EUR/AUD remains neutral as range trading continues. On the downside, break of 1.5559 will resume the fall from 1.6168 to retest 1.5250/5354 support zone. On the upside, however, break of 1.5898 will argue that pull back form 1.6168 has completed. Intraday bias will be back to the upside for 1.6168 resistance.

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.

Daily Pivots: (S1) 1.0326; (P) 1.0354; (R1) 1.0372; More....

Intraday bias in EUR/CHF remains on the downside at this point. Firm break of 1.0324 low will resume larger down trend from 1.1149 to 161.8% projection of 1.1149 to 1.0694 from 1.0936 at 1.0200 next. On the upside, above 1.0401 minor resistance will extend the corrective pattern with another rise leg. But upside should be limited by 38.2% retracement of 1.0936 to 1.0324 at 1.0558.

In the bigger picture, long term down trend from 1.2004 (2018 high) is still in progress. Next target is 61.8% projection of 1.2004 to 1.0505 to 1.1149 at 1.0223. On the upside, firm break of 1.0505 support turned resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will remain bearish even in case of rebound.

Daily Pivots: (S1) 1.2527; (P) 1.2558; (R1) 1.2616; More...

Intraday bias in USD/CAD remains mildly on the upside for 1.2619 support turned resistance first. Firm break there will argue that whole pull back from 1.2963 has completed and bring stronger rally through 1.2812 to retest 1.2964. Nevertheless, rejection by 1.2619, followed by break of 1.2448, will retain near term bearishness for deeper decline to 1.2286 support next.

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 form 1.4667 and that carries larger bearish implications too.

Daily Pivots: (S1) 0.7155; (P) 0.7193; (R1) 0.7213; More...

Intraday bias in AUD/USD remains neutral for the moment. On the upside, above 0.7313 will resume the rebound from 0.6992 to 0.7555 resistance. However, break of 0.7128 support will bring retest of 0.6991/2 instead.

In the bigger picture, strong rebound from 0.6991 key structural support will retain medium term bullishness. That is, whole up trend from 0.5506 is still in progress. Firm break of 0.7555 resistance will target 0.8006 high and above. However, sustained break of 0.6991 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.