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Overall risk sentiment turns sour again following terrible US retail sales data. DOW futures reverse early gains and turn deep red, pointing to a much lower open. Yen is powering up following risk-off sentiment while Aussie is now leading commodity currencies lower. At the same time, Dollar is turning mixed. But for the week, the greenback is still the worst performing while Yen looks set to secure its position as the top gainer.

Technically, EUR/JPY's break of 130.01 support how argues that rise from 127.36 is finished at 131.59. The whole corrective pattern from 134.11 is going to extend with another falling leg. We'll see if GBP/JPY would follow, and align with the outlook, by breaking through 154.85 support.

In Europe, at the time of writing, FTSE is down -0.50%. DAX is down -1.08%. CAC is down -0.96%. Germany 10-year yield is up 0.0041 at -0.084. Earlier in Asia, Nikkei dropped -1.28%. Hong Kong HSI dropped -0.19%. China Shanghai SSE dropped -0.96%. Singapore Strait Times rose 0.76%. Japan 10-year JGB yield rose 0.0192 to 0.151.

US retail sales dropped -1.9% mom in Dec, ex-auto sales down -2.3% mom

US retail sales dropped -1.9% mom to USD 626.8B in December, much worse than expectation of 0.0%. Ex-auto sales dropped -2.3% mom, below expectation of 0.2% mom. Ex-gasoline sales dropped -2.0% mom. Ex-auto, ex-gasoline sales dropped -2.5% mom.

Total sales for the 12 months of 2021 were up 19.3% from 2020. Total sales for the October 2021 through December 2021 period were up 17.1% from the same period a year ago.

ECB Lagarde: Monetary accommodation is still needed for inflation to settle at 2%

In a speech, ECB President Christine Lagarde said the "rapid reopening" of the economy has led to steep rises in fuel prices, gas and electricity and price hikes in durable goods and some services. These factors are "weighing on growth in the near term". Higher energy prices are "cutting into household incomes and denting confidence". Supply bottlenecks are leading to "shortages in the manufacturing sector.

"That is why, at our last Governing Council meeting, we recalibrated our policy measures, allowing for a step-by-step reduction in the pace of our net asset purchases," she added.

However, Lagarde also noted, "at the same time, we concluded that monetary accommodation is still needed for inflation to settle at 2% over the medium term."

Eurozone exports rose 14.4% yoy in Nov, imports rose 32.0% yoy

Eurozone exports of goods rose 14.4% yoy, to EUR 225.1B in November. Imports rose 32.0% yoy to EUR 226.6B. Trade deficit came in at EUR -1.5B. Intra-Eurozone trade rose 22.1% yoy to EUR 204.3B.

On seasonally adjusted bases, extra-Eurozone exports rose 3.0% mom to EUR 213.2B. Imports rose 4.5% mom to EUR 214.5B. Trade balance turned into EUR -1.3B deficit. Intra-Eurozone trade rose from EUR 192.2B to EUR 193.9B.

UK GDP grew 0.9% mom in Nov, back above pre-pandemic level

UK GDP rose strongly by 0.9% mom in November, well above expectation 0.4% mom. Looking at some details, services grew 0.7%, production rose 1.0% mom, and production increased 3.5% mom.

Monthly GDP was back above pre-COVID level in February 2020, for the first time, by 0.7%. Also, if there are no other data revision, Q4 GDP should either reach or surpass its pre-coronavirus level in Q4 2019, provided monthly December GDP does not fall by more than -0.2% mom.

Also released, industrial production rose 1.0% mom, 0.1% yoy versus expectation of 0.2% mom, 0.5% yoy. Manufacturing rose 1.1% mom, 0.4% yoy, versus expectation of 0.2% mom, -0.3% yoy. Index of services rose 1.3% 3mo3m, versus expectation of 0.5%. Goods trade deficit narrowed slightly to GBP -11.3B, versus expectation of GBP -14.2B.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 113.88; (P) 114.29; (R1) 114.59; More...

USD/JPY's fall from 116.34 is still in progress and intraday bias stays on the downside for 112.52 support. Considering bearish divergence condition in in daily MACD, 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, above 114.22 minor resistance will turn intraday bias neutral first.

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.

Economic Indicators Update

Daily Pivots: (S1) 113.88; (P) 114.29; (R1) 114.59; More...

USD/JPY's fall from 116.34 is still in progress and intraday bias stays on the downside for 112.52 support. Considering bearish divergence condition in in daily MACD, 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, above 114.22 minor resistance will turn intraday bias neutral first.

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.

US retail sales dropped -1.9% mom to USD 626.8B in December, much worse than expectation of 0.0%. Ex-auto sales dropped -2.3% mom, below expectation of 0.2% mom. Ex-gasoline sales dropped -2.0% mom. Ex-auto, ex-gasoline sales dropped -2.5% mom.

Total sales for the 12 months of 2021 were up 19.3% from 2020. Total sales for the October 2021 through December 2021 period were up 17.1% from the same period a year ago.

Full release here.

In a speech, ECB President Christine Lagarde said the "rapid reopening" of the economy has led to steep rises in fuel prices, gas and electricity and price hikes in durable goods and some services. These factors are "weighing on growth in the near term". Higher energy prices are "cutting into household incomes and denting confidence". Supply bottlenecks are leading to "shortages in the manufacturing sector.

"That is why, at our last Governing Council meeting, we recalibrated our policy measures, allowing for a step-by-step reduction in the pace of our net asset purchases," she added.

However, Lagarde also noted, "at the same time, we concluded that monetary accommodation is still needed for inflation to settle at 2% over the medium term."

Full speech here.

The Canadian dollar is in positive territory and continues to have an excellent week, with gains of 1.28%. The currency is back below 1.25 and is looking to close below this symbolic line for the first time since mid-November.

This week’s robust rally by the Canadian dollar is more a case of greenback weakness rather than loonie strength, as the US dollar has retreated broadly against the major currencies this week. Investors continue to be in a risk-on mode, shrugging off a soft nonfarm payrolls report and a sizzling CPI reading of 7.0% y/y. Fed Chair Jerome Powell managed to soothe concerns of runaway inflation earlier this week, saying that the Fed stood ready to raise rates to combat inflation but that he expected inflation to ease in later in the year. This has kept risk appetite high, but it’s questionable if investors will stay this optimistic if inflationary pressures remain at 40-year levels.

We continue to see a rotation out of US dollars this week, with the majors enjoying gains of around 1% against the retreating US dollar. The driver behind the US dollar’s weakness has been elevated risk appetite, which has not waned despite exploding Omicron cases, a soft nonfarm payrolls report and surging inflation in the US. Still, risk sentiment can change quickly, and I would not be surprised to see the US dollar recover in the near term if Omicron is more damaging than anticipated or if inflation heads even higher.

The week wraps up with US retail sales later today. The headline reading is expected to come in at -0.1%, and a decline could boost the Canadian dollar as it would put pressure on the Fed to hold back from normalizing policy. Investors will also be keeping an eye on UoM Consumer Sentiment, which is expected to drop from 70.6 to 70.0 points. A sharp drop in consumer confidence could raise expectations that the Fed will delay a rate hike, which would be bearish for the US dollar.

USD/CAD Technical

• USD/CAD is testing support at 1.2513. Below, there is support at 1.2396
•  There is resistance at 1.2762 and 1.2879

GBPJPY is consolidating between the 156.00 handle and the 157.84 level, which is the 161.8% Fibonacci extension of the down leg from 144.94 until 124.00. The simple moving averages (SMAs) are reflecting a fragile neutral-to-bullish trend in the pair.

That said, the short-term oscillators are indicating that bearish forces are growing. The MACD, deep in the positive region, has faded below its red trigger line, while the RSI is sliding in the bullish territory and is about to face a key support level. The negatively charged stochastic oscillator is promoting a bearish pullback in the pair. Currently, it appears that the 156.00 level may be acting as the immediate barrier, which could restart a price course either lower or higher.

If sellers maintain their slight advantage and dip the price beneath the 156.00 mark, prompt support could arise at the neighbouring 154.29-155.38 border. If this fortified boundary fails to provide footing for buyers, the price may then target a support area formed between the 50-day SMA at 153.19 and the inside swing high of 152.62. Should the SMAs struggle as well to dismiss the price from retracing further, the lower Bollinger band at 150.96 could come into play.

Otherwise, if positive traction develops off the 156.00 level, the 161.8% Fibo extension of 157.84 and the more than five-year high of 158.20 could contest a positive breakout of the sideways market that has gripped the pair for around three-months. If the one-month rally extends higher, the upper Bollinger band at 159.21 may be challenged before buyers tackle the critical 160.09 high from back in June 2016, where the price previously collapsed 16% in a day. Overshooting this, upside momentum could then be tested by the 176.4% Fibo extension of 160.88.

Summarizing, GBPJPY is exhibiting a neutral-to-bullish tone as it holds near the upper end of the three-month trading range. That said, a push below 156.00 or above 158.20 may restart price volatility in the pair.

The Japanese yen continues to roll, with gains for a third successive day. USD/JPY has fallen below the 114 line and is now at its lowest level since December 21st. The yen has enjoyed an outstanding week, as USD/JPY is down 1.42%, its sharpest one-week decline since June 2020.

Only a week ago, the USD/JPY punched above the 1.16 line, as US Treasury yields were on a roll and climbed above 1.70%. The yield rally has run out of steam as yields have plateaued, allowing the yen to recover. The yen is very sensitive to the US/Japan rate differential, and if US yields resume their upswing, we can expect USD/JPY to rise as well. This week’s movement is more about the dollar’s broad weakness rather than yen strength, and I would not discount the possibility of a US rebound in the near term.

Japan’s wholesale prices climbed 8.5% in December y/y, after the record-breaking 9.2% gain in November. Wholesale prices have shown growth for 10 straight months, indicative of continuing inflationary pressures. Companies have been hit with a surge in oil and commodity prices, and the gradual passing on of these hikes to consumers is pushing CPI higher.

The Bank of Japan holds a policy meeting on Tuesday. The bank is expected to maintain its ultra-easy policy, but in an acknowledgment of higher inflation, the bank is expected to revise upwards its inflation view for the first time since 2014. Inflation is nowhere near the high levels we are seeing in the US (7%) and UK (5%), but the upswing in inflation is significant, given that Japan has grappled with deflation for years. According to a Reuters report the BoJ is considering eventually raising rates even if the bank’s inflation target of 2% is not reached.

USD/JPY Technical

USD/JPY faces resistance at 116.29. Above, there is resistance at 117.02, which has held since January 2017

There is support at 114.89 and 114.22

The USD remains bearish after US CPI figures this week that came out around expectations, while PPI yesterday increased by 0.2%, less than expected. The dollar is down even after some weakness on stocks yesterday during the US session.

So EURUSD is higher, but one of the reasons can be remarks by ECB Vice President Luis de Guindos who said on Thursday that euro zone's inflation spike is not as transitory as earlier thought.

EUR/USD 1h Elliott Wave analysis

Technically speaking we see EURUSD in uptrend on intraday charts with room for further gains. Support is at 1.1430-1.1450.

Gold remains in uptrend and is coming nicely higher, as expected away from the 1814 support. We see fifth wave now in progress with a projection up at around 1835/40 area where trend may once again start slowing down.

Gold 30 min Elliott Wave analysis

Eurozone exports of goods rose 14.4% yoy, to EUR 225.1B in November. Imports rose 32.0% yoy to EUR 226.6B. Trade deficit came in at EUR -1.5B. Intra-Eurozone trade rose 22.1% yoy to EUR 204.3B.

On seasonally adjusted bases, extra-Eurozone exports rose 3.0% mom to EUR 213.2B. Imports rose 4.5% mom to EUR 214.5B. Trade balance turned into EUR -1.3B deficit. Intra-Eurozone trade rose from EUR 192.2B to EUR 193.9B.

Full release here.

The Euro started a steady increase from the 1.1320 support zone against the US Dollar. The EUR/USD pair broke the 1.1380 resistance zone to move into a positive zone.

There was also a move above the 1.1400 level and the 50 hourly simple moving average. It is now consolidating gains above the 1.1450 level. An immediate resistance near the 1.1480 level.

The next major resistance is near the 1.1500 level. A break above the 1.1480 and 1.1500 resistance levels could start a decent increase towards the 1.1550 level in the near term.

On the downside, an initial support is near the 1.1450 level. There is also a key bullish trend line with support near 1.1450 on the hourly chart, below which the pair could extend losses. The next key support is near 1.1420, below the pair could test 1.1400 on FXOpen.