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Markets

Reuters and Bloomberg yesterday each ran an exclusive story on PEPP options at the ECB meeting next week in order to prevent a monetary cliff after the programme ends in March. Sources with Reuters floated either creating a new envelope to be spent over the rest of 2022 or raise asset purchases under APP temporarily before scaling back again as the year progresses. Bloomberg, citing officials, said the ECB is mulling the idea of applying PEPP’s flexibility to its reinvestments (due to run until end 2023), both in terms of geographic allocation and timing. In an example, the ECB could decide to funnel proceeds of maturing German Bunds to Italian BTP’s but it may keep that fire powder dry for a while and use it a time of distress. Being wrongfooted in the past, markets didn’t do much with both articles. Declining core bond yields were mostly the result of an overall risk-off trading session. European stocks edged 0.6% lower, losses on WS were as much as 1.7% (Nasdaq). German yields fell 2.5 bps (2y) to 4 bps (10y). The US curve flattened with changes of +0.7 bps (2y) to -3.1 bps (20y). Weekly jobless claims plunged to a 52-year low, explaining some UST underperformance. The 30y bond yield (-1.6 bps) reversed earlier losses partially after a huge tail in the $22bn auction. EUR/USD losses accelerated when US dealings got rolling. The currency pair closed near 1.129 support (from 1.134). EUR/GBP eased from the high 0.85 area back to the middle zone, mainly on sterling strength even as a BoE rate hike is in doubt. The 2y yield closed at the level after the central bank backtracked in November.

China’s yuan is grabbing some market attention this morning. The PBOC is growing ever more uncomfortable with the strong currency. It raised the reserve requirements for foreign currencies yesterday (causing a yuan weakening) and set the daily fixing for a second day straight weaker than expected. The difference with market estimates was the largest on record even. USD/CNY gapped higher but retraced completely in the meantime. USD/CNY trades near the 3-year high of 6.36. Other currencies trade muted as do core bonds. Stocks drop 0.5-1%.

Finally some interesting data today. US Michigan consumer sentiment dropped to 10 year low last month on rising inflation concerns. Consensus expects the indicator to recover only very marginally from 67.4 to 68. If inflation was the cause, then there’s little reason to expect a major confidence boost indeed. US CPI probably accelerated in November to 6.8% (4.9% core). Market impact could stay limited though since the Fed already made very clear it will step up the normalization pace. Money markets discount three hikes next year. Sentiment may thus remain key for core bond yields. EUR/USD has poor cards to play with and we don’t expect a strong boost ahead of the ECB next week. Sterling faces similar central bank uncertainty but it may keep the balance stable against a weak euro.

News headlines

At a news conference, governor Glapinski of the National Bank of Poland took a cautious stance on further policy tightening. The NBP on Wednesday raised its policy rate by 0.50% to 1.75%. According the NBP governor, there is significant room to raise rates further if necessary, but the MPC doesn’t state unequivocally that the NBP is engaged in rate hike cycle as several uncertainties are still in play. The MPC doesn’t pre-commit and calibrates hikes to avoid a slowdown. On FX interventions, the NBP aims to use the tool to smooth out volatility. Glapinski indicated that the NBP has no target for the zloty and is happy with its current level. The NBP doesn’t plan QE auctions for now. The zloty yesterday gained slightly in a daily perspective but the reaction to the press conference was muted. EUR/PLN closed at 4.6025.

The US Senate on Thursday took an important procedural step to raise the US debt limit and avoid a US default later this month. With the backing of 10 Republicans, the US Senate by a 59-35 majority vote approved a bill that, after being rubberstamped by president Biden, will allow the Senate to raise debt ceiling by a simple majority on a one-time basis. Usually, raising the debt ceiling needed a 60-vote majority in the Senate. The legislation also stipulates that the debt ceiling should raise the limit by a specific amount, not for a certain period.

The British pound is hovering near its lowest level in more than a year ahead of the latest UK GDP numbers that will come out at 9:00 GMT. The numbers are expected to show that the UK economy expanded by 22.2% in the third quarter. This will be a strong number and will be attributed to the country’s reopening. Other numbers that will come out today are the latest manufacturing and industrial production numbers. The Office of the National Statistics will also publish the latest trade and construction output data. Still, the key concern is that the UK government has announced new restrictions that could derail the recovery.

US equities were mixed on Thursday after the US published the latest initial jobless claims numbers. The data showed that the number of Americans filing for initial jobless claims declined to the lowest level in more than 50 years. This is another sign that the US economy is tightening and that the Federal Reserve will start tightening policies next week. Stocks wavered as investors waited for the upcoming US inflation data. The numbers, which will come at 15:30 GMT are expected to show that prices rose by more than 6.8% in November.

There will be some other additional numbers to watch today. Earlier on, the New Zealand statistics agency published strong electronic sales numbers. They provide further evidence that the country’s economy is doing relatively well. In Europe, the German statistics agency will release the latest inflation numbers. Based on the first estimate, the numbers are likely to show that inflation rose to more than 5% in November. Christine Lagarde will also talk and provide hints about the ECB’s monetary policy.

EURUSD

The EURUSD pair retreated after the strong initial jobless claims numbers. It declined to a low of 1.1290, which was lower than yesterday’s high of 1.1358. On the four-hour chart, the pair moved slightly below the middle line of the Bollinger Bands while the Relative Strength Index (RSI) has tilted lower. The same is true with the MACD. Therefore, while the path of least resistance is lower, the pair could also bounce back as investors buy the dips.

GBPUSD

The GBPUSD pair is hovering near the lowest point in more than a year. On the four-hour chart, the pair has moved below the 25-day moving average. It has also formed a descending channel that is shown in purple. The MACD and the Relative Strength Index (RSI) have also pointed lower. Therefore, the pair will likely keep dropping today because of the divergence between the Fed and the Bank of England.

USDCHF

The USDCHF rose to a high of 0.9255 after the Swiss government downgraded the economy’s recovery. On the four-hour chart, the pair is above the 25-day and 50-day moving averages. It has also moved above the 38.2% Fibonacci retracement level. The Relative Strength Index (RSI) is also pointing lower. Therefore, the pair will likely keep rising depending on the US inflation figure.

The Nasdaq 100 softened following a decrease in weekly US jobless claims. The index bounced off 15550 which used to be a supply zone from September’s peak.

A break above the last leg of sell-off at 16100 has prompted sellers to cover. 16450 is the next hurdle and its breach would put the December plunge behind and clear the path for the all-time high at 16760.

An overbought RSI temporarily holds the bullish drive back. The psychological level of 16000 would be a key support as buyers catch their breath.

The US dollar is recovering ahead of the Fed meeting next week. A rally above the double top at 9.1000 on the daily chart is a strong bullish sign. That said, its overextension has led to a correction.

Leveraged buyers came under pressure after successive breaks below 9.0800 and then 9.0100. The former now has turned into a resistance.

Meanwhile, an oversold RSI caused a rebound from 8.8600. A bullish breakout would test the key hurdle at 9.1900. Failing that, a deeper pullback could drive the pair towards 8.7000.

Gold is stalling ahead of US inflation data expected later today. A bearish MA cross on the daily chart weighs on overall sentiment.

The bulls have been eager to buy the dips in the demand zone from last November’s lows (1760). Meanwhile, an oversold RSI may attract some buying interest. However, they will need to lift offers around 1806 before they could hope to turn things around.

A bearish breakout would invalidate last month’s rally and send the precious metal to 1730, a major floor that keeps the price afloat in the medium term.

UK GDP grew 0.1% mom in October, below expectation of 0.3% mom. GDP remained -0.5% below pre-pandemic level in February 2020.

Services grew 0.4% mom, back at pre-pandemic level. Production dropped -0.6% mom, at -2.1% below pre-pandemic level. Manufacturing rose 0.0% mom, at -2.5% below pre-pandemic level. Construction dropped -1.8% mom, at -2.8% below pre-pandemic level.

Full release here.

EUR/USD

Current level - 1.1295

During the last couple of days, the currency pair has been trading in the range between 1.1260 and 1.1366 and neither the bulls nor the bears have so far managed to take control. A confirmed breach of either of the borders of the range would set the future direction for the EUR/USD. At the time of writing the analysis, the most likely scenario is for the pair to violate the resistance level of 1.1366 and head towards a test of 1.1460. Today, increased trading activity can be expected around the announcement of the CPI data for the U.S. (13:30 GMT).

USD/JPY

Current level - 113.46

The Ninja is facing difficulties in overcoming the resistance at 113.80 and the expectations are for the pair to decline and test the support level of 113.05, followed by the major support at 112.75. A confirmed breach of this level would lead the pair towards the next support zone at 112.00. In case the support at 112.75 resists the bearish pressure, then the range-bound trading is expected to continue for a couple of extra days.

GBP/USD

Current level - 1.3224

The support level of 1.3206 managed to resist the bearish pressure and the forecast is for the pair to retrace and attack the resistance level of 1.3296. A successful test of 1.3296 would pave the way towards the resistance zone at 1.3360. On the other hand, an unsuccessful test of 1.3296 would strengthen the negative sentiment and lead to another test of the major support level of 1.3206.

Daily Pivots: (S1) 1.2667; (P) 1.2694; (R1) 1.2739; More...

Intraday bias in USD/CAD is turned neutral with current recovery. On the upside, break of 1.2742 minor resistance will suggest that pull back from 1.2852 has completed. Intraday bias is turned back to the upside for resuming the rally from 1.2286 through 1.2852. On the downside, firm break of 1.2604 will argue that rebound from 1.2286 might be finished at 1.2852. Deeper fall would be seen back to 1.2286 support.

In the bigger picture, medium term outlook is neutral for now. The pair drew support from 1.2061 cluster and rebounded. Yet, upside was limited below 38.2% retracement of 1.4667 to 1.2005 at 1.3022. On the upside, firm break of 1.3022 should affirm the case of medium term bullish reversal. However, break of 1.2286 will turn focus back to 1.2005 low again.

Daily Pivots: (S1) 0.7126; (P) 0.7157; (R1) 0.7177; More...

Intraday bias in AUD/USD remains neutral with focus on 0.7172 resistance. Sustained break there should confirm short term bottoming at 0.6992. More importantly, whole corrective fall from 0.8006 might be finished too after defending 0.6991 key structural support. Stronger rise should then be seen to 55 day EMA (now at 0.7273). Firm break there will target 0.7555 resistance to confirm this bullish case. On the downside, however, firm break of 0.6991 will carry larger bearish implication and extend the down trend from 0.8006.

In the bigger picture, focus stays on 0.6991 key support level. Strong rebound from there will argue that up trend from 0.5506 is still intact for another rise through 0.8006 at a later stage. However, sustained break of 0.6991 will argue that the up trend is over, 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.

Daily Pivots: (S1) 0.9228; (P) 0.9251; (R1) 0.9272; More....

Intraday bias in USD/CHF remains neutral for the moment. On the upside, break of 0.9274 will suggest that the pull back from 0.9372 is finished. Intraday bias will be turned back to the upside for 0.9372. On the downside, below 0.9156 will target 0.9084 support. Firm break there should confirm that choppy rise from 0.8925 has completed, and suggests that fall from 0.9471 is resuming. Deeper decline would be seen through 0.8925.

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.