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Stock markets are enjoying some reprieve after a rocky start to the week and investors will be hoping earnings season provides more cause for optimism in the weeks ahead.

The January blues are alive and well and with markets now eyeing up the possibility of four rate hikes this year, we may be approaching peak fear just in time for earnings season. We've quickly pivoted from the transitory inflation narrative to aggressive tightening including a combination of accelerated tapering, multiple rate hikes, and impending balance sheet reduction. That's quite the shift.

I'm not sure the inflation data tomorrow is going to put investors' minds at ease, with CPI seen hitting a multi-decade high above 7%. A higher reading could spook investors once again just as equity markets appear to be stabilizing.

We saw a strong recovery in the final hours of trading on Wall Street on Monday, which is carrying over into today's session. But that could prove fragile if price pressures intensify more than expected; although I do wonder just how much more hawkish the markets can realistically be.

Which may make the timing of earnings season all the more welcome. We've had the scare of omicron, the relief rally, and now interest rate anxiety. That's a lot of uncertainty for investors to contend with. Earnings season should be a timely reminder that the economy remains in a strong position despite all of this.

Oil eyes Autumn highs

Oil prices are rebounding higher again on Tuesday, up more than 1%, and with sights seemingly set on the late Autumn highs. We saw some heat come out of the market over the last couple of days but pullbacks were always likely to be limited given the broader dynamics.

Of course, omicron offers some demand uncertainty over the coming months but the market is tight as OPEC+ slowly turns the taps back on. And OPEC struggling to deliver on targets doesn't help alleviate any of that tightness in the market. Prices could remain elevated for some time yet.

Can gold mount a rally as yields rise?

Gold has shown remarkable resilience in the current environment of rising rate expectations and higher yields, to such an extent that it makes me really question whether it can in fact rally in the short-term. There doesn't appear much rationale behind the move unless we see weakness in the dollar but it's impossible to ignore price action.

And the yellow metal is continuing to force the move higher, pushing strongly against the $1,800 barrier to the upside with some short-term success before being pushed back. Today it's rallied as high as $1,810 and has once again been driven back but it's holding above $1,800. A close above here could be a bullish signal, albeit a confusing one.

Can Bitcoin hold $40,000?

We're seeing a battle emerge in the bitcoin market after it dipped briefly below $40,000 on Monday. The cryptocurrency fought back to defend key support before peaking back above $42,500. It's since settled back around $41,500, leaving us none the wiser about where the next move will come. Clearly, there's plenty of support at $40,000 but if bitcoin is as sensitive to monetary tightening as it appears, how long can it hold?

Kansas City Fed President Esther George said, "my own preference would be to opt for running down the balance sheet earlier rather than later as we plot a path for removing monetary accommodation."

Separately, Cleveland Fed President Loretta Mester said, "If the economy in March looks like it does today and the outlook is similar ... then I would support moving the funds rate up at that meeting and starting to move back from some of the extraordinary accommodation we needed earlier in the pandemic."

EURCHF buyers have dominated ever since touching a 6½-year low of 1.0325, plotting four consecutive green candles, which has steered the price above the 50-day SMA of 1.0442 and the 1.0469 level, which is the 23.6% Fibonacci retracement of the down leg from 1.0937 until 1.0325. Despite the latest climb in the price, the SMAs are still sponsoring the negative trend in the pair.

The Ichimoku lines are indicating that an upside drive is countering the bearish bias, while the short-term oscillators are reflecting that the bulls have gained the upper hand. The MACD, is strengthening above its red trigger line and looks set to prod north of the zero threshold, while the RSI is heading for the 70 overbought level.

If the pair continues to claw in additional lost ground, preliminary upside constraints could arise from the 38.2% Fibo of 1.0558 ahead of the resistance zone from the 1.0574 barrier until the 100-day SMA at 1.0604. Should the pair overcome the cloud, buyers may then tackle the 50.0% Fibo of 1.0630 prior to challenging the key 1.0659-1.0690 boundary (previous support-now-resistance), which extends back to November 2020.

Alternatively, if sellers resurface, an initial support zone could develop between the 23.6% Fibo of 1.0469 and the 1.0431 obstacle. Diving lower, the Ichimoku lines may delay the test of the 1.0390 barrier and the support section of 1.0312-1.0338. Should the latter barricade, which includes the 6½-year low give way, the bears could then target the 1.0278 trough from the end of May 2015.

Summarizing, EURCHF is exhibiting a bearish bias below the 1.0600 handle, and specifically the 1.0574-1.0604 resistance area. Nevertheless, buyers are currently dominating and have yet to show any signs of weakness.

The Australian dollar continues to have a quiet week and is unchanged in Tuesday trade. In the European session, AUD/USD is trading at 0.7170.

Australia’s retail sales soar

Australian consumers opened their purse strings in November, as retail sales jumped 7.3%, well above the consensus of 3.6%. This follows a gain of 4.9% in October, which suggests that the economy will show a strong recovery for the fourth quarter of 2021. The jump in retail sales resulted from the easing of Covid lockdowns as well as well as strong spending in the pre-Christmas period.

Despite the rosy retail sales numbers, the Australian dollar did not budge, as investors remain concerned over the explosion in Omicron infections. Australia is reporting over 1 million infections, as businesses are grappling with staff shortages due to sickness or isolation rules. So far, the government has avoided new lockdowns, but if the infection rates continue to rise, lockdowns could be reimposed which would hamper economic activity.

Early in the New Year, the markets remain focused on high inflation and the series of rate hikes that are widely expected this year. Although projections indicate that inflation will ease back to the 2% target, Wall Street is nervous that the Fed could press that rate trigger as early as March, when it winds up its asset purchase programme. Following the mixed US employment report on Friday, which included a soft NFP but strong wage growth and a drop in unemployment, there are expectations for three and even four rate hikes in 2022. The markets are clearly jittery about rate hikes, but market moves in January are often erratic, so things should cool down once we move further into 2022.

AUD/USD Technical

• There is resistance at 0.7263 and 0.7343
• AUD/USD has support at 0.7116 and 0.7049

Powell testimony in focus; Bundesbank’s new chief warns on inflation

Markets are anticipating Fed Chair Jerome Powell’s renomination hearing in Congress later today, waiting to find out his current views on inflation ahead of the CPI data release on Wednesday. In his prepared remarks, Powell vowed to bring down inflation and warned markets that the ongoing post-pandemic expansion might look different from what they have witnessed before.

Earlier today, ECB President Christine Lagarde gave a speech at the ceremony marking the change of office of the President of the German Bundesbank. Although her remarks offered nothing new, Joachim Nagel’s speech – the new Bundesbank President and ECB Governing Council member – struck a hawkish tone, stressing his fear that inflation might remain elevated for longer than expected, helping the common currency to gather strength against the US dollar.

In the rest of the FX arena, the US dollar inched lower on Tuesday against a basket of currencies, driven by the pullback in the 10-year Treasury yield, which stabilized around 1.77%. The perceived risk-on mood in today’s trading has weighed on the Japanese yen, which slipped against all of its major rivals and benefited the commodity-linked Canadian dollar, which is gaining ground against the euro and the greenback.

US stocks headed for opening gains

On Monday, the S&P 500 index edged 0.1% lower for a fifth consecutive session, while the tech-heavy Nasdaq 100 closed the day in the green as ‘buy the dip’ investors emerged, erasing an intraday loss of around 2.7%. This move reversed days of tech and high-growth shares selling pressures, which were driven by the increasing prospects of faster monetary policy tightening. However, with inflationary pressures remaining elevated, the prospect of higher bond yields might drive investors further out of growth and into value-oriented stocks.

Futures for the major US indices are pointing for a higher opening on Tuesday, with investors continuing to monitor rising yields and persistent inflation risks. Moreover, the European Stoxx 600 index is in positive territory, bouncing back from yesterday’s decline. In Asia, Hong Kong’s Hang Seng index closed 0.03% lower, weighted by fresh regional lockdowns in China. Lastly, oil prices are gaining ground over fears of reduced US future production, as President Biden announced the reduction of land available for oil leasing in Alaska.

Chips undersupply to last throughout 2022

According to recent updates, last week’s fire in ASML’s production site in Berlin has damaged crucial components for the manufacturing of the extreme ultraviolet (EUV) machines, used to build chip architecture. This could derail the company’s production, increasing fears that chip shortages could persist for longer than anticipated. Moreover, Volkswagen's CFO stated in an interview today that the undersupply of chips is likely to remain throughout 2022.

Daily Pivots: (S1) 1.1290; (P) 1.1325; (R1) 1.1366; More...

EUR/USD is still bounded in sideway consolidation and intraday bias remains neutral. On the upside, sustained trading above 55 day EMA (now at 1.1385) will bring stronger rise back to 1.1663 support turned resistance. On the downside, break of 1.1185 will resume larger decline from 1.2348. Next target is 161.8% projection of 1.2265 to 1.1663 from 1.1908 at 1.0934.

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) 1.3541; (P) 1.3572; (R1) 1.3612; More...

Intraday bias in GBP/USD is back on the upside as rise from 1.3158 extends, despite weak upside momentum. Corrective fall from 1.4248 could have completed with three waves down to 1.3158, after hitting 1.3164 medium term fibonacci level. Sustained trading above 1.3570 will pave the way to 1.3833 resistance next. On the downside, however, break of 1.3430 will dampen this bullish case and turn bias back to the downside for 1.3158 low.

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) 0.9214; (P) 0.9244; (R1) 0.9303; More....

Intraday bias in USD/CHF remains on the upside, as rise from 0.9101 is in progress for 0.9293 resistance. As noted before, with 0.9084 support intact, choppy rise from 0.8925 could still extend higher. Break of 0.9293 should target 0.9372 resistance and above. On the downside, break of 0.9199 minor support will turn intraday bias neutral first.

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) 114.89; (P) 115.37; (R1) 115.69; More...

USD/JPY is staying in consolidation from 116.34 and intraday bias remains neutral. Downside of retreat should be contained well well above 114.26 resistance turned support to bring rally resumption. On the upside, firm break of 61.8% projection of 109.11 to 115.51 from 112.52 at 116.47 will pave the way to 100% projection at 118.90, which is close to 118.65 long term resistance.

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. For now, this will remain the favored case as long as 112.52 support holds, in case of deep pull back.

Overall mood in the market is positive today, major European indexes and US futures trading up. The question is whether US stocks, in particular NASDAQ, could build on yesterday's strong rebound for some more gains. Benchmark treasury yields are firm globally. Gold and Silver also recover. In the currency markets, most major pairs and crosses are stuck inside yesterday's range, with Yen soften mildly again with Aussie. Canadian Dollar and Swiss Franc are regaining some ground. Focus will turn to Fed Chair Jerome Powell's Testimony, and tomorrow's US CPI.

Technically, we'll keep an eye on EUR/USD as Powell speaks. Near term outlook remains bearish with the pair staying in a consolidation pattern in a down trend. Also, upside is capped well by 55 day EMA so far. Thus, downside breakout through 1.1185 is in favor. But we'll see how it goes.

In Europe, at the time of writing, FTSE is up 0.69%. DAX is up 1.14%. CAC is up 1.21%. Germany 10-year yield is down -0.009 at -0.041. Earlier in Asia, Nikkei dropped -0.90%. Hong Kong HSI dropped -0.03%. China Shanghai SSE dropped -0.73%. Singapore Strait Times rose 0.60%. Japan 10-year JGB yield is up 0.0199 at 0.155.

Fed Bostic: March hike a reasonable possibility

Atlanta Fed President Raphael Bostic said today, "there is a risk inflation is likely to be elevated for an extended period of time and we need to respond directly, clearly and aggressively." "If things continue the way they are March would be a reasonable possibility," he added.

Bostic also said there was no need to phase in balance sheet runoff. "I would hope we would move pretty quickly and get out of this emergency stance," he said. "The tool is pretty well understood and the motivation is pretty well understood. It should go faster for sure."

ECB Lane: Criteria for rate hike not in place

In an interview, ECB chief economist Philip Lane pointed to the December economic projections, and said, " inflation will fall this year, and that it will go below our 2 per cent target in 2023 and 2024."

While the 5% December inflation number is "unusually high", Lane said that's dominated by the 26% rise in energy prices last year. He added, "we do not see behaviour that would suggest inflation will remain above our target into the medium term."

As inflation will "settle below our target in 2023 and 2024", he added, "The criteria for moving interest rates up are therefore not in place. This remains our view."

On growth, Lane said that bottlenecks are "temporary factors" and the order book is very good. "Overall, in Europe we see a solid growth engine this year, next year and the year after that."

Bundesbank Nagel: Inflation could remain high for longer than expected

New Bundesbank President Joachim Nagel said in his swearing in ceremony, "it's true that high inflation rates can be attributed to special effects that expire automatically. But not entirely. I see a danger that inflation could remain high for longer than expected."

At the same occasion, ECB President Christine Lagarde said, "we understand that rising prices are a concern for many people, and we take that concern very seriously... The whole Governing Council is united in pursuit of this goal. At the same time, one of the key strengths of the Eurosystem is the way that it brings together different perspectives to form a consensus. Our rich quality of debate and diversity of views ensures that our decisions are robust."

BoJ public opinion survey: 78.8% expect prices to rise in a year

According to BoJ's December public opinion survey, 78.8% of the respondents said they expect price levels to go out one year from now. That's a notable increase from September's 68.2% and the highest level since 2019. Among them, 13.4% said prices will go up significantly, comparing to September's 8.4%.

On outlook for economic conditions one year from now, 26.0% said it will improve, up from 16.6%. 52.5% said it will remain the same, up from 46.1%. 21.0% said it will worsen, down from 36.4%. The Diffusion Index rose from -19.8% to 5.0%.

Australia retail sales rose 7.3% mom in Nov as restrictions eased

Australia retail sales rose 7.3% mom in November, well above expectation of 4.0% mom. That's also the fourth strongest monthly rise on record. Total turnover at current prices hit a record AUD 33.4B.

"Further easing of COVID-19 restrictions in the South-Eastern states and territories has seen the retail industry recover all lost momentum caused by the Delta outbreak," Ben James, Director of Quarterly Economy Wide Statistics, said. "Victoria recorded the largest state rise, up 20.0 per cent, reaching its highest level of the series. This follows the state's lockdown ending in late October."

"Continued easing of COVID-19 restrictions, including less strict density and capacity limits, in New South Wales (5.1 per cent) and the Australian Capital Territory (19.2 per cent) led to rises in turnover to record levels."

Australia exports rose 2% in Nov, imports rose 6%

Australia goods and services exports rose 2.% mom or AUD 691m to AUD 43.86B in November. Goods and services imports rose 6% mom or AUD 2049m to AUD 34.44B. Trade surplus came in at 9.42B, below expectation of AUD 10.75B.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 114.89; (P) 115.37; (R1) 115.69; More...

USD/JPY is staying in consolidation from 116.34 and intraday bias remains neutral. Downside of retreat should be contained well well above 114.26 resistance turned support to bring rally resumption. On the upside, firm break of 61.8% projection of 109.11 to 115.51 from 112.52 at 116.47 will pave the way to 100% projection at 118.90, which is close to 118.65 long term resistance.

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. For now, this will remain the favored case as long as 112.52 support holds, in case of deep pull back.

Economic Indicators Update