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Consumer price inflation ticked up to 4.8% year-on-year (y/y) in December, in line with market expectations. Energy prices slowed to 21.2% (from 26.4% in November), but excluding energy, prices picked up noticeably, to 3.8% (from 3.3 in November).

Food price growth accelerated again, hitting 5.2% y/y (from 4.4% in November). Shelter prices also eclipsed the 5% mark, hitting 5.4% (from 4.8%) as insurance costs accelerated. Clothing price inflation continued to bounce back, increasing to 1.1% (from 0.7%). Recreation, reading & education, and tobacco & alcohol saw a slower rate of price growth in December.

Seasonally adjusted, month-on-month prices were up 0.3%, in line with price growth in November. Prices gains were led by shelter (+0.5%), food (+0.4%), and household operations and furnishings (+0.2%). Clothing and footwear (-0.7%) and transportation prices (-0.3%) fell in December, while the remaining categories were flat on the month.

All three of the Bank of Canada's core inflation metrics picked up in December. CPI-trim remained rose to 3.7% (from 3.4%), CPI-median to 3.0% (from 2.8%), and CPI-common measure to 2.1% (from 2.0%).

Key Implications

As it is everywhere, inflation remains hot in Canada. Many of the sources of upward pressure on prices in Canada are global, reflecting the mismatch between strong demand for goods and the hobbled ability of the global economy to supply them.

The one exception to the global nature of the current inflationary environment, is housing inflation, which is both domestically driven and, outside of increased incidents of extreme weather driving up insurance prices, directly related to the Bank of Canada's policy stance. There are good reasons beyond its direct impact on consumer price inflation to pay attention to a frothy housing market. High household debt adds financial vulnerabilities that that may challenge the future ability of monetary policy to maintain price stability.

Given the strength in the labour market and the challenges faced by employers in filling positions, the economy is operating at or near its productive potential. As noted in the Bank of Canada's Business Outlook Survey, these are increasingly becoming imbedded in expectations. Inflation is likely to come down over the next year, but getting it there will require tighter financial conditions and rate hikes by the Bank of Canada. The process is likely to begin this year but bringing inflation back to 2% is likely to be a multiyear project.

Cable regained traction and bounced on Wednesday, signaling an end of three-day pullback, sparked by a double rejection at 200DMA (1.3733) last week.

Pound was boosted by UK CPI data which showed that inflation in Britain continued to rise and hit the highest level in nearly 30 years in December, offsetting policymakers’ general view of transitory process and boosting hopes for another BoE’s rate hike on Feb 3 monetary policy meeting.

On the other side, political turmoil in Britain over a series of lockdown parties in Downing Street, which caused strong revolt by lawmakers, resulting in demands for PM Johnson’s resignation, so far did not have strong negative impact on the currency, but may undermine pound’s performance.

Daily studies remain constructive and support scenario of an end of shallow correction, as 14-day momentum remains in the positive territory and turned north, while formation of 20/100DMA bull-cross and thick daily cloud underpin the action.

Today’s close above cracked 10DMA (1.3627) would generate initial positive signal, with close above 1.3660 (Tuesday’s high / Fibo 50% of 1.3748/1.3572 pullback) to complete bullish engulfing pattern and boost positive signals.

Res: 1.3660; 1.3681; 1.3707; 1.3733.
Sup: 1.3614; 1.3572; 1.3546; 1.3498.

Daily Pivots: (S1) 1.1288; (P) 1.1355; (R1) 1.1394; More...

Intraday bias in EUR/USD remains neutral first. Outlook is unchanged that rebound from 1.1185 is seen as corrective move. Break of 1.1284 will argue that larger down trend from 1.2348 is ready to resume. Intraday bias will be back on the downside for retesting 1.1185 low first. Also, in case of another rise, upside should be limited by 38.2% retracement of 1.2265 to 1.1185 at 1.1598 eventually.

In the bigger picture, there are various ways of interpreting the fall from 1.2348 (2021 high). It could be a correction to rise from 1.0635 (2020 low), 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 1.1703 support turned resistance holds. Sustained break of 61.8% retracement of 1.0635 to 1.2348 at 1.1289 would pave the way back to 1.0635.

Daily Pivots: (S1) 1.3561; (P) 1.3611; (R1) 1.3650; More...

Intraday bias in GBP/USD remains neutral for the moment. While deeper fall cannot be ruled out, downside of retreat should be contained by 1.3489 support to bring another rally. As noted before, corrective fall from 1.4282 should have completed with three waves down to 1.3158, after hitting 1.3164 medium term fibonacci level. Above 1.3748 will target 1.3833 first. Sustained break of 1.3833 will pave the way back to retest 1.4248 high.

In the bigger picture, strong support was seen from 38.2% retracement of 1.1409 to 1.4248 at 1.3164. The development suggests that 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) 0.9144; (P) 0.9161; (R1) 0.9191; More....

USD/CHF is staying in consolidation from 0.9090 and intraday bias remains neutral first. On the downside, firm break of 0.9084 support will argue that choppy rise from 0.8925 has completed. Fall from 0.9471 might be ready to resuming. Further decline would be seen back to 0.8925 support first. On the upside, above 0.9276 will target 0.9372 resistance instead.

In the bigger picture, the corrective structure of the rebound from 0.8925 argues that fall from 0.9471 is not complete yet. It could either be the second leg of pattern from 0.8756 (2021 low), or resuming larger down trend from 1.0237 (2018 high). We'd pay attention to the downside momentum and assess the odds later. But for now, medium term outlook will be neutral at best as long as 0.9471 resistance holds.

Daily Pivots: (S1) 114.34; (P) 114.70; (R1) 114.95; More...

The break of 114.30 minor support suggests that recovery from 113.47 has completed at 115.05. Intraday bias is back on the downside for 113.47. Break will target 112.52 structural support. Considering bearish divergence condition in in daily MACD, further break of 112.52 will confirm that it's already in correction to the up trend from 102.58. Deeper decline would be seen to 38.2% retracement of 102.58 to 116.34 at 111.08. On the upside, break of 115.05 will resume the rebound from 113.47. But we'd not expect a break of 116.34 high even in this case.

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. However, firm break of 112.52 support will dampen this bullish case and we'll assess the outlook based on subsequent price actions later.

Daily Pivots: (S1) 1.2478; (P) 1.2521; (R1) 1.2556; More...

USD/CAD's fall from 1.2963 resumes by breaking 1.2452 and intraday bias is back on the downside. Current development argues that whole pattern from 1.2005 has completed with three waves to 1.2963. Below Further decline would be seen to 1.2286 support, possibly further to retest 1.2005 low. Nevertheless, on the upside, break of 1.2569 minor resistance will indicate short term bottoming and turn bias back to the upside for stronger rebound.

In the bigger picture, focus will be 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.

Canadian Dollar jumps higher again after data should consumer inflation rose further to multi-decade high. On the other hand, Dollar is paring some gains as stock markets are trying to recover. As for the week so far, Euro remains the worst performing one. Sterling is next and will look into BoE Governor Andrew Bailey's comments. Yen and Swiss Franc are mixed for now.

Technically, USD/JPY's breach of 114.30 minor support suggests that recovery from 113.47 is finished. Deeper fall could be seen to this support. We'll see if greenback's weakness would be displayed in other Dollar pairs. Or, Yen is staging a more broad-based recovery with GBP/JPY breaking through 154.86 minor support.

In Europe, at the time of writing, FTSE is up 0.61%. DAX is up 0.69%. CAC is up 0.93%. Germany 10-year yield is up 0.0078 at -0.008. Earlier in Asia, Nikkei dropped -2.80%. Hong Kong HSI rose 0.06%. China Shanghai SSE dropped -0.33%. Singapore Strait Times rose 0.12%. Japan 10-year JGB yield dropped -0.0148 to 0.137.

Canada CPI rose to 4.8% yoy in Dec, highest since 1991

Canada CPI ticked up from 4.7% yoy to 4.8% yoy in December above expectation of 4.7% yoy. That's the highest level since September 1991. Excluding gasoline, CPI rose 4.0% yoy. On monthly basis, CPI dropped -0.1% mom, first decline since December 2020, in response to lower demand due to Omicron.

CPI common rose from 2.0% yoy to 2.1% yoy matched expectations. CPI median rose from 2.8% yoy to 3.0% yoy, above expectation of 2.9% yoy. CPI trimmed jumped from 3.4% yoy to 3.7% yoy, above expectation of 3.4% yoy.

Also from Canada, wholesales sales rose 3.5% mom in November versus expectation of 2.8% mom.

From the US, housing starts rose to 1.7m annualized in December while building permits rose to 1.8m annualized.

UK CPI accelerated to 5.4% yoy in Dec, core CPI rose to 4.2% yoy

UK CPI accelerated to 5.4% yoy in December, up from 5.1%, above expectation of 5.2% yoy. This is the highest reading since record began in 1997. CPI core rose to 4.2% yoy, up from 4.0% yoy, above expectation of 4.0% yoy.

Also released, PPI input came in at -0.2% mom, 13.5% yoy, versus expectation of 0.7% mom, 13.7% yoy. PPI output was at 0.3% mom, 0.6% yoy, versus expectation of 0.6% mom, 9.4% yoy. PPI output core was at 0.5% mom, 8.7% yoy, versus expectation of 0.8% mom, 8.6% yoy.

Australia consumer sentiment dropped to 102.2 in Jan, cautiously pessimistic on economic conditions

Australia Westpac-MI consumer sentiment index dropped from 104.3 to 102.2 in January. The -2% decline was much better than the -5.2% fall during the first month of the delta outbreak in New South Wales, the -6.1% drop in Victoria's second wave in 2020, not to mention the epic -17.7% collapse in early 2020.

The 'economic conditions, next 12 months' sub-index dropped -9.6% from 104.9 to 94.8, a swing from "cautious optimism to cautious pessimism". 55% of respondents, an outright majority, expected mortgage interest rates to rise over the next 12 months. Unemployment Expectations Index increased by 8.2% to 112.7, marking a significant deterioration.

RBA would make a decision on the bond purchases program at the February 1 meeting. Westpac expects the central bank to choose to "scale back rather than full wind down, in response to the sudden emergence of Omicron. But that would depend on the upcoming employment and inflation data.

Silver resumes rebound from 21.39, targeting 23.90 first

Silver's rebound from 21.39 resumed by breaking through 23.42 and hitting as high as 23.63 so far. Further rise is now in favor as long as 22.79 support holds. Next target is 100% projection of 21.39 to 23.42 from 21.93 at 23.90.

The main question is still on whether corrective pattern from 30.07 has completed as a five-wave descending triangle at 21.39. Break of 23.90 projection level will affirm the bullish case. Upside acceleration could then follow to 161.8% projection at 25.21, which is close to 25.39.

However, rejection by 21.39 will keep the rebound from 21.39 corrective and maintain medium term bearishness.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.2478; (P) 1.2521; (R1) 1.2556; More...

USD/CAD's fall from 1.2963 resumes by breaking 1.2452 and intraday bias is back on the downside. Current development argues that whole pattern from 1.2005 has completed with three waves to 1.2963. Below Further decline would be seen to 1.2286 support, possibly further to retest 1.2005 low. Nevertheless, on the upside, break of 1.2569 minor resistance will indicate short term bottoming and turn bias back to the upside for stronger rebound.

In the bigger picture, focus will be 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.

Economic Indicators Update

Elevated yields favour dollar, Canadian inflation in spotlight

Primary market focus remains centred around the Fed and how it will tackle inflation, with market participants juggling the premise of how many rate hikes will unfold this year. Expectations almost ‘guarantee’ three hikes but the dollar’s recent gains have been fuelled by rising treasury yields, which have supported the dollar index around the 95.60 mark. US stock futures are somewhat finding their feet after the correction, while the 10-year treasury yield has hit 1.84%.

The yen is holding around the 114.50 level per dollar, while gold ticks marginally higher to $1,818 /oz.

UK inflation at highest level since 1992, euro lags despite pickup in growth

Realistically the ECB will stick to its guns in jumping onto the rate train, set to the timeline of early 2023. That said, should persisting inflationary pressures and supply shortages weigh on economic growth in the eurozone, which has recently gained some momentum, bets of a hike could increasingly poke at markets.

The euro has failed to sustain recent headways, and should the dollar continue to lead, the common currency could remain subdued for a while longer (currently at $1.1335). EURGBP has slid close to the 0.8300 mark as the euro lags the better performing pound, which is also holding up better against the king dollar.

The pound improved to $1.3640 after ending 2021 with unexpected stronger yearly inflation data of 5.4% in December, higher than November’s 5.1%, and beating estimates. The core component also rose from November at 4.0% to 4.2% in December with consumers paying a 7.5% increase in goods on a yearly basis in December, the most since 1991.

The stronger inflation data in the UK today - mainly around soft consumables - has improved the odds that the Bank of England is most likely to proceed with raising interest rates in February, as this has underpinned pressure households are currently facing. Households are encountering increases in everyday goods, while improvements in wages lag, and ministers are considering ways to soften another blow, estimated to hit households in April, that being a surge in utility bills.

Later today at 14:15 GMT Governor Bailey is due to speak regarding the BoE Financial Stability Report before the Treasury Select Committee, in London.

Oil uptrend intact and loonie stout ahead of CPI data

WTI futures are around $86.30 per barrel, above seven-year highs. Supply disruptions, production gaps on OPEC+ side, shrinking stockpiles and robust demand may be the perfect recipe to underpin oil further.

Canada’s inflation figures will be released today at 13:30 GMT and are likely to provide a clearer picture in relation to whether the Bank of Canada will cement a rate hike next Wednesday. The Canadian economy is very strong even though it is confronted with elevated inflation and supply shortages. Stronger inflation figures could strengthen the loonie, sending the pair to test the C$1.2450.

US building permits and new housing starts are due at 13:30 GMT, while BoE Governor Bailey is due to speak at 14:15 GMT.

Canada CPI ticked up from 4.7% yoy to 4.8% yoy in December above expectation of 4.7% yoy. That's the highest level since September 1991. Excluding gasoline, CPI rose 4.0% yoy. On monthly basis, CPI dropped -0.1% mom, first decline since December 2020, in response to lower demand due to Omicron.

CPI common rose from 2.0% yoy to 2.1% yoy matched expectations. CPI median rose from 2.8% yoy to 3.0% yoy, above expectation of 2.9% yoy. CPI trimmed jumped from 3.4% yoy to 3.7% yoy, above expectation of 3.4% yoy.

Full release here.