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• Why is everything selling off?
• Gold testing key level
• Crude oil topping out?

Thursday’s rug pull was very significant and marked yet another setback for the bulls on Wall Street who have had a nightmare start to the new year. Mind you, crypto investors just cannot catch a break with prices breaking further lower today due to the general risk-off environment across the financial markets. Even the mighty crude oil has reversed, while gold hangs in the balance as investors weigh the prospects of tighter monetary policy against positive influences on the metal such as high levels of inflation and haven flows.

Why is everything selling off?

The number on reason behind the risk off tone is surging inflation and the prospects of faster-than-expected monetary policy tightening. The era of ZIRP is beyond us as central banks now start to withdraw support. Investors now have to rely on solid company fundamentals than chasing momentum. Most companies and sectors remain significantly overvalued, as Netflix investors have found out. With inflation eating into disposable incomes, it is possible that investing could take a hit while certain group of investors cash out to release funds for real-world purchases. Volatility is here to stay, especially if the 200-day moving average also breaks on the S&P 500:

Gold testing key level

Although off its best levels, gold is still up for the second week, suggesting investors have been seeking protection against surging inflation and as excessive risk taking in equities and crypto came to an end.

I think the markets have priced in a hawkish Fed meeting already and gold has been able to shrug off the recent strength in yields. So, a potential breakout from the current ranges should not be too surprising. It would help if the Fed were to talk down the prospects of an even faster tightening cycle.

As we mentioned the possibility earlier in the week, gold turned lower from around $1845 resistance, but it is now testing the breakout area around $1830, which needs to hold to validate Wednesday’s sharp breakout. Given how gold has been able to climb higher in the past couple of weeks, it is possible we could see renewed strength come in later today, especially if investors dump equities again.

Crude oil topping out?

Crude oil prices have fallen back from their recent highs alone with risk assets following the sharp reversal on Wall Street Thursday. The daily chart of Brent shows an inverted hammer on Thursday, while the weekly shows the significance of the $86.50ish level, which was significant resistance in the past. Although we have broken above this level, failure to hold that breakout could ignite a sharp sell-off.

Market sentiment deteriorates as yields remain elevated

The US stock futures’ negative correction develops lower, with the tech-heavy Nasdaq 100 affected more, falling 4.6% yesterday. The first gain in US crude oil inventories in eight weeks in yesterday’s data release may have added to bearish sentiment in markets.

Despite this week’s disappointing US jobless claims, linked to the omicron variant, which rose 286 k versus an expected 225 k, and the correction in the US stock futures - in an environment of elevated yields - the market story is likely to remain the same with the Fed moving forward with removing accommodation and delivering expected interest rate hikes.

The USD/JPY pair currently at 113.84 per dollar failed to return above the 114.00 mark, and the USD/CHF pair now at 0.9125, fell around half a basis point today, both together indicating that demand for havens has picked up.

The shift into havens may have caused a drop in the 10-year Treasury yield, currently at 1.84%. That said, interesting enough, gold lost some of its shine surrendering around $10 to slip to $1833/oz.

Yields continue to keep the reserve currency somewhat stable with the dollar index currently around 95.60 after recently failing to improve beyond the 96.00 level. The euro has creeped slightly up to $1.1340 on the back of modest weakness in the greenback.

UK consumers lose confidence, weak retail sales hurt the pound

The pound has slid beneath the January 18 trough of $1.3572 after UK retail sales fell 3.7% m/m in December 2021, coming in worse than an anticipated drop of 0.6% and following two-months of strong growth in retail sales. The drop in sales in December may be related to the fact the public did their holiday shopping earlier this year and the strains to movement from the omicron variant.

Moreover, UK consumer confidence in January fell to -19 from December’s figure of -15. Concerns centre around fears of high utility bills and inflation, which is hurting households.

Sterling is standing at around $1.3565 presently.

Antipodean currencies

The kiwi at $0.6725 is on the back foot and is about to test the December 2021 low of $0.6700. However, the aussie is faring better and is flirting with the $0.7200 mark after oil stabilized and China increased its asset purchases. Australia’s largest exporter has stepped up its policy easing efforts to cushion a slowing economy, after worries intensified last year on whether the economy in China would be able to weather the storm from weak consumer spending, restrictions and a property sector blip.

US oil stockpiles rise and loonie awaits retail sales

WTI oil futures have stabilized slightly north of the $84.00 per barrel mark. The black liquid fell $4.20 dollars to $82.80 per barrel in the Asian trading session from a fresh 7-year high of $87.00 per barrel. Yesterday’s crude oil inventories in the US increased by 515,000 barrels the week ending January 14, up for the first time since November 2020 and countering the expectations of a 938,000 barrel drop.

Nonetheless, oil retains a bullish tone - not far off the $100.00 per barrel mark as per some analysts - caused by strong demand and supply constraints in the market. The rising energy prices pose a conundrum for central banks who are currently juggling inflation and economic growth.

The USD/CAD pair is holding marginally above the C$1.2500 mark, with the Canadian dollar showing some resilience even as oil took a blow yesterday.

The loonie is firm ahead of upcoming Canadian retail sales, which are due at 13:30 GMT.

At 15:00 GMT, consumer confidence in the eurozone will be released, while Treasury Secretary Yellen is due to speak at 16:30 GMT.

A turbulent end to the week with widespread selling as underlying anxiety in the markets once again takes hold.

The hope going into earnings season was that companies were going to settle the nerves. That we were about to get a reminder of the strength of the economy and the resilience we've seen over the last couple of years. Instead, the results have been rather disappointing.

The banks didn't give us much to cheer about and if the Netflix results are anything to go by, big tech may also underwhelm. The subscriber numbers were a real blow and investors are being forced to adjust to the reality that there is nowhere near the momentum that the last couple of years was expected to generate. Immense competition in the space and higher costs are also major headwinds.

And that negativity, on top of everything else, is taking its toll across the broader markets as investors are starting to realise that earnings season may not be the game-changer they hoped it would be. From the perspective of Netflix, I do wonder whether the response is overblown with the 20% decline in premarket trade taking the price back to pre-pandemic levels. But that is a reflection of the mood in the markets right now.

And it could get much worse. The Nasdaq has broken through some key technical support levels including the 200-day moving average for the first time since April 2020. The party isn't over for big tech but unless they give us something to cheer about next week, they could be in for a rough ride in the coming weeks.

Retail Sales don't change the outlook for UK interest rates

UK retail sales fell 3.7% in December, well below forecasts, as consumers likely pulled forward festive shopping in anticipation of supply shortages. While the number was well short of expectations, no one was falling off their chair in shock at the release. It was expected that spending in December would disappoint as a result of omicron and earlier Christmas shopping so traders were always going to allow for a large margin for error.

The fact remains that the data changes nothing with regards to how the BoE will act this year and a rate hike next month still looks a near cert. The pound is a little lower today but that is no reflection on interest rate expectations. Four hikes are still heavily priced in this year.

How long until oil bulls jump back in?

Oil prices are slipping more than 1% at the end of the week, pulling back a little further from the highs just short of $90. The decline came shortly after the EIA inventory data on Thursday, which showed a surprising rise against expectations of a 2.1 million barrel decline. The White House also looking to apply further pressure in response to higher prices may be contributing to the pullback, although as we've seen before, their power appears quite limited.

Obviously, that's no game-changer but it came at a good time when crude was running into resistance at $90 and losing momentum. It's a big psychological barrier as once that goes, people are just counting down the days until we have triple-figure oil. It's a big deal, but one we'll have to wait a little longer for. The question is how long until traders jump back in. Given the fundamentals, I don't think we'll be waiting too long.

Can gold propel higher after the breakout?

Gold is marginally lower on Friday but finding support around $1,830 where it experienced significant resistance in recent weeks. The break above this level was big for the yellow metal and could propel it higher in the coming weeks. That starts though with holding above $1,830, as confirmation of the breakout will be a big confidence boost for gold bulls.

The move suggests gold is once again playing the role of the inflation hedge and a safe haven in these unstable markets. A lot of tightening is priced into the markets but inflation is running hot and there doesn't appear to be much confidence that it will be enough. It's no wonder there's so much anxiety out there.

Bitcoin slips below key psychological support

Bitcoin is getting pummelled, hit by another wave of risk aversion in the markets that's pushed the price below $40,000 and probably exacerbated the move in the process. The price is more than 6% lower on the day but more than 10% from yesterday's highs. It doesn't look good for cryptocurrency.

And it comes at a time when Russia has proposed banning the use and creation of cryptocurrencies which will come as a blow as it's currently the world's third-largest crypto miner. It had little impact on price though as we've seen how quickly the industry can adapt to these blanket bans in the past.

The Euro started a fresh decline from well above the 1.1450 zone against the US Dollar. The EUR/USD pair traded below the 1.1400 support zone to move into a bearish zone.

There was also a move below the 1.1350 level the 50 hourly simple moving average. A low was formed near 1.1300 and the pair is now correcting higher. An immediate resistance near the 1.1350 level.

The next major resistance is near the 1.1380 level. A break above the 1.1350 and 1.1380 resistance levels could start a decent increase towards the 1.1420 level in the near term.

On the downside, an initial support is near 1.1312 on FXOpen. The next key support is near 1.1300, below the pair could decline heavily. In the stated case, the pair could move down towards the 1.1250 level in the near term.

The Canadian dollar continues to tread in choppy waters, as it trades slightly above the symbolic 1.25 line.

The week will wrap up with Canada releasing retail sales, the primary gauge of consumer spending. For November, the headline reading is expected to slow to 1.2% y/y (1.6% prior) and core retail sales are forecast to remain unchanged at 1.2%.

Canadian provinces have renewed tough health restrictions in a bid to curb the spread of Omicron, which is dampening restaurant and entertainment activity. GDP growth will be affected by the restrictions, and expectations are that Canada will show marginal or no growth in the first quarter. The good news (hopefully) is that pent-up demand will translate into strong growth once the Omicron wave subsides.

Despite the toll that Omicron has inflicted on the Canadian economy, the markets are expecting the Bank of Canada to act at next week’s policy meeting. A quarter-point hike has been priced in at around 70%, even though at its meeting, the BoC is expected to revise lower its growth forecast for Q1.

Canadian inflation hits 30-year high

Financial headlines announcing that inflation has surged to 30-year highs are becoming more common. First, it was US inflation, followed by the UK just this week, and now Canada has joined the club. In December, headline CPI rose to 4.8% y/y, the highest level since a 5.5% print back in September 1991.

The jump in inflation has raised expectations that the BoC will press the rate trigger at next week’s meeting. Inflation has now overshot the bank’s inflation target of 1% to 3% for nine straight months.  Higher oil prices are also contributing to inflation, but we could see some relief as oil futures indicate that oil prices will ease in the first half of this year.

USD/CAD Technical

• There is support at 1.2434, which has held since mid-November. Below, there is support at 1.2322
•  There is resistance at 1.2678 and 1.2810

• US stocks erase early gains to close negative, falling yields don’t help
• Yen advances as risk aversion intensifies, oil succumbs to gloomy mood
• Dollar choppy, Netflix disappoints, US-Russia meeting in focus

Selling snowballs

The stock market just can’t shake off the blues. Wall Street took another sharp hit yesterday as investors continued to unload riskier assets and rotate into safe havens to insulate their portfolios from any further downside.

All this mayhem started with worries around the Fed raising interest rates at a faster clip, but that’s no longer the driving force. Treasury yields have been falling for most of the week as traders hedge risk and yet, equities keep bleeding. Hence, there is no clear catalyst behind the selloff anymore aside from the fear of further selling itself.

This is the type of move you would expect to see when market participants are worried about something huge, like a Russian invasion of Ukraine, not the Fed trying to raise rates into a solid economy. But if that was the case, oil and gold prices would be going berserk, which hasn’t really happened.

Ultimately this is good news. As long as yields are stable or retreating, that will help cushion the stock market from any brutal losses. It can always get uglier, but without a clear narrative behind the shellacking anymore, bargain hunters could soon emerge to take advantage of the deepening discounts in many quality names.

Yen shines as yields retreat

In the FX spectrum, the defensive Japanese yen has been the clear winner this week, capitalizing on all the risk aversion and the pullback in global yields. The US dollar has been choppy in recent sessions but is still headed for solid weekly gains against the euro and sterling, both of which tend to underperform in periods of market stress.

The sour mood has also left its marks on the New Zealand dollar, which is currently testing multi-month lows despite money markets pricing in a rate increase by the Reserve Bank in every single meeting this year and fresh stimulus measures in China.

The Canadian dollar has performed much better than its commodity cousins, helped by speculation that the Bank of Canada will expedite its normalization plans and raise interest rates next week. The final piece of this puzzle will be the retail sales numbers that will be released today.

Oil pulls back, geopolitics in focus

Meanwhile in energy markets, oil prices have rediscovered the gravitational pull of risk sentiment, erasing all their gains for the week to trade lower instead. It seems that crude cannot ignore the havoc in stocks for too long, although geopolitical factors could also be at play.

The top diplomats of the United States and Russia will meet today for the second round of negotiations to de-escalate the crisis around Ukraine. Whether these talks bear fruit could be crucial for traders trying to price geopolitical risk into assets such as crude oil and gold, as the rhetoric has become more heated lately with President Biden warning of a ‘heavy price’ if Russia invades.

There isn’t much else on the economic calendar today. Instead, markets will turn their gaze to next week’s events, which feature central bank meetings in America and Canada.

Finally, it is worth noting that Netflix shares are lower by a stunning 20% in premarket trade after the streaming giant warned of a slowdown in subscriber growth during its quarterly earnings call.

USD and JPY are coming higher as stocks continue to weaken with SP500 breaking below 4500. So risk-off may resume which can allow USD to recover even more.

EURUSD came higher last week after US CPI figures. Pair moved to the upper side of a corrective channel line, to around 1.1490 where bulls slowed down as the market turned with impulsive bearish price action. We see nice and sharp reversal down and pair already testing the lower trendline support where we expect a breakdown that will make a room for further weakness back to 1.1185.

EUR/USD 4h Elliott Wave analysis

NZDUSD has detached from the converged simple moving averages (SMAs) and has dipped below the multiple lower wicks of the candles from January 6 till the 11. The stabilized SMAs are endorsing a more neutral trajectory in the price as the pair remains rangebound, oscillating between the 0.6678-0.6700 floor and a 0.6890-0.6910 ceiling.

The falling Ichimoku lines are indicating that negative forces are commanding lately, while the short-term oscillators are suggesting that the price may test the floor of the one-month sideways market. The MACD, in the bearish region, is diving further below its red trigger line, while the RSI is nearing the 30 oversold barrier. The stochastic oscillator is sustaining its negative charge, but the %K line is hinting of possible stalling in downside momentum.

Heading lower, preliminary support could arise at the critical 0.6678-0.6700 section. In the event selling interest intensifies and the price breaks beneath the floor of the range, sellers may then target the key 0.6612 and 0.6588 neighbouring troughs from the start of November 2020. Should the negative trajectory endure, the next downside barrier to overcome lies around 0.6551.

If buyers re-emerge and drive the price back over the immediate 0.6732 and 0.6752 obstacles (previous support-now-resistance), the Ichimoku lines could delay an overshoot in the price. That said, for upside momentum to strengthen, the bulls would need to surpass a resistance section located between the 200-period SMA at 0.6787 and the Ichimoku cloud’s lower band at 0.6810. Piloting higher, the price may test the 0.6849 and 0.6873 boundaries respectively before buyers can challenge the 0.6890-0.6910 ceiling to the horizontal price zone.

Summarizing, NZDUSD is exhibiting an increase in downward forces and has neared the lower end of the trading range. Yet, for the neutral-to-bearish tone to turn bearish, the price would need to break below the 0.6678-0.6700 floor. On the other hand, the picture could become optimistic with a climb in the price north of the 0.6890-0.6910 barricade.

GBPJPY continues to trend southwards so far this month following the peak at a two-month high of 157.75, with the price recently slipping back below its 20-day simple moving average (SMA) to reach a new low at 154.39 on Friday.

The pair is decelerating within the lower bearish Bollinger zone and the momentum indicators are painting a gloomy picture for the short term as the MACD keeps losing ground below its red signal line and the RSI is entering the bearish territory below 50.

Encouragingly, the long-term ascending trendline from March 2020, which managed to add some footing under the price at the end of December, is within breathing distance around 154.40. A rebound here cannot be excluded as the Stochastics are already comfortably below their 20 oversold level. Also, the 38.2% Fibonacci retracement of the 148.96 – 157.75 up leg and the lower Bollinger band are in the neighborhood, increasing the odds for an upside reversal.

Should the bears breach that floor, the pair may weaken towards the 50% Fibonacci of 153.35 and the 50-day SMA. If the 200-day SMA at 153.00 gives way as well, the sell-off may sharpen towards the 61.8% Fibonacci of 151.75.

Otherwise, a bounce on the trendline could initially pause between the 23.6% Fibonacci of 155.68 and the 20-day SMA slightly above at 155.91 before it challenges the tough ceiling within the 157.75 – 158.20 territory. The 160.00 psychological mark, last seen in 2016, could be the next target.

In brief, GBPJPY is currently holding a bearish bias. Unless the 154.40 region blocks the way, the sell-off may stretch towards the longer-term SMAs.

EUR/USD

The rally of the pair turned out to be fake as expected and the downtrend resumed from the high at 1.1480. During yesterday's session, the support at 1.1320 was violated, but has not yet been breached. The lack of buyers around 1.1360 and their low activity around 1.1320 suggests that a new decline towards the support at 1.1280 is possible. The bears could take a break at around 1.1300 and prices could rise again above 1.1360, at which point they could start looking for better market entries or add to their shorts. The key resistance at the moment is 1.1400 and buyers can expect to find support around 1.1280. With a breach of 1.1280, a serious decline towards 1.1000 can still remain on the table. An alternative scenario is for the market to remain choppy in the coming days or at least until the Federal Reserve meeting scheduled for next week as the event could be the necessary catalyst needed to spark new huge moves.

USD/JPY

The Ninja is headed for a new test of the support at 113.48. The market is showing signs of divergence and the bottom may end up being aggressively bought. The reaction of the prices around this area will determine whether the market will enter a complex pullback or if the downtrend will continue. Next support zones for the bulls are 113.00 and 112.55. The first resistance for the bulls is 114.20, while a more serious obstacle ahead of them is 115.00. The central banks are expected to have a strong influence on future market developments and a possible failure to cope with inflationary pressures and a loss of confidence in the dollar could quickly bring prices down to 109.00.

GBP/USD

The uptrend for the Cable can now be considered disrupted. The expectations are for a complex correction and possible reversal of the current direction. The main support for the bulls is 1.3570, followed by 1.3480. The first serious resistance is 1.3650, and for market sentiment to change to positive, it will have to be cleared first.

EUGERMANY40

The German index could not hold onto its daily gains and was aggressively dumped at the end of yesterday's session. Prices are again gravitating around the key support at 15664 and sentiment is highly negative. If the level is breached, then a decline towards 15520, and even 15300, can be expected. The declines after the record peak are still within the limits of a correction and it is thus too early to speak about a main trend reversal. There is a possibility of a downward move reversal, which could happen either from the current levels or from 15520. Seasonally speaking, the last week of January is bullish for indices, but for market optimism to be reignited, the 15660 level would have to withstand the bearish pressure first. In such a scenario, a strong rally, targeting the levels of 15900 and 16070, can be expected.

US30

The U.S. blue-chips look like they are in a free fall. Volatility remains high and sentiment is sour. It is possible that the index will be able to form a bottom at around 34550 and go up to test the resistance at 35000. The U.S. markets are still riding the earnings season, and the meeting of the Federal Reserve next week is highly anticipated by investors. Seasonality is in favour of the bulls, and if President Powell manages to calm the markets, then short position covering and a purely mechanical rally with targets at around 35630 and even 35980, can be expected.