Forex-novosti i prognoze od 07-01-2022

• AUD/USD has been choppy on Friday in wake of a mixed US labour market report.
• The pair is now trading in the 0.7180s having dipped as low as the 0.7130s.
• The dollar weakened broadly despite the jobs report spurring upside in yields on Fed tightening expectations.

AUD/USD was choppy on the final day of the first week of 2022, dipping as low as the 0.7130s in pre-US open European trade before eventually rebounding 50 pips in wake of a mixed US jobs report to the 0.7180s. The rally has stalled in this area given the presence of the 21-day moving average at 0.7190 and the Monday/Tuesday lows at 0.7185. On the day, that means AUD/USD is on course to gain around 0.3%, a fairly uninspired performance when compared to the gains some of its G10 peers are enjoying versus the US dollar in wake of the jobs data. And on the week, AUD/USD is still set to close about 1.2% lower.

FX strategists were perplexed at the dollar reaction to the latest jobs report. Yes, the headline monthly gain in non-farm payrolls came in at 199K, well below median forecasts for 400K. But that won’t matter too much to the Fed has acknowledged that the main problem holding the US labour market back from further job gains is a lack of labour supply, not demand. Meanwhile, the unemployment rate dropped under 4.0% and a measure of underemployment also fell substantially and back very close to pre-pandemic levels. Wage growth was also strong. Thus, the data endorses the Fed stance laid out in the minutes this week that the labour market is very “tight” and is either very close to or already at “short-term” full-employment.

The jobs report thus meets the criteria that, so long as labour market progression remains reasonable, rate hikes will soon be warranted. In other words, the central banks tightening plans for 2022, as laid out at the December meeting and in its minutes, remain very much intact. This helped boost long-term US bond yields, with the 10-year yield hitting its highest since January 2020 at just under 1.80%. Typically, surging US yields would be dollar positive. Perhaps the dollar bulls will regain control next week, a week which sees the release of the December US Consumer Price Inflation report on Wednesday, Producer Price Inflation on Thursday and December Retail Sales on Friday. Fed Chair Jerome Powell will also testify on Monday. That’s plenty of catalysts for dollar bulls to latch onto.

• The British pound advances some 0.18% vs. the Japanese yen.
• GBP/JPY failure to reclaim above 158.22 exposes the pair to downward pressure unless GBP bulls keep the pair above 156.00.

As the end of the first trading week of 2022 approaches, the British pound trimmed some of Thursday’s losses and reclaimed the 157.00 figure. At the time of writing, the GBP/JPY is trading at 157.12 during the North American session.

On Friday, the GBP/JPY was subdued amid the lack of UK and Japanese economic data in the docket. During the overnight session for North American traders, the GBP/JPY was range-bound in the 156.70-157.10 range, trendless and seesawing around the 50-hour simple moving average (SMA).

GBP/JPY Price Forecast: Technical outlook

The GBP/JPY is still bullish biased, though failed short of breaking above the 158.00 figure, once broken in October of 2021, when the GBP/JPY printed the yearly high at 158.22. However, Friday’s recovery leaves some doubts on the table. The cycle high reached on January 5 at 157.76, is lower than the abovementioned, so any strong twist in the market mood would exert downward pressure on the GBP/JPY.

To the upside, the GBP/JPY first resistance level is the January 5 daily high at 157.76. A breach of the latter would expose October 20, 2021, cycle high at 158.22, followed by the 160.00 figure and then May’s 2016 monthly highs around 163.86.

On the flip side, the cross-currency first support is the 157.00 figure. A clear break of the figure opens the door for a challenge of the January 6 daily low at 156.09, followed by the January 3 daily low at 154.89, and then December 28, 2021, pivot low at 154.00.

• EUR/JPY has pushed back above the 131.00 level on Friday as the euro puts in a strong performance.
• The pair is eyeing a test of resistance in the 131.50 area.
• Eurozone inflation surprised on the upside on Friday; further Eurozone inflation surprises could see EUR gain versus JPY this year.

The euro has put in a solid performance on the final trading day of the first week of 2022. Though not the best performing currency in the G10, the euro has rallied about 0.4% versus the safe-haven yen and nearly 0.6% against the underperforming dollar. As a result, EUR/JPY has rallied from Asia Pacific session levels under 131.00 to current levels in the 131.30 area, with bulls eyeing an imminent test of the key 131.50 balance area, which market this week’s top and was a key area f support turned resistance in late-October/mid-November.

The euro’s outperformance on Friday likely has something to do with another Eurozone inflation surprise. Eurostat released the flash estimate of December Eurozone HICP inflation on Friday, which came in at 5.0% YoY from 4.9% in November versus forecasts for a drop to 4.7%. Meanwhile, the core measure also rose unexpectedly to 2.7% from 2.6% versus forecasts for it to remain unchanged. As Reuters put it, the data will likely make “for more uncomfortable reading at the European Central Bank, which has consistently underestimated price pressures and come under fire for this from some of its own policymakers”.

Risks are clearly tilted towards a further hawkish shift in ECB policy. Euro money markets earlier this week had a 10bps hike in October fully priced in, which seems excessive. As ECB Chief Economist Philip Lane reminded market participants on Monday, a 2022 rate hike is very unlikely. But Q1 2023 is very much on the cards and this is something hawkish ECB members have talked about in the past if inflation continues to surprise to the upside. A Q1 2023 rate hike would presumably be preceded APP QE purchases being axed by the end of Q4 2022.

Traders should be prepared to trade expectations for a widening ECB/BoJ policy divergence in 2022 and any associated widening impact this might have on Eurozone/Japan yields. For now, German 10-year yields remain below 0% and thus still below Japan 10-year yields. Much fanfare will likely be made if the German 10-year climbs back above the Japanese and such a move could well couple with EUR/JPY moving back towards Q4 2021 highs in the 133.50 area.

• The EUR/GBP advances during the North American session, up some 0.18%.
• Eurozone inflation rose more than expected, breaking the 5% threshold.
• EUR/GBP Technical outlook: Bearish biased as long as it remains below 0.8500.

The shared currency rises for the third day in a row against the British pound, on higher than expected Eurozone inflation figures. The EUR/GBP is trading at 0.8361 during the North American session at press time.

Eurozone HICP Flash for December rises above the 5% threshold

On Friday, during the overnight session for North American traders, the Eurozone economic docket featured inflation figures. The HICP Flash for December on an annual basis rose by 5.0%, higher than the 4.7% estimated by analysts. The jump in the figure is attributed to high energy prices, rising 26%, compared to 2021. However, increases for food, services, and imported goods were also above the European Central Bank’s target of 2%.

EUR/GBP Price Forecast: Technical outlook

The EUR/GBP portrays its inability to break under the YTD low at 0.8335 two times, one in Friday’s session. Nevertheless, the daily moving averages (DMAs) position 90-pips above the spot price, confirming the downward bias in the pair.

The EUR/GBP first resistance would be a resistance trendline drawn from January 5 highs, which confluences near the R1 daily pivot point around the 0.8366-72 region. A breach of that area would expose the 200-hour SMA at 0.8380, followed by the R2 daily pivot at 0.8386.

On the other hand, EUR/GBP’s first support level would be the 100-hour SMA at 0.8356, once broken would expose the 50-hour SMA at 0.8350, followed by the S1 daily pivot at 0.8334.

• WTI slipped back under $79.00 on Friday but remains on course for substantial weekly gains.
• Supply/geopolitical issues have been key drivers of oil this week, with the broader macro story taking a back seat.  

Oil prices have come under modest selling pressure on the final day of the first trading week of 2022, with front-month WTI futures dupping back below $79.00 in recent trade from earlier weekly highs above $80.00. At current levels in the $78.75 region, WTI is still on course to post a weekly gain of around $3.50, which would mark a third successive week in the green. Order appears to have been restored in the capital city of Kazakhstan, with the President declaring constitutional order restored after Russia sent paratroopers to help the government quell widespread protests which had turned into an uprising.

Crucially for oil markets, it appears that there hasn’t been a lasting impact on Kazakhstan’s 1.6M barrel per day (BPD) in output, so Friday’s losses may represent a modest reduction in geopolitical risk premia. But output problems elsewhere amongst OPEC+ nations remain a key theme for oil traders. Reports earlier in the week said that Libyan output had dropped to just 729K BPD from recent highs of 1.3M BPD amid infrastructure maintenance work. Libya’s most recent output hiccup is indicative of a broader struggle of many of the smaller OPEC+ nations to keep up with rising output quotas in recent months.

For instance, a survey by Reuters earlier in the week showed that OPEC+ output rose just 70K BPD in December versus a more than 250K allowed output increase, amid declining output in Libya and Nigeria. That took the group's compliance to 127% - in other words, OPEC+ nationals are producing 27% less than allowed under their current output quotas. This has been a key source of support for oil markets this week and the theme of OPEC+ struggles to up supply is set to remain a key talking point in 2022.

Oil prices have this week deviated from trading as a function of the broader macro story, gaining despite steep losses in US equities (primarily in tech) in wake of a hawkish Fed minutes release and sharp upside in bond yields. Rocky sentiment in equities adds to the downside risk for crude oil prices at these levels, with crude oil relatively more “expensive” than if stocks were still trading close to record levels. Traders will be attentive to how the broader macro story plays out next week and whether this comes back as a major crude oil market driver.

• US Nonfarm Payrolls disappointed, but the Unemployment Rate improved.
• Eurozone inflation hits the 5% threshold, higher than estimations.
• EUR/USD Technical Outlook: The 1-hour chart depicts an upward bias, though a break above 1.1400 increases the opportunity of an attempt to the 100-DMA at 1.1500.

After a mixed than expected US employment report weakened the US dollar, the euro advances for the second time of the week. During the New York session, the EUR/USD is trading at 1.1346 at press time.

The market mood is risk-off as portrayed by European equity indices closing in the red, while US ones are losing, except for the Dow Jones Industrial (DJI) rising 0.34%. Also, the US 10-year Treasury yield printed a YTD high around 1.801%, failing to boost the greenback, with the US Dollar Index dropping 0.56%, sitting at 95.78.

US Nonfarm Payrolls report came mixed while Eurozone inflation reached the 5% threshold

Earlier in the North American session, the Bureau of Labor Statistics (BLS) released the US Nonfarm Payrolls report for December. The figures came shorter than expected, with the US economy adding 199K jobs, lower than the 400K foreseen by analysts. However, the Unemployment Rate improved, from 4.1% down to 3.9%, hitting a 22-month low.
December’s report was unlikely to reflect the impact of the fourth wave of the Covid-19, linked to the Omicron variant. The survey was done by mid-December, just as the newly discovered strain hit the US.

In the meantime, the Eurozone economic docket featured inflation figures. The HICP Flash for December on an annual basis rose by 5.0%, higher than the 4.7% estimated by analysts. The jump in the figure is attributed to high energy prices, rising 26%, compared to 2021. However, increases for food, services, and imported goods were also above the European Central Bank’s target of 2%.

EUR/USD Price Forecast: Technical outlook

Once macroeconomic data from the Eurozone and the US are on the rearview mirror, the EUR/USD pair stabilized around the 50-day moving average (DMA) at 1.1352. Given that the Relative Strength Index (RSI) is at 53 in bullish territory, the pair might print a leg up, but it would face strong resistance around December 31, 2021, daily high at 1.1386. A decisive break of that supply zone would send the pair towards 1.1400.

On the flip side, the EUR/USD first support is the January 5 high at 1.1346. A breach of the latter exposes the R1 daily pivot at 1.1325, immediately followed by a robust support area where ALL the hourly simple moving averages (SMAs) confluence with the daily pivot point around the 1.1308-16 region.

• Spot gold has been swinging either side of the $1790 level in recent trade in wake of the latest jobs report.
• XAU/USD is being shielded from higher yields by a weaker dollar, though if this reverses, gold will be in trouble.

Spot gold (XAU/USD) is nervously holding on to very modest on-the-day gains of about 0.2%, with prices swinging either side of the $1790 level as traders digest the implications of the latest US labour market report. Trading conditions in wake of the mixed report, which saw headline jobs growth disappoint but also saw improvements in measures of slack and strong wage growth, have been choppy and two-way. XAU/USD hit lows around $1782 and high around $1796 and is currently trading towards the upper end of this intra-day range around $1794.

Gold has been surprisingly resilient in wake of the report which analysts interpreted as endorsing the Fed’s tightening plans for 2022. Earlier in the week, the FOMC minutes laid out the stance, so long as labour market progression continues at the current pace (which the latest jobs report revealed that it did in December), rate hikes would soon be warranted. Whilst the jobs report appears not to have boosted the market’s expectations for further near-term rate hikes (hence US 2-year yields remaining flat around 0.87%), it does seem to have boosted the market’s conviction in the Fed’s long-term rate trajectory. 10-year yields recently broke above the 2021 high at 1.77% and came within a whisker of hitting 1.80%. At current levels of around 1.78%, they are around 5bps higher on the day.

Half of this move came from a small boost to inflation expectations, but half is coming from a boost to underlying real yields, with the 10-year TIPS hitting fresh multi-month highs above -0.75% in recent trade. Usually, when real and nominal yields rise, this increase in the opportunity cost of holding non-yielding assets weighs on the demand for precious metals. However, US dollar-denominated gold prices are being held up by weakness in the buck. In a surprise for FX strategists, the dollar has been weakening in recent trade despite the positive reaction seen in US bond yields to the latest jobs report. Positioning could be overstretched, and the buck could be struggling amid profit-taking. Either way, the weaker dollar is making the price of USD-denominated gold more affordable for international investors, thus negating the negative impact of higher real yields.

Many FX strategists have been calling for the dollar to move higher given the recent surge in long-term US bond yields this week as conviction in the Fed’s ability to get rates back to pre-pandemic levels grows. On the week, 10-year nominal yields are up over 25bps, whilst 10-year real yields are up more than 35. The dollar may well now be seen by some as “cheap” given the recent widening in US/G10 rate differentials in favour of the buck. Meanwhile, the bigger relative moves higher in real yields represent a drop in inflation expectations, diminishing the appeal for inflation protection, a key reason why investors buy gold. If current trends in bond markets continue and the dollar starts to pick up, XAU/USD may well be headed back to 2021 lows under $1700 in the next few weeks/months.

• The greenback ignores rising US Treasury yields, with the 10-year hitting 1.785%.
• US Nonfarm Payrolls report came at 199K, lower than estimations, unemployment rate dips under 4%.
• USD/JPY Technical Outlook: Downward biased, unless it reclaims the 116.00 figure.

The USD/JPY fails to gain traction after a mixed US Nonfarm Payrolls report, trading under the 116.00 threshold during the New York session. At the time of writing, the USD/JPY is exchanging hands at 115.67. The market sentiment is downbeat, as witnessed by US equity indices trading in the red, after the US employment report showed that the labor market is tight, with unemployment falling but wages rising.

Nonfarm Payrolls fell short than expected, but the unemployment rate dipped below 4%

Before Wall Street opened, the US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls rose by 199K, lower than the 400K median foreseen by economists. In the meantime, the Unemployment Rate fell to a 22-month low of 3.9% from 4.1% in the previous report. 
In 2021, the labor market improved, creating 6.4 million jobs. That is the largest increase in employment record-keeping in 1939. 
“January will paint a weaker picture, and the remaining months are in the hands of the latest COVID wave,” per analyst cited by Reuters.

December’s report was unlikely to reflect the impact of the fourth wave of the Covid-19, linked to the Omicron variant. The survey was done by mid-December, just as the newly discovered strain hit the US.

In the meantime, US Treasury yields keep skyrocketing, with the 10-year Treasury yield at 1.7850% up some five basis points in the day. Contrarily, the US Dollar Index, a greenback measurement against a basket of six peers, drops 0.40%, sitting at 95.93.

USD/JPY Price Forecast: Technical outlook

The USD/JPY 1-hour chart depicts the pair still has an upward bias, as long as the spot price remains above the 200-hour simple moving average (SMA), which lies at 115.43. On the downside, the first support would be the S1 daily pivot, tested two previous times in the day at 115.59, followed by the 200-hour SMA at 115.43, and then the S2 daily pivot at 115.33.

The US/JPY first resistance would be 116.00. A breach of the latter would expose the January 6 high at 116.18, followed by the January 4 cycle high at 116.34.

• The S&P 500 is down about 0.6% as yields rally, hurting the dominant tech sector.
• The latest US jobs report, while mixed, has been interpreted as endorsing the Fed's monetary tightening plans for 2022.

The S&P 500 is trading on the back foot as its heavyweight tech sector suffers amid a rise in long-term US government bond yields in wake of the latest US labour market report. The index is down about 0.6% and trading close to the 4670 mark, having now dropped more than 3.0% from Tuesday’s all-time highs near 4820. The upside in bond yields seems to be the market's way of saying that the latest jobs report, despite headline non-farm payroll gains in December missing expectations, keeps the Fed’s 2022 monetary policy tightening plans on track. Either way, higher long-term yields increase the opportunity cost of holding stocks whose valuation is derived on bets for future earnings growth, thus weighing on their value.

As a result, so-called “growth” stocks are underperforming and this is weighing heavily on the Nasdaq 100 index, which is down more than 1.0% on the day and probing the 15.5K level. That means the index is more than 6.0% below the highs it posted above 16.6K just after Christmas. Upside in bond yields is giving the S&P 500 financial sector a boost (+0.4%), while defensive S&P 500 sectors such as utilities and consumer staples are also holding up well. Disproportionate weighting towards stocks in so-called “value” sectors which tend to hold up better when yields are rising means the Dow is performing better than the other major US indices and is down just 0.1% on the day.

Equity strategists have warned this week that higher yields amid decisively more hawkish Fed policy in 2022 pose a major downside risk to “growth” stocks in 2022 and that, as a result, rotation into “value” and “cyclical” stocks may well continue. Some strategists have suggested that European and Japanese equities, that are less dominated by the tech sector, may outperform US indices. Certainly, that has been the case thus far this year, with the Stoxx 600 down just 0.5% on the week versus losses of over 2.0% for the S&P 500.

San Francisco Federal Reserve Bank President Mary Daly said on Friday that inflation is not as temporary as the Fed once thought because Coivd-19 isn't either. A wage-price spiral isn't showing up in the data yet, she added, but is worth watching for. 

Further remarks:

On wage-price spiral...

"Anchored longer-run inflation expectations also make me a little less worried than some others are about an upward inflation spiral."

"I don't feel we are at the precipice of a price-wage spiral."

"Definitely believe we need to adjust policy."

On QE/QT...

"Supportive of tapering asset purchases."

"Would prefer to see rate hikes gradual, and move to balance sheet reductions earlier than during the last cycle."

"Would not want to start trimming balance sheet at the same time as start raising rates."

"Could imagine adjusting balance sheet after one or two rate hikes."

"Would prefer flatter funds rate path, faster adjustment of balance sheet."

Other remarks...

"We face tradeoffs as policymakers."

"Once Covid is gone, every likelihood inflation pressure will still be downward."

• NZD/USD is probing session highs in the 0.6760s as the dollar weakens after a mixed US jobs report.
• The jobs report likely won’t impact the Fed’s tightening plans so USD weakness is perplexing and could be positioning-related.

NZD/USD is probing session highs in the 0.6760s, though the gains are currently capped by the presence of resistance in the form of the Tuesday lows, as the US dollar weakens in wake of Friday’s mixed US jobs report. A break above resistance could open the door to a test of the 21-day moving average just under 0.6790. At current levels, the pair is trading about 0.25% higher and sits around the middle of the G10 performance table. Ahead, a smattering of Fedspeak from the likes of Mary Daly, Thomas Barkin and Raphael Bostic over the course of the afternoon will keep FX traders entertained, though may not provide markets with any impetus.

NFP review

The US economy added less jobs than expected in December (just 199K versus 400K forecasts), but measures of economic slack showed improvement across the board (unemployment fell to 3.9% from 4.2%) and wage growth was solid. The implication is that the labour market is 1) tight and 2) suffering from a lack of fresh workers (hence weak monthly job gain). This is very much in fitting with the way the Fed has been viewing the labour market. Fed Chair Jerome Powell and others at the bank have said they see the pandemic as artificially holding back millions of workers from returning to the labour market, which has upped the competition amongst employers for those workers who are available.

The Fed minutes revealed FOMC participants viewed the US labour market as either already at “short-term” full employment or close to it, amid the expectation it will take some time (and the subsiding of the pandemic) for labour supply to start picking up again. The FOMC minutes also revealed that, as a result of near-term full employment being close, it may soon be time to start raising interest rates, a statement markets took as indicating potential lift-off in March. The latest jobs report will not change any of this thinking, so it is a little odd to see the US dollar weakening.

USD weakness could be a reflection of fears of a Fed mistake. In other words, it could reflect a view that it would be economically optimal for the Fed to wait a little longer before raising rates, as starting the hiking cycle in March could stymie growth and bring down the eventual terminal rate. Given the fact that US bond yields haven't seen much of a post-NFP reaction (you would expect to see lower longer-term yields if there were fears of a hawkish Fed mistake), that may be overthinking it. Perhaps the weakness reflects USD profit-taking in a market already very long dollars. Either way, if the current weakness persists, that could put NZD/USD on course to break back above 0.6800 and have a go at recent 0.6850 highs next week.

• Ivey PMI dropped sharply to 45.0 in December from above 60.0 in November. 
• The seasonally adjusted measure also dropped sharply, but remained above 50.0.
• The loonie ignored the data and continues to bask in the afterglow of a strong December labour market report. 

Canada's Ivey PMI, which is released by the Richard Ivey School of Business each month and captures business conditions in Canada, fell to 45.0 in December from 61.2 in November. As with other PMI indicators, a result above 50 is generally associated with MoM growth in economic activity. Thus, Canada's Ivey PMI suggests business conditions in the country fell into contractionary territory last month. However, the less volatile seasonally adjusted version of the PMI index fell to 51.1, remaining in expansion territory, after slipping from 61.2 in November.  

Market Reaction

The loonie continues to bask in the afterglow of a stronger than anticipated December labour market report and has thus, for now, ignored the weaker Ivey PMI report. 

Nonfarm Payrolls disappointed, but the labor market tightness indicators were stronger than expected. The employment numbers had a modest impact on the FX market. Looking ahead, economists at TD Securities think the bar is very high to undermine the USD, especially as the Fed is very determined to move out of very accommodative policy settings.

Risk of earlier QT to cause yen underperformance

“We do not think that the disappointment in headline payrolls will do much to undermine the USD. The Fed is on a mission to move into restrictive policy; taper is almost over, lift-off is happening, inflation is very high with evidence of second round price pressures, and QT is all the rage. And, despite the back-up in yields this week, financial conditions remain accommodative especially relative to the growth and inflation backdrop.”

“We are not putting much stock on Omicron to sway sentiment in risk or FX, and consequently, we think the Fed's determination should keep the USD in resilient form.” 

“USD/JPY is the best FX expression of Fed policy given it is just a mirror image of the Fed funds futures. Ultimately, we remain biased to USD/JPY topside with an eye to 118/19 in the coming weeks and months, as further acknowledgement of QT should reinforce duration supply and higher 10y real yields.”

• The Canadian economy added double of the jobs foreseen by economists, while the unemployment rate fell below 6%.
• The US Nonfarm Payrolls disappointed, but the Unemployment Rate dipped under 4%.
• USD/CAD Technical Outlook: A break under 1.2700 opens the door for a fall towards 1.2642.

The USD/CAD is extending its fall to two consecutive days in the week, briefly pierced the 50-day moving average (DMA) around 1.2687, to then reclaim the 1.2700 figure after Canadian and US employment data struck the wires. At the time of writing, it is trading at 1.2686.

Canadian jobs report overshadowed US Nonfarm Payrolls

The Canadian economy docket featured the employment report for December 2021. Statistics Canada said that the country added 54,700 jobs to the economy, doubling analysts’ estimations for a 27,500 gain. Additionally, the Unemployment Rate fell from 6.0% t0 5.9%.

The dip in the jobless rate is the lowest seen since February 2020, before Covid-19 emerged. After December’s report, Canada’s labor market is up 240,500 jobs above the pre-pandemic level. However, it is worth noting that the poll was done between December 5 and December 11, pre-Omicron outbreak in the country. Analysts expect a weaker January 2022 report on the latter mentioned.

At the same time, the US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls rose by 199,000, worse than the 400,000 foreseen by economists. The positive of the employment report is that Unemployment Rate in the US dipped under the 4% threshold, at 3.9%, lower than the estimated 4.1%.

In the meantime, US Treasury yields fell some, after reaching a daily high of around 1.771%, retreated four basis points down to 1.741%. The US Dollar Index, briefly pierced under 96.00 at press time, sits at 96.03.

USD/CAD Price Forecast: Technical outlook

The USD/CAD 1-hour chart depicts the pair as downward biased after breaching the 50, 100, and 200-hour simple moving averages (SMAs), leaving them residing above the spot price. Additionally, the pierce of the 1.2700 threshold opened the door for a further dip towards the S1 daily pivot level at 1.2684. A break of that level would expose the January 4 daily low at 1.2667, followed by the S2 daily pivot at 1.2642.

• USD/TRY trades within a tight range in the sub-14.00 area.
• Turkey 5y, 10y bond yields reverse the recent drop.
• Elevated inflation keeps weighing on Turk’s sentiment.

The Turkish lira halted its depreciation in levels just below the 14.00 mark vs. the US dollar at the end of the week, all amidst a narrow trading range in USD/TRY.

USD/TRY remains poised for extra gains

USD/TRY seems to have met quite a decent barrier near 14.00 the figure on Friday, although it managed to record new highs for the year, nonetheless.

In the meantime, the lira remains under scrutiny amidst the current feeble outlook, which has been exacerbated after inflation figures recorded a 19-year peak beyond 36% in the year to December (Monday).

From the Turkish cash markets, yields of the 5y and 10y bonds reverse the recent multi-session weakness and resume the upside to past the 24% mark and just above 23%, respectively. The recent decline in yields have been promoted by purchases of government debt by the Turkish central bank (CBRT) according to latest news.

What to look for around TRY

The lira resumed the downtrend while market participants continue to digest the recent inflation figures and the government scheme to protect deposits in the domestic currency. The reluctance of the CBRT to change the (collision?) course and the omnipresent political pressure to favour lower interest rates in the current context of rampant inflation and (very) negative real interest rates are forecast to keep the lira under intense pressure for the time being, That said, another visit to the all-time high north of the 18.00 mark in USD/TRY should not be ruled out just yet.

Eminent issues on the back boiler: Progress (or lack of it) of the new scheme oriented to support the lira. Constant government pressure on the CBRT vs. bank’s credibility/independence. Bouts of geopolitical concerns. Much-needed structural reforms. Growth outlook vs. progress of the coronavirus pandemic. Potential assistance from the IMF in case another currency crisis re-emerges. Presidential elections in 2023.

USD/TRY key levels

So far, the pair is losing 0.24% at 13.7871 and a drop below 12.7523 (weekly low Jan.3) would pave the way for a test of 11.9694 (55-day SMA) and finally 10.2027 (monthly low Dec.23). On the other hand, the next up barrier lines up at 13.8967 (YTD high Jan.3) followed by 18.2582 (all-time high Dec.20) and then 19.0000 (round level).

• Spot silver prices were choppy post-NFP but are little changed from pre-data levels in the $22.20 area.
• Headline US job gains missed expectations but measures of slack point to an improving and tight labour market.

Spot silver (XAG/USD) prices have seen a confused, two-way reaction to the latest US labour market report. Spot prices at one point dipped under the $22.00 level, but have since rebounded back to in line with pre-data levels near $22.20 after printing session highs just under $22.30. For reference, headline job gains in the US disappointed, but measures of slack showed indicated that the US labour market continued to make progress to “near-term” full employment (i.e., full utilisation of workers actually willing to engage in the labour force at present). As such, the money market impied probability that the Fed lifts interest rates by 25bps in March moved slightly higher to 90% from 80% prior to the release.

Given the mixed nature of the report and as traders continue to digest what it means for the outlook for Fed policy, FX and bond markets arent much moved. If anything, the dollar is a tad weaker, with the DXY currently testing the 96.00 level. Meanwhile, US 5 and 10-year TIPS (real) yields are flat in the respective -1.34% and -0.77% areas, roughly in line with pre-data levels. From a correlation standpoint, it thus makes sense that data hasn’t had much follow-through for precious metals yet either.

While silver appears to have made it through NFP unscathed (to the surprise of some), it may be too soon for the bulls to declare this week’s selling pressure over, given that three Fed speakers will be orating over the course of the afternoon. Fed’s Mary Daly is up first at 1500GMT, followed by remarks from Fed’s Raphael Bostic at 1715GMT and Thomas Barkin at 1730GMT. The tone of their remarks is likely to echo the hawkish minutes, with FOMC participants seemingly in agreement on most aspects of monetary policy. Bond yields have come a long way higher on the week to price in a more hawkish Fed and, at current levels, XAG/USD is set to end the week nearly 5.0% lower. Perhaps that limits the scope for further losses. If not, a break below $22.00 would open the door to a test of December lows around $21.40. 

The Canadian labour market continues to make solid progress in its recovery with another 55K jobs created during the month of December. The data had little impact on the CAD but there is enough here to adopt a bias that the upcoming Bank of Canada meeting is live. As such, economists at TD Securities think risk/reward has moved in favour of the loonie.

Canadian labour market enters 2022 on strong footing

“The Canadian economy added 55K jobs during the month of December, above the market consensus for 25K (TD: 30K), pulling the unemployment rate down to 5.9%. Details were somewhat mixed, with full-time employment up 123K, while hours worked rose just 0.3% and wage growth slipped to 2.7% YoY.”

“Today's report should place some added pressure on the BoC ahead of the January meeting, where markets are currently pricing a roughly 50% chance of a rate hike, although we continue to look for lift-off in April.”

“We hold a bearish USD/CAD bias but we think that the USD leg could be a bit resilient given a very hawkish Fed and deeply entrenched USD positioning.”

EUR/USD continues to trade in a 1.1225-1.1385 channel since late-November. Upside momentum over the past few days has been limited and economists at Scotiabank expect the world’s most popular currency pair to drift lower towards the 1.10 level.

ECB is unlikely to increase rates before late-2023

“We think it’s more likely that the Fed hikes by 100bps this year (markets are at 75bps) than the ECB hikes by 10bps – with OIS markets penciling a first ECB increase in October. The 50bps in rate increases that markets are seeing by end-2023 would be a sharp turnaround from the ultra-dovish ECB.” 

“As markets adjust expectations around the Fed and the ECB, EUR/USD losses toward 1.10 should resume.”

“Support is ~1.1270/85 followed by 1.1260 and 1/1235/40.” 

“Key resistance is the 50-day MA at 1.1351 and the recent high of 1.1386.”

GBP/USD is stable in mid 1.35s. Economists at Scotiabank notes that the bullish trend in cable could drive the pair towards the 1.36 level on a break above the 100-day moving average at 1.3556.

100-DMA of 1.3556 acts as resistance

“The pound should find decent support at the 1.35/high-1.34s zone on dips with the mid-figure area following.” 

“Resistance after the 100-day MA of 1.3556 stands at 1.3577, the 38.2% Fib retracement of its Jun-Dec drop, with the 1.36 level acting as another key mark to beat on the charts.”

EUR/CAD fails at key 1.4615 resistance. Now, the pair looks soft and prone to renewed weakness again, in the view of economists at Scotiabank.

Key resistance seen at 1.4615

“The late year consolidation in EUR/CAD has taken the form of a rough – but validlooking – bear flag.”

The EUR is testing the base of the consolidation and a break below 1.4325 should signal a resumption of the losses we have been expecting to (eventually) unfold.”

“Key support remains 1.4165.”

“Key resistance remains 1.4615.”

• USD/CHF gained some positive traction on Friday and shot to over a two-week high.
• The disappointing headline NFP was offset by a larger drop in the jobless rate.
• Rising US bone yields acted as a tailwind for the USD and remained supportive.

The USD/CHF pair finally broke out of its intraday consolidative range and shot to over a two-week high, around the 0.9230-35 area during the early North American session.

The latest uptick witnessed over the past hour or so followed the release of the mixed US jobs report, which showed that the US economy added 199K new jobs in December. This was far below consensus estimates pointing to a reading of 400K, though was offset by an upward revision of the previous month's print to 249K from 210K reported early.

Moreover, the unemployment rate fell more than anticipated to 3.9% from 4.2% in November. Despite the disappointing headline NFP, additional details reinforced speculations for an eventual Fed lift-off in March. This was evident from a fresh leg up in the US Treasury bond yields, which provided a modest lift to the US dollar and the USD/CHF pair.

In fact, the yield on the benchmark 10-year US government bond rose to levels not since March 2021. Adding to this, the US 2-year notes, which are highly sensitive to rate hike expectations along with 5-year notes, climbed to a near two-year high. The USD bulls, however, seemed reluctant to place aggressive bets.

Apart from this, an intraday slide in the equity markets extended some support to the safe-haven Swiss franc and kept a lid on any meaningful gains for the USD/CHF pair. Nevertheless, the overnight sustained strength beyond the 0.9200 round-figure and the subsequent move up supports prospects for a further near-term appreciating move.

Technical levels to watch

USD/JPY is taking a healthy breather. Economists at Credit Suisse view this as a healthy pause ahead of a test of the long-term downtrend from April 1990 at 116.83.

Support at 114.96 ideally now holds

“With 10yr US Bond yields now seen completing a major base as looked for we expect this to further reinforce the existing base in USD/JPY.” 

“We look for a break above 116.35 for a test of the long-term downtrend from April 1990, now seen at 116.83. Whilst we would expect to see a fresh phase of consolidation to emerge here, we look for a break higher post this for a challenge on the 118.61/66 highs of late 2016 and 2017.” 

“Big picture, we look for an eventual rise to 1222.90/123.00.” 

“Near-term support moves to 115.62, then 115.68/62 which we look to ideally hold. A close below 114.96 though remains needed to ease the immediate upside bias.”

• The index keeps the bearish note above the 96.00 mark.
• US Non-farm Payrolls rose by 199K jobs in December.
• The unemployment rate ticked lower to 3.9%.

The selling interest around the greenback remains well and sound at the end of the week and keeps the US Dollar Index in the area above the 96.00 barrier in the wake of the Nonfarm Payrolls.

US Dollar Index remains side-lined

The index appears offered on Friday after the US economy created 199K jobs during last month, coming in short of expectations for a gain of 400K jobs. The November’s reading was revised to 249K (from 210K).

Further data showed the jobless rate eased to 3.9% and the critical Average Hourly Earnings – a proxy for inflation via wages – rose 0.6% MoM and expanded 4.7% from a year earlier. Another key gauge, the Participation Rate, improved a tad to 61.9%.

Later in the session, San Francisco Fed M.Daly (2024 voter, hawkish), Atlanta Fed R.Bostic (2024 voter, centrist) and Richmond Fed T.Barkin (2024 voter, centrist) are all due to speak.

US Dollar Index relevant levels

Now, the index is retreating 0.13% at 96.11 and a break above 96.46 (weekly top Jan.4) would open the door to 96.90 (weekly high Dec.15) and finally 96.93 (2021 high Nov.24). On the flip side, the next down barrier emerges at 95.57 (monthly low Dec.31) followed by 95.51 (weekly low Nov.30) and then 94.96 (weekly low Nov.15).

• Canada added 54.7K jobs in December, above the 27.5K expected. 
• CAD saw some kneejerk strength, though conditions have been choppy. 

The Canadian economy added 54.7K jobs in the month of December, above expectations for a 27.5K gain, though still a marked deceleration from the 153.7K jobs added in November, according to the latest release from Statistics Canada released on Friday. Canada saw 122.5K new jobs in full-time employment, whilst part-time employment fell 67.7K. The unemployment rate fell to 5.9% from 6.0% in November, below expectations for it to remain unchanged. 

Market Reaction

CAD saw kneejerk strength in wake of the latest Canadian jobs report, but trade has been choppy. 

• NFP rose by 199K in December, below the 400K expected. 
• The unemployment rate fell to 3.9% and Average Hourly Earings rose 0.6% MoM. 
• The dollar has seen a choppy reaction even though the report boosted money market pricing for a March Fed hike. 

Nonfarm Payrolls (NFP) rose by 199K in December versus the median forecast for a 400K rise (some newswires had reported the median forecast at 447K), data published by the US Bureau of Labor Statistics showed on Friday. That meant the pace of job gains was roughly in line with November, when 249K jobs (revised up from 210K) were added to the US economy. Private employment rose by 211K, below expectations for a 365K rise and below last month's 279K rise (which was revised up from 235K). Manufacturing employment rose 26K, below expectations for a 35K rise and down from November's 35K gain (which was revised up from 31K). Government payrolls fell 12K. 

The unemployment rate fell to 3.9% from 4.2% in November, versus expectations for a drop to 4.1% and continued to close in on its pre-pandemic levels of 3.5% in December. The U6 underemployment rate fell to 7.3% from November's 7.7% (which was revised lower from 7.8%), only slightly above its pre-pandemic level of 7.0%. The participation rate rose to 61.9% from 61.8% and the employment-population ratio rose to 59.5% from 59.2%, still well below its pre-pandemic level at 61.1%. 

Meanwhile, the MoM gain in Average Hourly Earnings came in at 0.6%, above expectations for it to rise to 0.4% from November's 0.4% MoM level (which was revised up from 0.3%). That meant that the YoY rate of Average Hourly Earnings growth came in at 4.7% in December versus median forecasts for a fall to 4.2% from 5.1% (revised up from 4.8%). 

Market Reaction

The dollar has seen a choppy reaction to the latest jobs report. It initially saw downside, likely due to the headline number missing expectations. The DXY dipped as low as 96.05 but has since been choppy in the 96.10-20 area in tandem with the money market-implied probability of the Fed hiking interest rates in March rising to 90% from 80% prior to the data. 

Yes, the job gains seen in December were weaker than expected. But measures of economic slack, such as the unemployment rate, the U6 underemployment rate and the participation rate all showed further improvement. Wage gains were also stronger than expected. The Fed minutes of the December meeting suggested that most members view the economy as very close to or having already reached "short-term" full employment. That is to say, with the ongoing pandemic holding workers back from re-entering the workforce, the available labour supply seems to be at or close to full utilisation.

Friday's labour report likely then fulfills the criteria set out by the Fed in the minutes that rate hikes might soon be appropriate so long as the labour market continues to make rapid progress towards full employment. USD bulls will wonder whether this can reignite some upside in the buck. 

• GBP/USD is subdued at just under 1.3550 as the key US jobs report looms.
• The pair continues to trade within its recent bullish trend channel, with traders eyeing resistance at 1.3600 and support at 1.3400.

GBP/USD is unsurprisingly trading in subdued fashion as FX market participants await the release of the latest official US labour market report at 1330GMT. So far on Friday, the pair has been unable to poke above the 1.3550s and has mostly been going sideways in the 1.3530-50 area. In the broader technical context, GBP/USD’s has been moving higher within the confines of a bullish trendline since just after Christmas and this trend currently remains intact. But traders may be leery about chasing the pair any higher if the upcoming US labour market report comes in as good as expected, thus boosting the prospect of a March Fed rate hike.

GBP/USD bulls will be relieved that the hawkish Fed minutes from earlier in the week and associated sharp upside in US bond yields didn’t translate into broad USD strength. Indeed, the pair is actually on course to post a modest weekly gain of about 0.1%, which would mark a third successive week in the green, with sterling having gained recently as UK pandemic/lockdown fears subsided. But some FX strategists have argued that the proximity of the jobs report so close after the release of the hawkish Fed minutes may have deterred USD bulls from, at the time, increasing their long exposure. With the jobs report out of the way (as long as it is decent), the dollar may get the “green light” to push higher, analysts have warned.

Was that to be the case, GBP/USD likely would suffer and the 1.3500 level would below vulnerable. A break below that could open the door to technical selling to drive the pair as low as 1.3400 where the 50-day moving average resides. In the reverse case where the dollar sees post-jobs report weakness, the key area of resistance to watch is at 1.3600.

• AUD/USD attracted fresh sellers on Friday and dropped to over a two-week low.
• The overnight decisive break below an ascending trend-line favours bearish traders.
• Bears now await the release of the closely-watched US monthly jobs report (NFP). 

The AUD/USD pair remained on the defensive and languished near the lowest level since December 22, around mid-0.7100s heading into the North American session.

The pair did attempt a minor recovery during the early part of the trading on Friday, though struggled to capitalize on the move despite modest US dollar weakness. This comes on the back of the recent repeated failures near the 100-DMA and the overnight decisive break below a one-month-old ascending trend-line, which favours bearish traders.

The negative outlook is reinforced by the fact that technical indicators on the daily chart have again started drifting into bearish territory. Investors, however, seemed reluctant to place aggressive bets, preferring rather to wait on the sidelines ahead of the release of the closely-watched US monthly jobs data – popularly known as the NFP report.

Nevertheless, the technical set-up support prospects for a further near-term depreciating move towards testing the 0.7100 round-figure mark. Some follow-through selling should pave the way for a further downfall and drag the AUD/USD pair back towards challenging 2021 low,s around the key 0.7000 psychological mark touched early December.

On the flip side, attempted recovery moves might now confront resistance and meet with a fresh supply near the daily swing high, around the 0.7175-80 region. This, in turn, should cap the upside near the ascending trend-line support breakpoint, currently around the 0.7200 mark. This should act as a key pivotal point for short-term traders.

A sustained strength beyond might trigger a short-covering move and push the AUD/USD pair back towards the 0.7255-60 region, or the 100-day SMA barrier. A subsequent move up will negate the negative bias and pave the way for a move towards the next relevant hurdle near the 0.7340-45 region en-route the 0.7375-80 zone and the 0.7400 round-figure mark.

AUD/USD daily chart

Technical levels to watch

European Central Bank Chief Economist Philip Lane on Thursday told Ireland's RTE News that he believes inflation will come down later in the year. He labeled the current spike in inflation as a part of a "pandemic cycle of inflation". Moreover, he called the spike in energy costs a "major economic issue", before reiterating that it was highly unlikely that the bank would hike interest rates this year. 

Lane's remarks come after headline HICP inflation in the Eurozone rose to a fresh post-pandemic high of 5.0% in December, according to a Eurostat flash estimate. Earlier in the week, euro money markets were pricing a full 10bps rate hike from the ECB as soon as October. 

Market Reaction

His remarks do not seem to have stirred any reaction in FX markets. 

• EUR/USD struggles for direction amidst a cautious price action.
• The loss of the 1.1270 region opens the door to extra losses.

Consolidation remains the name of the game around EUR/USD ahead of the release of the US labour market figures on Friday.

In the meantime, bouts of weakness should initially put the 1.1270 region to the test. If breached, then spot could slip further back and retest the weekly low at 1.1234 (December 20) ahead of the December’s low at 1.1221 (December 15).

The broader negative outlook for EUR/USD is seen unchanged while below the key 200-day SMA at 1.1742.

EUR/USD daily chart

• DXY fades Thursday’s modest advance and retests 96.00.
• If bulls wake up, then the next target comes near 96.50.

DXY alternates gains with losses at/above the 96.00 yardstick ahead of the key US Nonfarm Payrolls on Friday.

If the buying interest gathers impulse, the index should initially target the area of YTD highs near 96.50 to allow for further gains to 96.90 (December 15) and the 2021 peak at 96.93 (November 24).

In the meantime, while above the 4-month support line (off September’s low) around 95.00, further upside in DXY is likely. Looking at the broader picture, the longer-term positive stance remains unchanged above the 200-day SMA at 93.06.

DXY daily chart

Canadian employment details overview

Statistics Canada is scheduled to publish the monthly jobs report for December later this Friday at 13:30 GMT. The Canadian economy is anticipated to have added 27.5K new jobs during the reported month, marking a sharp decelerating from a massive growth of 153.7K in November. That said, the unemployment rate is expected to hold steady at 6.0% and the Participation Rate is also likely to remain unchanged at 65.3%.

How could the data affect USD/CAD?

Ahead of the key release, bullish crude oil prices underpinned the commodity-linked loonie and acted as a headwind for the USD/CAD pair. Apart from this, modest US dollar weakness weighed on the major for the second successive day. Stronger Canadian employment details should provide additional lift to the domestic currency, though the data is likely to be overshadowed by the simultaneous release of the US NFP report. 
Nevertheless, any significant divergence from the expected readings might still influence the Canadian dollar and infuse some volatility around the major.

Meanwhile, Dhwani Mehta, Senior Analyst at FXStreet, offered a brief technical outlook and important technical levels to trade the major: “USD/CAD has confirmed a falling wedge breakout on the daily sticks a day before, with the bulls now recapturing the critical 21-Daily Moving Average (DMA) at 1.2798. The pain in the Canadian dollar could be exacerbated if the jobs data fall short of the market’s expectations, prompting the pair to break through the recent range highs around 1.2850. Further up, all eyes will remain on the 1.2900 level. The 14-day Relative Strength Index (RSI) looks north just above the midline, backing the bullish view.”

“Only an upside surprise on the Canadian jobs data or a big disappointment on the US NFP report could save the day for CAD bulls. In that case, the spot could retrace to test the wedge resistance-turned-support at 1.2723, below which a sharp drop towards the bullish 50-DMA at 1.2684 will be in the offing,” Dhwani added further.

Key Notes

  •   Canadian Jobs Preview: Slowdown in jobs growth could worsen CAD’s plight

  •   USD/CAD bounces off daily low, defends 1.2700 mark ahead of US/Canadian jobs report

  •   USD/CAD Outlook: Overnight pullback warrants caution for bulls amid rallying oil prices

About the Employment Change

The employment Change released by Statistics Canada is a measure of the change in the number of employed people in Canada. Generally speaking, a rise in this indicator has positive implications for consumer spending which stimulates economic growth. Therefore, a high reading is seen as positive, or bullish for the CAD, while a low reading is seen as negative or bearish.

About the Unemployment Rate

The Unemployment Rate released by Statistics Canada is the number of unemployed workers divided by the total civilian labour force. It is a leading indicator for the Canadian Economy. If the rate is up, it indicates a lack of expansion within the Canadian labour market. As a result, a rise leads to weaken the Canadian economy. Normally, a decrease of the figure is seen as positive (or bullish) for the CAD, while an increase is seen as negative or bearish.

• EUR/JPY manages to resume the upside after Thursday’s drop.
• The cross faces the next target at 131.60 ahead of 132.17.

EUR/JPY regains upside traction and recovers ground lost after Thursday’s noticeable retracement.

Further gains remain on the cards for the time being if the cross surpasses the so far YTD high at 131.60 (January 5). Once cleared, the next hurdle is seen at the Fibo level (of the October-December drop) at 132.17.

While above the 200-day SMA, today at 130.52, the outlook for EUR/JPY should point to extra gains.

EUR/JPY daily chart

US monthly jobs report overview

Friday's US economic docket highlights the release of the closely-watched US monthly jobs data. The popularly known NFP report is scheduled for release at 13:30 GMT and is expected to show that the economy added 400K new jobs in December, up from the previous month's dismal reading of 210K. The unemployment rate is expected to edge lower to 4.1% from 4.2% in November. Given Wednesday's stellar US ADP report on private-sector employment, market participants are bracing for a positive surprise from the official figures.

As Joseph Trevisani, Senior Analyst at FXStreet, explains: “The availability of employment, the extremely low level of layoffs, the desire of many workers to improve their wages to cope with soaring inflation, and the vibrant US expansion, should give Nonfarm Payrolls a good December. Given the strength of the attendant indicators and the ADP result, risk is weighted to a substantially better number than forecast.”

How could the data affect EUR/USD?

Heading into the key release, a generally positive risk tone, along with softer US Treasury bond yields kept the US dollar bulls on the defensive and acted as a tailwind for the EUR/USD pair. That said, the divergence in monetary policy stance between the Fed and the European Central Bank (ECB) kept a lid on any meaningful gains for the major. A stronger NFP print would reaffirm hawkish Fed expectations and provide a fresh lift for the greenback. Conversely, any disappointment is more likely to be offset by growing acceptance for an eventual Fed liftoff in March. This, in turn, suggests that the path of least resistance for the pair remains to the downside and any attempted recovery move could still be seen as a selling opportunity.

Meanwhile, Eren Sengezer, Editor at FXStreet, offered a brief technical outlook for the major: “EUR/USD's near-term technical picture shows that the pair is struggling to find direction with the Relative Strength Index (RSI) indicator moving sideways near 50 on the four-hour chart. Moreover, the pair is currently fluctuating in a tight range in between the 100-period and 200-period SMA's on the same chart, reflecting its indecisiveness.”

Eren also outlined important technical levels to trade the EUR/USD pair: “In case US T-bond yields start to push higher after NFP data, the first target on the downside aligns at 1.1270 (static level) ahead of 1.1240 (static level) and 1.1200 (psychological level). Resistances are located at 1.1320 (50-period SMA), 1.1340 (static level) and 1.1360 (static level, post-ECB high).”

Key Notes

  •  Nonfarm Payrolls Preview: A strengthening labor market backs a tighter monetary policy

  •  US Nonfarm Payrolls December Preview: The labor market seconds Fed policy

  •  EUR/USD Forecast: Sellers move to sidelines while waiting for NFP's impact on rate hike bets

About the US monthly jobs report

The nonfarm payrolls released by the US Department of Labor presents the number of new jobs created during the previous month, in all non-agricultural business. The monthly changes in payrolls can be extremely volatile, due to its high relation with economic policy decisions made by the Central Bank. The number is also subject to strong reviews in the upcoming months, and those reviews also tend to trigger volatility in the forex board. Generally speaking, a high reading is seen as positive (or bullish) for the USD, while a low reading is seen as negative (or bearish), although previous months reviews and the unemployment rate are as relevant as the headline figure.

Senior Economist at UOB Group Alvin Liew reviews the recently published FOMC Minutes of the December meeting (Wednesday).

Key Takeaways

“The Dec 2021 FOMC minutes were seen as overtly hawkish with an extensive discussion about policy normalisation considerations, especially on reducing the Fed’s signifcant balance sheet.”

“The minutes revealed FOMC policymakers’ thoughts of an earlier and faster timeline to raise interest rates in 2022 due to inflation concerns and tighter labor market conditions. It also extensively discussed reducing the US$8.8 trillion balance sheet with participants looking at a shorter time frame between the start of the balance sheet runoff and the policy rate liftoff this time (versus 2018 which was a gap of 2 years).”

“Post-FOMC minutes, our projection for the faster pace of QE reduction by Mar 2022 remains intact. Thereafter, we still expect three Fed funds target rate hikes in 2022, the first hike in Jun 2022 by 25bps to 0.25-0.50%, followed by 2 more hikes in Sep 2022 and Dec 2022. While the risk admittedly is skewed towards the Fed to hike even earlier in Mar FOMC, our principal concern is about Omicron variant developments, given the rapid spread across US accompanied by the country’s relatively low vaccination rate, when compared to its G7 peers.”

According to a recently conducted Reuters survey, experts expect the Canadian dollar to strengthen against the greenback in 2022.

The median forecast for the USD/CAD pair stands at 1.2600 in three months, compared to 1.2500 in December's poll. By the end of the year, the pair is expected to decline by 3% to 1.2350, slightly higher than the previous forecast of 1.2300.

"Canada is a major producer of commodities, including oil, so the loonie tends to be sensitive to the outlook for the global economy. Oil has rallied 27% since December," Reuters noted.

Market reaction

USD/CAD showed no immediate reaction to this headline and was last seen posting small daily losses at 1.2718.

Friday’s jobs data will be important. And the markets are likely braced for a strong report. An upside surprise on wage inflation numbers could lift the USD/JPY pair to the 117.00 level, economists at MUFG Bank report.

The decider is likely to be the wage data

“We will be looking closely at the wage today and upside surprises there coupled with a strong NFP print would ensure the upward momentum for yields likely continues.”

“USD/JPY has struggled in circumstances of equity market underperformance but we still see scope for further upside to test and probably breach the long-term trendline resistance (1990 & 2015 highs) at around the 117.00 level.”

• USD/CHF was seen consolidating the previous day’s strong move up to a two-week high.
• A positive risk tone undermined the safe-haven CHF and continued lending some support.
• Softer US bond yields have kept the USD on the defensive and capped upside for the major.
• Investors also seem reluctant to commit, preferring to wait for the release of the US NFP report.

The USD/CHF pair lacked any firm directional bias and seesawed between tepid gains/minor losses, above the 0.9200 mark through the first half of the European session.

A combination of diverging forces failed to assist the USD/CHF pair to capitalize on the overnight strong gains to a two-week high and led to a subdued/range-bound price move on Friday. A softer tone surrounding the US Treasury bond yields kept the US dollar bulls on the defensive and capped the upside. That said, a generally positive risk tone undermined the safe-haven Swiss franc and extended some support.

Overall the Fed's hawkish outlook is acting as a tailwind for the greenback and has helped limit any meaningful slide for the USD/CHF pair. It is worth recalling that the December 14-15 FOMC monetary policy meeting minutes released on Wednesday indicated that the US central bank could hike interest rates earlier than anticipated. Moreover, the money market is now pricing in a roughly 80% chance for an eventual lift-off in March 2022.

The fundamental backdrop supports prospects for an extension of this week's goodish rebound from the 0.9100 mark – a two-month low. Bulls, however, are are staying on the sidelines in anticipation of Friday's release of the market moving US monthly jobs data. The popularly known NFP release, due for later today during the early North American session, will play a key role in determining the next leg of a directional move for the USD/CHF pair.

Technical levels to watch

Economist at UOB Group Ho Woei Chen, CFA, notes the Bank of Korea (BoK) is seen hiking rates further in Q1 2022 on the back of persistent elevated inflation.

Key Takeaways

“Inflation is expected to remain elevated this year due to sustained high oil prices and the economic recovery coupled with supply disruption. After rising to a decade-high of 2.5% in 2021 (2020: 0.5%), we expect headline inflation to average 2.0% this year while core inflation could edge slightly higher from 1.8% in 2021. The monthly headline inflation is likely to stay above the BOK’s target through 1H22.”

“South Korea’s economic fundamentals have stayed strong but export growth is expected to cool due to the moderation of growth in the major economies and a high comparison base while a slowdown in China poses further downside risk. Overall, export growth had rebounded 25.8% in 2021 from -5.5% in 2020. The government forecasts exports to post a small gain of 2% this year.”

“We continue to project the next BOK rate hike in 1Q22, likely at the 24th Feb meeting instead of the upcoming meeting on 14th Jan in line with its gradual normalisation approach. The BOK remains wary of the coronavirus spread that would threaten the global recovery as well as an increase in credit risk among households and small businesses as the central bank raises interest rates.”

Economists at TD Securities look for further sharp Turkish lira depreciation. They forecast the USD/TRY above the 20.00 level in the second quarter of the year.

The nightmare after Christmas

“We think that USD/TRY will rise to 16.25 by end-Q1 and breach well over 20 in Q2. However, this is when we expect the CBRT to start tightening, which should help bring the pair down to around 19 by end-Q2.” 

“The lira can continue appreciating in a gradual manner throughout the rest of 2022 assuming no further policy missteps.” 

“From 2023 onwards, however, policy mistakes are yet again likely to set TRY on a weakening trajectory.”

EUR/JPY’s decline in mid-December reversed from a 127.39 low. The monthly chart shows the cross retaining its bullish bias, receiving positive hues from a bullish inverse head-and-shoulders pattern, Benjamin Wong, Strategists at DBS Bank, reports.

Retaining constructive bias

“The bullish outlook resonates well with the long-term monthly chart. We are now trending higher with a likely bullish inverse head-and-shoulders pattern.”

“The recent 127.39 low is fashioned as the penultimate support leg, before prices move on higher towards the 1.764 price extension located at 135.19 (beyond that rests the February 2018 peak at 137.50). This needs to bypass 134.42, the 61.8% Fibonacci retracement of 149.78 (December 2014 major peak) – 109.57(June 2016 major low).”

• Eurozone Retail Sales rose by 1.0% MoM in November vs. -0.5% expected.

• Retail Sales in the bloc arrived at 7.8% YoY in November vs. 5.6% expected.

Eurozone’s Retail Sales rose by 1.0% MoM in November versus -0.5% expected and 0.3% last, the official figures released by Eurostat showed on Friday.

On an annualized basis, the bloc’s Retail Sales came in at 7.8% in November versus 1.7% recorded in September and 5.6% estimated.

FX implications

The euro is holding onto its latest leg up on the upbeat Eurozone Retail Sales data.

At the time of writing, the major trades at 1.1316, higher by 0.24% on the day.

About Eurozone Retail Sales

The Retail Sales released by Eurostat are a measure of changes in sales of the Eurozone retail sector. It shows the performance of the retail sector in the short term. Percent changes reflect the rate of changes of such sales. The changes are widely followed as an indicator of consumer spending. Usually, the positive economic growth anticipates "Bullish" for the EUR, while a low reading is seen as negative, or bearish, for the EUR.

Economists at TD Securities maintain a positive view on the Polish zloty. As a result of positive fundamentals, they expect the EUR/PLN pair to drop towards 4.30 throughout the year.

Policy normalisation in Poland is in full swing

“We continue to hold a positive view on zloty. The policy normalisation in Poland is in full swing. The NBP already delivered 215bps of tightening since October 2021 as well as ended QE. In addition, the recovery in Poland continues at a robust pace.” 

“We continue to see EUR/PLN gradually converging back towards the pre-pandemic level of 4.30 over the course of 2022.”

The annualized Eurozone Consumer Price Index (CPI) rises by 5.0% in December, surprising markets to the upside while a tad higher from the previous jump of 4.9%, the latest data published by Eurostat showed on Tuesday. The consensus forecast was for a drop to 4.7%.

The core figures arrived at 2.6% YoY in December when compared to 2.5% expectations and 2.6% registered in November.

Earlier this week, Reuters reported that long-term Eurozone inflation expectations rose above 2.0% for the first time since late October 2021.

The Euro area figures come a day after Germany’s annual inflation eased for the first time in six months, arriving at 5.7% following a record increase of 6.0% in November.

Key details (via Eurostat)

“Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in December (26.0%, compared with 27.5% in November), followed by food, alcohol & tobacco (3.2%, compared with 2.2% in November), non-energy industrial goods (2.9%, compared with 2.4% in November) and services (2.4%, compared with 2.7% in November).”

EUR/USD reaction

EUR/USD is testing highs on unexpectedly hotter Eurozone inflation. The spot is currently adding 0.24% on the day, trading at daily highs near 1.1320.

Nasdaq-100 uptrend faced stiff resistance at the upper limit of an ascending channel drawn since October 2020 at 16760. Range-bound price action has developed after this test. A break below the lower limit at 15500/15350 would open up the October trough of 14380, economists at Société Générale report.

A rebound towards the recent peak of 16760 is not ruled out

“The index is now near the lower limit at 15500/15350. This is a crucial support.” 

“A rebound towards 16230 and recent peak of 16760 is not ruled out.”

“Only a break below 15500/15350 would mean possibility of a deeper pullback towards the 200-DMA at 14880 and October trough of 14380.”

A very hawkish set of FOMC minutes on Wednesday is still reverberating across markets, keeping the dollar reasonably well-supported. With the minutes revealing that the Fed already feels that conditions have been met for a first hike, today's December jobs data should keep the dollar bid on dips, according to economists at ING.

Fed would welcome a stronger dollar

“Given that the Fed seems to have fully swung behind the hawkish narrative, we would expect the dollar to stay strong today and be bid on dips even if the nonfarm payrolls disappoint.” 

“The consensus seems to be for a 450K headline jobs number, a 4.1% unemployment rate, and 0.4% month-on-month average hourly earnings. Right now, with the Fed's rotation to inflation, it feels like the unemployment rate and average earnings will be more important. Any strong readings there could see the dollar pop higher.”

“DXY is in the middle of its six-week trading range, but today could be a catalyst for a push back to the highs near 97.00.”

• GBP/USD gained some positive traction and build on the overnight bounce from sub-1.3500 levels.
• A positive risk tone, softer US bond yields undermined the safe-haven USD and extended support.
• Investors seemed to have moved on the sidelines and waited for the release of the US NFP report.

The GBP/USD pair maintained its bid tone, around the 1.3540-50 area through the first half of the European session, albeit seemed struggling to break through the 100-day SMA resistance.

Following the previous day's modest pullback and the subsequent bounce from sub-1.3500 levels, the GBP/USD pair managed to regain positive traction on Friday amid modest US dollar weakness. A generally positive tone around the equity markets was seen as a key factor that undermined the safe-haven greenback and extended some support to the major.

The British pound was further underpinned by hopes that the Omicron outbreak won't derail the UK economy and rising bets for additional interest rate hikes by the Bank of England. That said,  the worsening COVID-19 situation in Britain could act as a headwind for the sterling and keep a lid on any further gains for the GBP/USD pair, at least for now.

Investors also seemed reluctant to place aggressive bets, rather preferred to wait on the sidelines ahead of Friday's release of the closely watched US monthly jobs data. The popularly known NFP report, due later during the early North American session, will be looked upon to reinforce growing market expectations about a faster policy tightening by the Fed.

It is worth recalling that the December 14-15 FOMC monetary policy meeting minutes released on Wednesday indicated that the US central bank could hike interest rates earlier than anticipated. Hence, a stronger reading would reaffirm hawkish Fed expectations, which should be enough to provide a fresh lift to the USD and prompt some selling around the GBP/USD pair.

Apart from this, the broader market risk sentiment will influence the USD price dynamics. Traders will further take cues from developments surrounding the coronavirus saga to grab some short-term opportunities around the GBP/USD pair.

Technical levels to watch

In contemporary capitalism, the return on equity for shareholders is high. But, in the future, an equilibrium with a lower return on capital will probably inevitably emerge. In this new equilibrium, the share of wages and taxes in GDP will increase, and the share of capital income will decrease, according to economists at Natixis.

Return on capital and the share of capital income in GDP to decline 

“We believe that the upward trend in return on equity for shareholders (rising share of capital income in GDP) will reverse due to the upward pressure on wages, especially low wages (e.g., the decision to increase the minimum wage by 25% in Germany) and the need to finance a legitimate increase in many types of public spending through increased corporate taxation.”

“If there is a shift from an upward trend to a downward trend in the share of capital income in GDP, we should also expect a much less favourable trend for stock market indices.” 

GBP/USD has been moving sideways around 1.3550 so far on Friday after closing in the negative territory on Thursday. FXStreet’s Eren Sengezer doubts buyers can defend the 1.35 level on a strong Nonfarm Payrolls report.

US December jobs report could ramp up volatility ahead of the weekend

“The market expectation is for NFP to rise by 400,000 following November's disappointing increase of 210,000. A print close to market consensus should be good enough to for the Fed to stick to its hawkish outlook.”

“The Average Hourly Earnings are forecast to edge lower to 4.1% on a yearly basis in December from 4.8% in November. The Fed is more concerned about wage inflation feeding into more persistent price pressures than a one-month increase in NFP and a strong figure could trigger a dollar rally and vice versa.”

“In case the NFP report provides a boost to the dollar, 1.3500 (psychological level, 50-period SMA) aligns as key support. A break below that level could open the for additional losses toward 1.3450 (static level) and 1.3420 (100-period SMA).”

“An interim resistance seems to have formed at 1.3565 (static level) before 1.3600 (psychological level).”

The US Dollar Index (DXY) has unfolded a pause in its uptrend after facing resistance near 97.00. It has so far defended 95.50, the 38.2% retracement from October. DXY is moving sideways above 96.20, reflecting a neutral tone, but expected to resume the uptrend once above the 97.00 level, economists at Société Générale report.

95.10/94.50 to be a crucial support zone near-term

“Daily RSI is near the lower end of its bullish territory which denotes this still looks like a consolidation within uptrend.” 

“Once the index establishes itself beyond 97.00, the uptrend will resume towards next objectives at 97.70 and projections of 98.30.”

“Multi-month ascending trend line at 95.10/94.50 will be a crucial support zone near-term.” 

• EUR/USD is in wait-and-see mode and trading close to 1.1300 ahead of the latest official US jobs report.
• The data will primarily be viewed in the context of how it impacts expectations for a March Fed rate hike.
• The euro didn’t react to the latest hotter than expected Eurozone inflation figures for December.

EUR/USD is in wait-and-see mode ahead of Friday’s crucial US labour market report which, analysts suspect, will impact perceptions about whether the Fed will implement its first rate hike in December or not. The pair has been content thus far on Friday’s session to languish within recent ranges close to the 1.1300 level and has in recent hours been swinging either side of its 21-day moving average at 1.1306. EUR/USD’s recent trading patterns have been a dream for technicians who like to play the range; since the end of November, the pair has been locked within a 1.1220s to 1.1380s ish range. But the pair has formed a pennant structure thus far in 2022 that has increasingly squeezed the price action and looks to be at risk of a break-out that the upcoming US jobs report could be a catalyst for.

A bearish break could see the pair test recent December lows in the low 1.1200s, while a bullish break could see EUR/USD scorch past its 50-day moving average at 1.1354 and test recent range highs. In wake of this week’s decisively hawkish Fed minutes that triggered a surge in US yields and a further widening of US/Eurozone rate differentials, a decent labour market report (defined as anything that keeps Fed tightening plans intact), risks do seem tilted to the downside for the pair. Indeed, numerous FX strategists have been disappointed at the dollar’s inability to gain substantial ground this week. Perhaps what the dollar bulls need is the “green light” from a solid labour market report before chasing the buck higher, some analysts have suggested.  

The euro didn’t react to the latest hotter than expected flash estimate of HICP inflation in the Eurozone in December, which showed headline inflation rising at a pace of 5.0% YoY versus forecasts for a drop to 4.7% from 4.9%. But it is worth noting that ECB hawks have been warning that if inflation pressures continue to surprise to the upside, triggering a further upgrade to the ECB’s inflation outlook, the case would build for earlier monetary tightening. Earlier in the week, euro money market pricing implied that investors expect a 10bps rate hike from the ECB as soon as October 2022. Analysts should note that further eurozone inflation surprises have the scope to lift EUR in Q1 2022, especially versus the likes of the yen, though perhaps not against the US dollar is the Fed continues down a decisively more hawkish path.

• WTI price eases off seven-week highs on easing concerns over supply disruption.
• Russian troops restored order in Kazakhstan, Libya’s NOC says production resumes.
• WTI looks to take out stiff resistance near $80.50-$81.00 amid favorable technicals.

WTI (NYMEX futures) has pulled back from fresh seven-week highs of $79.97 reached earlier this Friday, currently adding 0.63% on the day to trade around $79.50.

The pause in the oil price rally comes on the heels of easing tensions surrounding supply disruptions. Kazakhstan President Kassym-Jomart Tokayev declared that order had largely been restored in the country, thanks to the deployment of the Russian troops, following efforts to suppress mass protests that erupted over fuel price increases and have left dozens of people dead. 

Meanwhile, Libya’s state-owned National Oil Corporation (NOC) said on Friday that the maintenance work for the main crude transmission line at Al-Waha Oil Company was completed, bringing back oil output to around one million barrels per day (bpd).

Technically, WTI seems to have entered an upside consolidative mode, as the bulls gather pace to take out the horizontal trendline resistance around $80.50.

Ahead of that, buyers need to find a foothold above the $80 mark. The flattening of the 14-day Relative Strength Index (RSI) also justifies the range play currently seen in the US oil.

The leading indicator, however, stays above the midline, suggesting that the uptrend remains well in place.

WTI: Daily chart

Despite the bullish momentum, the uptrend could likely face headwinds from an impending bear cross, as the 100-Daily Moving Average (DMA) is set to cross the 50-DMA for the upside.

Any retracement will seek a retest of the $78.00 levels, below which Thursday’s low of $76.41 could be threatened.

The next threshold at the $75.00 level will come to the rescue of WTI bulls.

WTI: Additional levels to watch

• USD/CAD attracted some dip-buying near the 1.2700 mark, though lacked any follow-through.
• Softer US bond yields kept the USD bulls on the defensive and capped the upside for the pair.
• The market focus will remain glued to the monthly jobs report from the US (NFP) and Canada.

The USD/CAD pair reversed an intraday dip and inched back closer to the daily high, around the 1.2720-25 region during the early part of the European session.

The pair managed to defend and attract some buying near the 1.2700 round-figure mark on Friday, though the attempted bounce lacked bullish conviction. Crude oil prices eased a bit from the highest level since mid-November, which undermined the commodity-linked loonie and acted as a tailwind for the USD/CAD pair.

On the other hand, a generally positive tone around the equity markets weighed on the safe-haven US dollar amid retreating US Treasury bond yields. This, in turn, failed to provide any meaningful impetus to the USD/CAD pair. Investors also seemed reluctant ahead of the monthly jobs data from the US and Canada.

The popularly known NFP report, due later during the early North American session, will be looked upon to reinforce the need for higher interest rates. It is worth recalling that the December FOMC meeting minutes that some policymakers want to tighten monetary policy faster to combat stubbornly high inflation.

The data, along with the US bond yields and the broader market risk sentiment, should influence the USD demand. Apart from this, traders will take cues from oil price dynamics to grab some short-term opportunities. Nevertheless, the USD/CAD pair seems poised to snap two successive weeks of the losing streak.

Technical levels to watch

• EUR/USD leaves behind Thursday’s negative price action.
• The greenback slips back into the negative ground despite higher yields.
• EMU flash CPI, US Nonfarm Payrolls next of note in the calendar.

The single currency regains the smile and lifts EUR/USD back above the key 1.1300 barrier on Friday.

EUR/USD now looks to domestic data, NFP

EUR/USD extends the erratic performance so far this week although always around the key 1.1300 neighbourhood and ahead of the critical release of US Nonfarm Payrolls for the month of December.

The pair has been following the broad risk appetite trends so far this week, although the lack of direction appears to have prevailed at least until the publication of the NFP.

Further out, headlines around the progress of the pandemic and the omicron variant look somewhat relegated to the back seat in favour of dollar dynamics, which have been exacerbated following the sharp climb in US yields and hawkish FOMC Minutes.

In the domestic calendar, advanced inflation figures in the broader Euroland should grab initial attention seconded by Retail Sales and the Economic Sentiment. Across the pond, the publication of the December’s NFP is expected to take centre stage ahead of speeches by FOMC’s Daly, Bostic and Barkin.

What to look for around EUR

EUR/USD met quite decent contention in the 1.1270 zone so far in the first week of the new year. In the meantime, price action around spot continues to track the performance of the greenback as well as the policy divergence between the ECB vs. the Federal Reserve and the response to the persistent elevated inflation on both sides of the Atlantic. On another front, the unabated progress of the coronavirus pandemic remains as the exclusive factor to look at when it comes to the economic growth prospects and investors’ morale.

Key events in the euro area this week: EMU Advanced December Inflation Rate (Friday).

Eminent issues on the back boiler: Asymmetric economic recovery post-pandemic in the euro area. ECB stance/potential reaction to the persistent elevated inflation in the region. ECB tapering speculation/rate path. Presidential elections in France.

EUR/USD levels to watch

So far, spot is up 0.17% at 1.1313 and faces the next up barrier at 1.1386 (monthly high November 30) followed by 1.1464 (weekly high Nov.15) and finally 1.1520 (200-week SMA). On the other hand, a break below 1.1272 (weekly low Jan.4) would target 1.1221 (weekly low Dec.15) en route to 1.1186 (2021 low Nov.24).

The upside momentum could push USD/CNH to the 6.4000 level in the next weeks, commented FX Strategists at UOB Group.

Key Quotes

24-hour view: “The strong rise in USD to 6.3975 came as a surprise (we were expecting sideway-trading). The sharp and rapid rise appears to be running ahead of itself and USD is unlikely to advance much further. For today, USD is more likely to trade between 6.3800 and 6.4000.”

Next 1-3 weeks: “On Tuesday (04 Jan, spot at 6.3735), we highlighted that the outlook for USD is mixed and it could trade between 6.3400 and 6.3900 for now. After trading in relatively quiet manner for a few days, USD soared to a high of 6.3975 during NY session before closing on a firm note at 6.3943 (+0.29%). Upward momentum has improved slightly but it appears too early to expect a sustained advance. That said, there is room for USD to edge higher to 6.4100. USD has to clear this solid resistance before a sustained advance is likely. On the downside, a breach of 6.3730 would indicate that the build-up in momentum has fizzled out.”

• DXY looks for direction in the low-96.00s ahead of Payrolls.
• US yields remain on the rise supported by speculation of rate hikes.
• December’s Nonfarm Payrolls, Unemployment Rate next of relevance.

The greenback, when gauged by the US Dollar Index (DXY), trades within an inconclusive fashion around the 96.20/30 band at the end of the week.

US Dollar Index focuses on data, yields

The index fades Thursday’s modest advance and returns to the low-96.00s on Friday amidst rising cautiousness ahead of the publication of the key US labour market report for the month of December.

Once again, the US dollar continues to ignore the march higher in US yields, where the 2y note revisits levels last seen in early March 2020 past the 0.88% yardstick, the belly of the curve flirts with 10-month peaks above 1.75% and the 30y note advances to the area close to 2.10%, last traded in mid-October.

The index moved within a consolidative range following Monday’s uptick despite the bear steepening in US yields, the hawkish message from the FOMC Minutes and recent supportive Fedspeak (after St. Louis Fed J.Bullard suggested an interest rate hike as soon as in March), as investors appear vigilant ahead of the NFP figures due later on Friday.

On the latter, the economy is expected to have created 400K jobs during last month and the jobless rate to have ticked lower to 4.1%. Following this release, San Francisco Fed M.Daly (2024 voter, hawkish), Atlanta Fed R.Bostic (2024 voter) and Richmond Fed T.Barkin (2024 voter, centrist) are all due to speak.

What to look for around USD

The index trades in a cautious tone above the 96.00 hurdle, so far somewhat decoupled from the strong move higher in US yields, particularly following the hawkish message from the FOMC release (Wednesday). As markets slowly return to normality, the dollar’s constructive outlook is forecast to remain bolstered by the Fed’s intentions to hike the Fed Funds rates later in the year amidst persevering elevated inflation, supportive Fedspeak, higher yields and the solid performance of the US economy.

Key events in the US this week: Nonfarm Payrolls, Unemployment Rate (Friday).

Eminent issues on the back boiler: Start of the Fed’s tightening cycle. US-China trade conflict under the Biden’s administration. Debt ceiling issue. Potential geopolitical effervescence vs. Russia and China.

US Dollar Index relevant levels

Now, the index is retreating 0.11% at 96.13 and a break above 96.46 (weekly top Jan.4) would open the door to 96.90 (weekly high Dec.15) and finally 96.93 (2021 high Nov.24). On the flip side, the next down barrier emerges at 95.57 (monthly low Dec.31) followed by 95.51 (weekly low Nov.30) and then 94.96 (weekly low Nov.15).

FX option expiries for January 7 NY cut at 10:00 Eastern Time, via DTCC, can be found below.

- EUR/USD: EUR amounts        

• 1.1200 404m
• 1.1250 982m
• 1.1290 1.3b
• 1.1350-55 960m
• 1.1450 715m

- USD/JPY: USD amounts                     

• 115.00 420m
• 116.00 2.7b

- GBP/USD: GBP amounts        

• 1.3000 670m

- USD/CHF: USD amounts        

• 0.9090 750m

- AUD/USD: AUD amounts

• 0.7160 2.6b
• 0.7200 2.2b
• 0.7250-55 747m

- USD/CAD: USD amounts       

• 1.2600 391m
• 1.2650 729m
• 1.2675-85 1.2b
• 1.2700 791m
• 1.2800 739m

• Gold languished near a two-week low amid a goodish rebound in the equity markets.
• Subdued USD price action extended some support to the dollar-denominated metal.
• Investors also seemed reluctant to place aggressive bets ahead of the US NFP report.

Gold remained depressed for the third successive day on Friday and was last seen hovering near a two-week low, just below the $1,790 level during the early European session. Slight improvement in the global risk sentiment – as depicted by a generally positive tone around the equity markets – acted as a headwind for the safe-haven XAU/USD. Apart from this, the Fed's hawkish outlook was seen as another factor that undermined the non-yielding yellow metal. It is worth recalling that the minutes of the December FOMC meeting released on Wednesday showed that some policymakers want to tighten monetary policy faster to combat stubbornly high inflation.

The markets were quick to react and are now anticipating a roughly 80% chance for an eventual liftoff in March, which was further reinforced by the overnight comments by Fed officials. St. Louis Fed President James Bullard said that the Fed could raise rates as soon as March and is now in a good position to take more aggressive steps to control inflation. Separately, San Francisco Fed President Mary Daly too supported the prospects for an early rate hike. This comes on the back of a shift from  Minneapolis Fed President Neel Kashkari, expecting two rate hikes this year as against his long-held view that the Fed should hold off on rate hikes until 2024.

This, in turn, pushed the US 2-year notes, which are sensitive to rate hike expectations along with 5-year notes, to a near two-year high. Moreover, the yield on the benchmark 10-year US government bond shot to levels now seen since March 2021. Investors, however, preferred to wait and see if the US jobs data (NFP), due later during the early North American session, would reinforce the need for higher interest rates. This, in turn, kept the US dollar bulls on the defensive and extended some support to the dollar-denominated gold. Nevertheless, the commodity, at current levels, remains on track to post the biggest weekly decline since late November.

Technical outlook

From a technical perspective, this week’s rejection near the $1,830-32 supply zone and the subsequent downfall might have already shifted the bias in favour of bearish traders. Some follow-through selling below the $1,785 horizontal support will reaffirm the negative outlook and set the stage for a further near-term depreciating move. Gold might then accelerate the downward trajectory towards the $1,770-69 intermediate support en-route December 2021 swing low, around the $1,753 region.

On the flip side, the $1,800 mark, coinciding with a technically significant 200-day SMA, now seems to act as immediate strong resistance. A sustained strength beyond might trigger a short-covering move and push gold prices towards the $1,815 hurdle. Some follow-through buying should allow bulls to aim back to challenge a strong barrier near the $1,830-32 region.

Gold daily chart

Technical levels to watch

EUR/USD seems to have steadied around 1.1300 ahead of key data releases. According to FXStreet’s Eren Sengezer, the shared currency could find demand on a hot inflation report.

Eyes on EU inflation, US NFP data

“The market expectation points to a Core CPI reading of 2.5% on a yearly basis in December, down from 2.6% in November. The annual CPI is forecast to edge lower to 4.7% from 4.9%. In case the data reveal stronger-than-expected inflation in the euro area, the shared currency could stay resilient against its rivals on the possibility of the ECB acting quicker to pull monetary support in the face of persistent price pressures.”

“A bigger-than-forecast increase in December NFP could ramp up rate hike chances and allow the greenback to end the week on a firm footing against its peers.”

“In case US T-bond yields start to push higher after NFP data, the first target on the downside aligns at 1.1270 (static level) ahead of 1.1240 (static level) and 1.1200 (psychological level).” 

“Resistances are located at 1.1320 (50-period SMA), 1.1340 (static level) and 1.1360 (static level, post-ECB high).”

On a trade-weighted basis, GBP is now trading at the highest levels since that fateful summer of 2016. Friday's US December jobs data could push the EUR/GBP lower to the 0.8280/8300 neighborhood on strong figures, economists at ING report.

A lot is priced in for the Bank of England now

“A lot is priced in for the Bank of England now. A 25bp hike is 80% priced for the 3 February meeting and the Bank Rate is priced at 1.00% for the August meeting. Our rates traders think that may be sufficient pricing for the time being. But that pricing looks unlikely to be unwound before the 3 February meeting and the BoE might feel emboldened by the hawkish shift from the Fed.” 

“Our 2022 FX view has been that the BoE story keeps GBP/USD better supported than EUR/USD in a strong dollar environment – and that EUR/GBP trades lower. We continue to hold that view and any dollar strength on the jobs data today could push EUR/GBP closer to the 0.8280/8300 area.”

Bank of Japan (BOJ) policymakers remain unperturbed by the yen's recent fall but the central bank has broader concerns about government reaction if USD/JPY hits the 120.00 level, MNI reports, citing sources familiar with the BOJ thinking.

Key takeaways

“The government to voice concern over the potential negative impact for energy costs and other imported goods on households and smaller firms and call for BOJ action.”

“A government call on the BOJ for countermeasures would be a troublesome factor for a policy as the central bank does not have effective tools to guide the currency.”

“But BOJ officials also see that the yen's fall, if it is slow, will be acceptable as Japan is far from a target of a sustained 2% rise in prices. “

“If prices in Japan were above 2%, officials would see yen weakness as undesirable.”

Market reaction

USD/JPY is sitting near-daily lows of 115.82 amid a retreat in the US Treasury yields, as the market awaits the NFP data for fresh directives. The spot is trading modestly flat on the day.

Thursday’s oil rally offered some support to the loonie, with USD/CAD now stabilising below 1.2800. Economists at ING expect the pair to hover around the 1.26/1.28 region for now.

Looking at jobs data amid fresh restrictions

“Today, expect any positive surprise in the US payrolls to benefit CAD in the crosses, as good US data normally have positive spillovers to the loonie. Jobs figures for December will also be released in Canada. Consensus expectations are for a moderate increase in hiring, but we flag the risk of a negative reading, which would worsen a domestic economic story that is already facing the strains of tough containment measures.”

“Disappointing employment data today may offer a reason for policymakers to sound more cautious on tightening given the Omicron spread. Still, we must remember that the Canadian economy (and the jobs market in particular) was in a very good place before Omicron hit, and any re-rating of BoC expectations may be premature.”

“The short-term outlook for CAD remains mostly tied to risk-sentiment swings and oil performance, although the worsening domestic picture and a market positioning that is not overstretched to the short-side both suggest the loonie is now facing an unusual domestic drag. We think USD/CAD may stabilise around the 1.26/1.28 area for now.”

The start of 2022 has seen a strong performance by those currencies backed by central banks prepared to pull the trigger on rate increases. In the view of analysts at ING, Fed lift-off should propel EUR/USD briefly below 1.10 this summer, but by year-end looming ECB hikes in 2023 could provide some support.

FX favors strong USD in 1H2022

“We would expect the dollar to stay strong through the first half of the year as the Fed prepares to pull the trigger in 2Q and the market starts to price the terminal US policy rate closer to 2%. Additionally, a mixed global risk environment should prevent the kind of broad-based flows into emerging markets, which can occasionally weaken the dollar.” 

“Our call is that EUR/USD briefly trades below 1.10 this summer, but could find support into year-end, ahead of the 2023 ECB rate hike.”

After strengthening last year on the back of higher oil prices and rising stock markets, economists at Nordea believe the Norwegian krone will move broadly sideways in 2022. The caveat is that rising rates could give a bumpy ride in equity markets which will hurt NOK.

Sideways, but be prepared for a bumpy ride

“We believe the NOK will move broadly sideways in 2022. While we see EUR/NOK hovering around 10.00, we believe a stronger USD will lead to somewhat higher USD/NOK ahead (above 9.00). The caveat to our view is that rising rates could give a bumpy ride in equity markets which will hurt the NOK.”

“we expect that the main drivers for the NOK in 2022 will be petroleum prices and risk sentiment. Rate differentials will matter too but are unlikely to be a key driver this year. Instead, Norges Bank’s FX transactions on behalf of the Government will likely play a bigger role than the upcoming rate hikes from Norges Bank.”

• USD/TRY keeps pushing higher, as bulls look to recapture the 14.00 barrier.
• The lira tumbles on Turkish Finance Minister’s comments, inflation woes.
• Hawkish Fed outlook supports the pair, with acceptance above 14.00 awaited.

USD/TRY is posting small gains so far this Friday, extending the bullish momentum into the fourth straight trading day.

Bulls look to recover ground above the 14.00 level, in the face of the ongoing descent in the Turkish lira. The beleaguered currency has lost almost 22% in the last nine trading sessions, with the latest decline attributed to the comments from the country’s Finance Minister Nureddin Nebati.

Nebati said that the government would now prioritize the fight against high inflation but added that it had abandoned "orthodox policies" and was charting its own course.

Meanwhile, concerns over Turkey’s soaring inflation also weigh on the lira. Simone Kaslowski, chairman of Turkey's leading TUSIAD business association, said earlier this week that the leap in annual inflation to 36.1% clearly showed the need to reconsider the policy steps Turkey has taken, per Business Recorder.

On the other side, the recent strength in the US dollar and the Treasury yields on the hawkish Fed’s outlook has also helped the upside momentum in the currency pair.

Attention now turns towards the US Nonfarm Payrolls for fresh trading impetus, with a robust report likely to bolster the pair’s upsurge while throwing lira under the bus.

USD/TRY: Technical outlook

Looking at USD/TRY’s technical chart, the pair is yearning to find acceptance above the 14.00 supply zone, having found a strong foothold above the previous resistance of the 21-Daily Moving Average (DMA), now at 13.33.

If the 14.00 mark is regained convincingly, then buyers will look up to the December 21 high of 14.14.

The 14-day Relative Strength Index (RSI) is trading firmer above the midline, allowing more room for the upside.

Meanwhile, a sustained break below the 21-DMA will knock the rates down towards the January 3 low of 12.75.

The next strong support is seen at the bullish 50-DMA of 12.27.

USD/TRY: Daily chart

The cases of Argentina and now Turkey show that when a country’s exchange rate begins to depreciate sharply, it becomes all but impossible to avoid a collapse of its currency. Emerging countries, therefore, need to rapidly arrest any downward movement in their exchange rates, in the view of analysts at Natixis.

A vicious circle is set in motion when an emerging currency begins to depreciate sharply

“If exchange rate depreciation sets in an emerging country, a self-reinforcing depreciation mechanism appears, as: Interest rates cannot be raised to a level that would offset the expected depreciation of the exchange rate; Imported inflation both leads to capital outflows linked to the search for an inflation hedge and worsens the country’s economic situation.” 

“To prevent sharp exchange rate depreciation, an emerging country should therefore rapidly arrest any downward movement in its exchange rate through currency interventions, by regulating speculative positions in the currency, etc.”

• AUD/USD struggled to preserve its modest intraday gains to 0.7175-80 region.
• The Fed’s hawkish outlook acted as a tailwind for the USD and capped the pair.
• The market focus remains glued to Friday’s release of the US jobs report – NFP.

The AUD/USD pair surrendered its modest intraday gains and was last seen hovering near the daily low, around mid-0.7100s during the early European session.

The pair edged higher during the early part of the trading on Friday amid a positive turnaround in the equity markets, which tends to benefit the perceived riskier aussie. On the other hand, retreating US Treasury bond yields kept the US dollar bulls on the defensive and provided a modest lift to the AUD/USD pair.

The uptick, however, lacked follow-through buying and ran out of steam near the 0.7175-80 region. Firming expectations that the Fed will tighten its monetary policy faster than anticipated previously acted as a tailwind for the greenback and kept a lid on any further gains for the AUD/USD pair, at least for now.

It is worth recalling that the December FOMC monetary policy meeting minutes released on Wednesday indicated that the US central bank could hike interest rates soon to combat high inflation. The money market was quick to reaction and is now pricing in a roughly 80% chance for an eventual liftoff in March 2022.

Hence, investors preferred to move on the sidelines and wait to see if the US jobs data due later this Friday would reinforce the need for higher interest rates. This, in turn, warrants some caution for aggressive traders and before positioning for any meaningful intraday movement.

Technical levels to watch

Gold suffered heavy losses on Thursday and closed below $1,800. On Friday, XAU/USD is seeing a renewed uptick towards $1,800 but downside risks remain intact as investors gear up for the US December jobs report, FXStreet’s Dhwani Mehta reports.

Solid American jobs data to boost Fed’s aggressive tightening bets

“American is seen adding 400K jobs in December vs. 210K created previously, with a potential downtick in the participation rate. Solid jobs numbers are likely to bolster the expectations of aggressive Fed rate hikes, which will pave the way for the balance sheet reduction. Gold will likely succumb to a fresh upswing in the Treasury yields on the US jobs blowout while the greenback will also ride the economic optimism wave. Only a big miss on the labor market report could offer some temporary reprieve to gold bulls, as the Fed’s hawkish narrative will likely remain intact going forward.”

“A four-hourly candlestick closing below the rising trendline support at 1,789 will confirm the bearish continuation formation, calling for a retest of the $1,785 support area. The next significant cushion is seen at the December 16 trough of $1,775. Fresh bearish positions will be created below the latter, as gold sellers will then aim for the $1,750 demand zone.”

“A sustained break above the rising trendline resistance at $1,796 will invalidate the bear flag formation, prompting a meaningful recovery towards the mildly bullish 100-SMA at $1,802. The downward-sloping 21-SMA at 1,806 will then challenge the bullish commitments, as XAU/USD looks to extend the upside towards the 50-SMA at $1,809. The weekly highs near 1,830 will be back on the buyers’ radar if the 50-SMA caves in.”

UOB Group’s FX Strategists noted that the upside pressure in USD/JPY could be alleviated in case the pair breaks below the 115.30 level.

Key Quotes

24-hour view: “We highlighted yesterday that ‘despite the rebound, upward momentum has not improved by much’. We added, USD ‘could edge higher but any advance is unlikely to break 116.50 today’. Our expectations for USD to edge higher did not materialize as it traded sideways between 115.61 and 116.18. Momentum indicators are mostly neutral and USD could continue to trade sideways. Expected range for today, 115.55/116.20.”

Next 1-3 weeks: “On Wednesday (05 Jan, spot 116.15), we highlighted, the strong surge in USD earlier this week has boosted the upward momentum and USD could strengthen further. Since then, USD has not been able to make any headway on the upside as it traded sideways the past couple of days. While upward momentum has eased somewhat, only a breach of 115.30 (no change in ‘strong support’ level from yesterday) would indicate that USD is not ready to head higher to 116.50.”

In light of preliminary readings from CME Group for natural gas futures markets, traders scaled back their open interest positions by around 1.3K contracts on Thursday, reversing at the same time three consecutive daily pullbacks. In the same line, volume shrank for the second day in a row, now by 2.7K contracts.

Natural Gas remains capped by $4.00

Prices of natural gas attempted a move near the $4.00 mark on Thursday, although ended the day with modest losses. This negative price action was amidst shrinking open interest and volume and is indicative that a deeper pullback appears not favoured for the time being. In the meantime, the $4.00 mark per MMBtu keep capping the upside so far.

Here is what you need to know on Friday, January 7:

After outperforming its rivals early Thursday on the FOMC's hawkish tilt, the dollar seems to have gone into a consolidation phase on Friday as investors gear up for the US December jobs report. The market expectation points to an increase of 400,000 in US Nonfarm Payrolls and a decline to 4.1% in annual wage inflation from 4.8% in November. The European docket will offer preliminary December Consumer Price Index, Retail Sales and business sentiment data for the euro area. Statistics Canada will also release December unemployment figures in the early American session.

Nonfarm Payrolls Preview: A strengthening labor market backs a tighter monetary policy.

Following the sharp drop witnessed on Wednesday, Wall Street's main indexes closed modestly lower on Thursday and the benchmark 10-year US Treasury bond yield moved sideways below 1.75%. After the Fed's December policy meeting minutes showed that policymakers saw it appropriate to start running off the balance sheet following the first rate hike, the market pricing of a March hike jumped above 70% before retreating to 63% early Friday. The US Dollar Index is moving sideways above 96.20, reflecting a neutral tone. In the meantime, US stocks futures indexes trade little changed on the day so far.

An interest rate Love Story: Being Jerome Powell means never having to say you're sorry?

EUR/USD closed in the negative territory but seems to be having a difficult time pulling away from the 1.1300 handle. Core CPI inflation in the euro area is expected to edge lower to 2.5% on a yearly basis in December from 2.6% in November. A stronger-than-expected print could help the shared currency stay resilient against its rivals and vice versa.

USD/CAD edged lower despite broad-based USD strength on Thursday as the surging crude oil prices helped the commodity-sensitive loonie find demand. Ahead of key data releases, the pair is trading within a touching distance of 1.2700.

Canadian Jobs Preview: Slowdown in jobs growth could worsen CAD’s plight.

GBP/USD tested 1.3500 early Thursday before recovering toward mid.13500s. There won't be any high-tier data releases from the UK and the dollar's market valuation is likely to continue to drive the pair's action ahead of the weekend.

USD/JPY seems to have steadied around 116.00 following Thursday's downward correction. Another leg higher in US T-bond yields could provide a boost to the pair.

Gold suffered heavy losses on Thursday and closed below $1,800. The pair seems to have broken below the uptrend that started mid-December. XAU/USD stays fragile due to its strong inverse correlation with US T-bond yields.

Bitcoin closed the fifth straight day in the negative territory and continues to edge lower toward $40,000. Ethereum is trading at its lowest level since early October and closes in on $3,000.

Industrial Production in Germany unexpectedly fell in November, the official data showed on Friday, suggesting that the recovery in the manufacturing sector is faltering.

Eurozone’s economic powerhouse’s industrial output fell by 0.2% MoM, the federal statistics authority Destatis said in figures adjusted for seasonal and calendar effects, vs. a 1.0% rise expected and 2.4% last.

On an annualized basis, the German industrial production declined by 2.4% in November versus a 0.9% drop registered in October.

FX implications

The shared currency is little changed despite the downbeat German industrial figures.

At the time of writing, EUR/USD is trading at 1.1297, up 0.08% on the day, awaiting the Eurozone inflation and US NFP data.

About German Industrial Production

The Industrial Production released by the Statistisches Bundesamt Deutschland measures outputs of the German factories and mines. Changes in industrial production are widely followed as a major indicator of strength in the manufacturing sector. A high reading is seen as positive (or bullish) for the EUR, whereas a low reading is seen as negative (or bearish).

• USD/IDR stays pressured around intraday low during two-day declines.
• Indonesia Senior Minister dashes emergency over domestic coal supplies.
• Pre-NFP trading caution weighs on US Treasury yields, greenback.

USD/IDR pares intraday losses around $14,350, down 0.13% on a day during early Friday in Europe.

In doing so, the Indonesia rupiah (IDR) pair drops for the second consecutive day while cheering the broad pullback of the US dollar and Treasury yields, as well as upbeat news from home.

Earlier on Friday, a Senior Minister said on CNBC Indonesia that the emergency is over on the domestic coal supply crunch. It’s worth noting that firmer prices of palm oil, Indonesia’s key export item, also favor the IDR prices of late. “The (benchmark palm oil) contract has gained 6.5% so far this week, rising for a third straight week and heading for its best week since the week ended Oct. 8,” said Reuters.

Adding to the pair’s weakness could be the recent pullback in US Treasury yields amid downbeat inflation expectations, portrayed by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, as well as softer US data.

That said, the US 10-year Treasury yields consolidate recent gains around a nine-month high while the S&P 500 Futures and EuroStoxx Future print mild gains. However, the market sentiment remains dull as the pre-data caution joins escalating covid woes and the US-China tussles, recently over trade and human rights.

Even so, recently hawkish Fedspeak and hints of faster rate hikes in the latest FOMC Minutes keep USD/IDR bears cautious ahead of the key US jobs report.

The US Nonfarm Payroll (NFP) is expected to rise from 210K to 400K while the Unemployment Rate may have eased to 4.1% from 4.2% prior. The underemployment rate, however, is likely rising from 7.8% to 8%.

Read: Nonfarm Payrolls Preview: A strengthening labor market backs a tighter monetary policy

Technical analysis

A failure to cross a two-month-old horizontal area around $14,440-55 triggered the USD/IDR pullback. However, the 200-DMA level surrounding $14,350 challenges the immediate downside.

Further retracement in AUD/USD is predicted to face an important support at 0.7110, noted FX Strategists at UOB Group.

Key Quotes

24-hour view: “While we expected AUD to weaken yesterday, we were of the view that ‘a break of 0.7185 is unlikely’. In other words, we did not expect the sharp drop to 0.7146. While deeply oversold, the weakness has scope to extend to 0.7135 before stabilizing. On the upside, a breach of 0.7205 (minor resistance is at 0.7185) would indicate that the weakness has stabilized.”

Next 1-3 weeks: “Yesterday (06 Jan, spot at 0.7220), we indicated that the outlook for AUD is mixed and we expected it trade between 0.7165 and 0.7290. We did not anticipate the sharp drop to 0.7146 during NY hours. The rapid drop appears to be running ahead of itself but as downward momentum has improved, the risk is tilted to the downside. That said, any weakness is expected to encounter solid support at 0.7110. On the upside, a break of 0.7235 would indicate that the downside risk has dissipated.”

CME Group’s advanced prints for crude oil futures markets noted open interest went up for the fourth consecutive day on Thursday, now by around 12.3K contracts. Volume followed suit and clinched the fifth straight build, this time by around 180.7K contracts.

WTI finally surpasses $80.00

WTI prices extended the intense rally on Thursday and briefly advanced beyond the key $80.00 mark per barrel. The move was accompanied by rising open interest and volume, which suggests that extra gains remain in the pipeline with the next target now emerging at November’s peak near $85.00 (November 10).

In opinion of FX Strategists at UOB Group, Cable needs to break above 1.3600 to allow for extra gains in the near term.

Key Quotes

24-hour view: “We expected GBP to ‘consolidate and trade within a range of 1.3525/1.3595’ yesterday. While our view for consolidation was not wrong, GBP traded within a lower range than expected (1.3491/1.3558). Momentum indicators are flat and GBP could consolidate further. Expected range for today, 1.3485/1.3570.”

Next 1-3 weeks: “There is no change in our view from yesterday (06 Jan, spot at 1.3555). As highlighted, upward momentum has improved slightly but GBP has to break 1.3600 before further advance is likely. The chance for GBP to break 1.3600 is not high for now but would remain intact as long as GBP does not move below 1.3460. Looking ahead, the next resistance above 1.3600 is at 1.3630.”

• A positive risk tone undermined the safe-haven JPY and assisted USD/JPY to gain traction on Friday.
• Retreating US bond yields kept the USD bulls on the defensive and kept a lid on any further gains.
• Investors now look forward to the closely-watched US NFP report for some meaningful impetus.

The USD/JPY pair traded with a mild positive bias heading into the European session, albeit seemed struggling to capitalize on the move beyond the 116.00 mark.

The pair attracted some buying on Friday and reversed a part of the previous day's losses amid a generally positive risk tone, which tends to undermine the safe-haven Japanese yen. That said, retreating US Treasury bond yields kept the US dollar bulls on the defensive and capped the upside for the USD/JPY pair, at least for the time being.

Investors also preferred to wait and see if the US jobs data due later this Friday would reinforce the need for faster policy tightening by the Fed. It is worth recalling that the December 14-15 FOMC monetary policy meeting minutes released on Wednesday indicated that the US central bank could hike interest rates earlier than anticipated.

The markets have priced in an 80% chance of a 25 bps Fed hike in March 2022. The speculations were reinforced by the overnight comments by St. Louis Fed James Bullard and San Francisco Fed President Mary Daly. The big shift in the policymakers' tone should continue to act as a tailwind for the US bond yields and lend support to the greenback.

The fundamental backdrop favours bullish traders and supports prospects for a further near-term appreciating move. A stronger NFP print will reaffirm the positive outlook and set the stage for the resumption of the USD/JPY pair's recent run-up to a five-year high, around the 116.35 region touched on the first day of the current week.

Apart from this, traders will take cues from developments surrounding the coronavirus saga. This, along with the broader market risk sentiment, will influence demand for the safe-haven JPY and produce some short-term opportunities around the USD/JPY pair.

Technical levels to watchC

Nomura recently slashed Australia’s GDP growth forecasts citing fears of the South African covid variant, namely Omicron.

The investment bank downgrades yearly expectations for 2022 from 3.7% to 3.0%. On the same line were hopes of a reduction in Aussie Q1 GDP to 0% from 1.4% before.

It’s worth noting that Australia’s most populous state New South Wales (NSW) announced the return of some activity restrictions due to the wider spread of the covid variant during early Friday.

The bank's latest forecast challenges the early-week projections of the AUD/USD prices, expecting 0.78 by December 2022.

FX implications

AUD/USD pares intraday gains around 0.7160 by the press time, after a two-day downtrend to a fortnight low.

Read: AUD/USD pares weekly losses below 0.7200 with eyes on yields, US NFP

Considering preliminary figures for gold futures markets from CME Group, open interest rose for the second session in a row on Thursday, this time by around 10.6K contracts. In the same direction, volume extended the uptrend and went up by nearly 80K contracts to nearly 282K contracts, the largest level since November 26.

Next on the downside comes $1,753

Prices of the yellow metal accelerated their losses on Thursday. The leg lower came amidst increasing open interest and volume, which should be supportive of the continuation of the downtrend in gold, at least in the very near term. That said, the next target of note comes at December’s low at $1,753 per ounce troy (December 15).

• USD/CAD drops for the second consecutive day while staying on course to snap two-week downtrend.
• Seven-week-old support, 100-DMA lures bears ahead of December jobs report.
• 21-DMA guards immediate upside, monthly horizontal line adds to the resistances.

USD/CAD remains on the back foot for the second day in a row as sellers attack 1.2700, down 0.13% intraday heading into Friday’s European session.

In doing so, the Loonie pair extends the previous day’s U-turn from 21-DMA amid bearish MACD signals as traders await key employment data from Canada and the US for December.

Read: USD/CAD bears remain on top desite hawkish Fed, oil prices and BoC support CAD

That said, 38.2% Fibonacci retracement (Fibo.) of October-December upside, near 1.2700 threshold, restricts immediate declines of the USD/CAD prices ahead of an ascending support line from November 19, near 1.2645 at the latest.

It should be noted, however, that the pair’s downside break of 1.2645 will need to conquer the 1.2630-25 support confluence, including the 100-DMA and 50% Fibo., to keep the bears on the driver’s seat.

Alternatively, strong resistance of the monthly horizontal line, around 1.2845, adds to the upside filters even if the USD/CAD prices manage to cross the immediate hurdle of the 21-DMA near 1.2795.

If at all the quote stays above 1.2845, odds of the pair’s rally towards 1.2900 and December’s peak of 1.2964 can’t be ruled out.

USD/CAD: Daily chart

Trend: Further declines expected

FX Strategists at UOB Group suggested EUR/USD is still expected to navigate within the 1.1240-1.1395 range in the next weeks.

Key Quotes

24-hour view: “EUR traded between 1.1283 and 1.1331 yesterday, narrower than our expected sideway-trading range of 1.1280/1.1340. The quiet price actions offer no fresh clues and further sideway-trading would not be surprising. Expected range for today, 1.1275/1.1335.”

Next 1-3 weeks: “On Tuesday (04 Jan, spot at 1.1305), we highlighted that the outlook for EUR is unclear and we expected EUR to trade between 1.1240 and 1.1395. EUR traded in a subdued manner the past couple of days and there is no change in our view for now. Looking ahead, the downside risk appears to be a tad higher but at this stage, there is no early indication that EUR is ready to move either direction in a sustained manner.”

• Gold prices in Euro consolidate the biggest fall in five weeks.
• 32-month high German Bund yields, clear break of €1,590 key level keeps bears hopeful.
• Euro hawks aim for firmer inflation, US NFP can challenge gold buyers.

Gold (XAU/EUR) prints mild gains around €1,585 as sellers take a breather near a three-week low heading into Friday’s European session.

The latest corrective pullback in gold prices could be linked to the cautious mood ahead of the Eurozone Consumer Price Index (CPI) for December and the US jobs report for the said month. Additionally, escalating covid woes and the US-China tussles, recently over trade and human rights, also favored gold buyers of late.

The bullion prices in Euro dropped the most since November 30 the previous day as the 10-year German Bund yields jumped to the highest since May 2019. Behind the moves could be Germany’s inflation gauge, namely the Harmonized Index of Consumer Prices (HICP), which eased in December while matching downbeat forecasts. On the same line were fears of tighter monetary policies at the European Central Bank (ECB) as Latvian central bank governor and ECB governing council member Martins Kazaks said earlier in the week that the ECB is ready to raise rates and cut stimulus if needed.

On the other hand, the US 10-year Treasury rallied to a nine-month high, retreating to 1.72% of late, while cheering hawkish Fedspeak that justifies Wednesday’s FOMC Minutes. That said, St. Louis Fed President James Bullard pushed for a March rate hike whereas Federal Reserve Bank of San Francisco President and an FOMC member Mary C. Daly marked the need to raise interest rates to keep the economy in balance.

Against this backdrop, the US 10-year Treasury yields consolidate recent gains around a nine-month high while the S&P 500 Futures and EuroStoxx Future print mild gains.

Moving on, Eurozone CPI, expected to ease to 4.7% from 4.9% YoY may allow XAU/EUR bears to retake controls ahead of the US jobs report. Following that, the US jobs report will be important to watch amid hawkish hopes from the Fed, which in turn may weigh on the EUR due to the Fed v/s ECB battle.

Technical analysis

Gold (XAU/EUR) slumped to a three-week low on breaking an upward sloping support line from September and the 50-DMA, around €1,590, the previous day. The downside also gains support from the recently bearish MACD signals.

As a result, the corrective pullback remains elusive until the quote rises back beyond the €1,590 level.

Even if the gold prices in Euro rise beyond the €1,590 hurdle, the 23.6% Fibonacci retracement (Fibo.) of September-November upside, near €1,613, will challenge the commodity buyers.

Meanwhile, gold’s downside towards the 50% Fibo. level of €1,567 becomes imminent while the 100-SMA level of €1,556 can challenge the metal sellers afterward.

Overall, gold prices are likely to portray further downside even as the latest move challenges the bears.

XAU/EUR: Daily chart

Trend: Further weakness expected

• GBP/USD keeps bounce off three-week-old support despite posting bearish candlestick the previous day.
• Multiple failures to cross 100-DMA, nearly overbought RSI challenges upside momentum.
• 61.8% Fibonacci Retracement adds to the upside filters, 50-DMA to lure bears after immediate trend line support.

GBP/USD seesaws around 1.3550, up 0.12% intraday heading into Friday’s London open. In doing so, the cable pair stays firmer around a two-month top despite the previous day’s bearish candlestick formation, namely “Hanging Man”.

While an ascending support line from December 20 favors the corrective pullback, the 100-DMA challenges immediate upside around 1.3560 amid nearly overbought RSI conditions suggesting consolidation of recent gains.

Even if the quote manages to cross the 1.3560 immediate hurdle, 61.8% Fibonacci retracement (Fibo.) of October-December declines, around 1.3575, challenges the GBP/USD buyers before directing them to November 09 swing high close to 1.3610.

Alternatively, a downside break of the stated support line, near 1.3530 by the press time, will drag the quote towards the 50-DMA level of 1.3400, wherein the 50% Fibo. level surrounding 1.3500 may offer an intermediate halt.

During the GBP/USD weakness past 50-DMA, tops marked during late November and mid-December, around 1.3370-75, will be important to watch.

Overall, GBP/USD bulls have multiple hurdles to keep the reins while sellers have brighter scope for entries.

GBP/USD: Daily chart

Trend: Pullback expected

• EUR/USD pares the first weekly loss in three with recent mild gains.
• German Bund yields poked 32-month high, US bond coupons ease from March 2021 levels.
• US inflation excitations, soft data triggers consolidation ahead of the key data.
• Fed hawks eye stronger NFP, ECB policymakers may not be satisfied with firmer inflation.

EUR/USD hangs in balance around 1.1300 heading into the key Friday’s European session.

In doing so, the major currency air licks wounds given by the FOMC minutes amid mixed concerns and cautious sentiment ahead of the Eurozone Consumer Price Index (CPI) for December and the US jobs report for the said month. However, the quote remains on the way to flash the first negative weekly closing in three as bears cheer firmer yields.

Hopes of overcoming the negative yields on German Bunds seem to underpin the EUR/USD rebound ahead of the European session. The Bund yields jumped to the highest since May 2019 the previous day after Germany’s inflation gauge, namely the Harmonized Index of Consumer Prices (HICP), eased in December while matching downbeat forecasts.

Earlier in the week, Latvian central bank governor and ECB governing council member Martins Kazaks said that the ECB is ready to raise rates and cut stimulus if needed.

It’s worth noting that the pre-NFP trading lull and a two-week low of the US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, underpin the latest pullback in the US bond yields and favor EUR/USD buyers. On the same line could be the recently downbeat US Factory Orders, Weekly Jobless Claims, ISM Services PMI and Good Trade Balance.

Even so, the hawkish Fedspeak and FOMC Minutes, which earlier propelled yields by citing higher odds of the Fed’s faster rate hike and balance sheet alteration keeps EUR/USD bears hopeful. That said, St. Louis Fed President James Bullard pushed for a March rate hike whereas Federal Reserve Bank of San Francisco President and an FOMC member Mary C. Daly marked the need to raise interest rates to keep the economy in balance.

Amid these plays, the US 10-year Treasury yields consolidate recent gains around            a nine-month high while the S&P 500 Futures and EuroStoxx Future print mild gains. However, the market sentiment remains dull as the pre-data caution joins escalating covid woes and the US-China tussles, recently over trade and human rights.

Looking forward, Eurozone CPI, expected to ease to 4.7% from 4.9% YoY may allow EUR/USD bears to retake controls ahead of the US jobs report. Even if the quote rises past the 4.7% forecast, pandemic woes challenge the recently hawkish rhetoric at the ECB and can keep the pair pressured.

On the contrary, US Nonfarm Payroll (NFP) is expected to rise from 210K to 400K while the Unemployment Rate may have eased to 4.1% from 4.2% prior. The underemployment rate, however, is likely rising from 7.8% to 8%. That said, firmer expectations from the US jobs report may help Fed hawks to keep reins, which in turn can weigh on EUR/USD prices.

Technical analysis

A sustained trading below the 10-DMA level of 1.1315, as well as the weekly resistance line near 1.1320, directs EUR/USD bears towards an ascending support line from November 24, around 1.1260.

• NZD/USD struggles to keep first intraday gains in three.
• Downside break of two-week-old trend line, 21-DMA favor sellers amid steady RSI, MACD retreat.
• Horizontal area from late September appears a tough nut to crack for bulls, 61.8% FE eyed by bears.

NZD/USD portrays a corrective pullback from short-term key support to 0.6750, up 0.12% intraday during early Friday.

In doing so, the Kiwi pair snaps a two-day downtrend near a fortnight low but stays on course to print the first weekly loss in three.

It should be noted, however, that a clear downside break of 21-DMA and a two-week-old ascending trend line joins descending RSI line, as well as receding bullish bias of the MACD, to keep NZD/USD sellers hopeful to break the immediate support zone near 0.6735-40.

Following that, the year 2021 bottom surrounding the 0.7000 threshold and 61.8% Fibonacci Expansion (FE) of the pair’s moves between November 15 and December 24, around 0.6650 will be in focus.

Alternatively, the support-turned-resistance line near 0.6775 will precede the 21-DMA level surrounding 0.6790 to limit short-term advances of the NZD/USD prices.

If the NZD/USD buyers manage to cross the 0.6790 hurdle, a 14-week-old horizontal area surrounding 0.6855-60 will challenge the NZD/USD bulls.

NZD/USD: Daily chart

Trend: Further weakness expected

• USD/INR is staying put between familiar ranges of consolidation. 
• The US dollar is changing hands between the bulls and bears in equally typical levels.

As illustrated below the price has been accumulating around 74.20/40. However, at this juncture, it is too premature to know if this is leaning with a bullish or bearish bias.

Nevertheless, the bulls could be encouraged to move in to clean up some of the imbalance of the recent price run, on a break of 74.60 in the coming days. This exposes the 38.2% Fibonacci retracement area on the daily chart near 75.10:

On the other hand, if the US dollar cannot catch a bid on the hawkish Federal reserve sentiment, then there is room for further downside into the imbalances of rice below the near-term dynamic trendline support. These areas come in at between 74.10 and 73.90. 

DXY daily chart

The US dollar needs to break out of this accumulation phase and beyond the highs of 97 the figure. In doing so, a fast trip to 98 and 99 could be on the cards for the coming weeks which would take on the 38.2% Fibo target and beyond in USD/INR. This would expose the 50% and 61.8% ratios that align with liquidity areas of 75.40 and 75.65 as old highs:

• AUD/USD consolidates the first weekly loss in three around a fortnight low.
• NSW recalls some virus-linked restrictions, Treasurer Frydenberg hints at RBA review.
• Sino-American tension renew, PBOC withdraws most funds in two-month with hints of further easing.
• US Treasury yields retreat ahead of all-important NFP.

AUD/USD licks its wounds near a two-week low, hovering around 0.7170-80 amid Friday’s Asian session. In doing so, the quote rises 0. 10% intraday while snapping a two-day downtrend, not to forget staying on course to print the first weekly gain in three.

The Aussie pair’s latest gains could be linked to the pullback in the US dollar, as well as hopes of further monetary policy easing from the People’s Bank of China (PBOC). Also supporting the AUD/USD pair’s counter-trend traders could be the downbeat prints of US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data. Additionally, downbeat prints of the US Factory Orders, Weekly Jobless Claims, ISM Services PMI and Good Trade Balance also underpin the latest corrective pullback of the Aussie pair.

It should be noted that the People’s Bank of China (PBOC) withdrew 660 billion yuan on a net basis for the week during this week's open market operations, marking it the biggest move in two months. However, hints of the PBOC’s further easing remain on the table considering the latest virus woes, which reinstated activity restrictions in Shenzhen, as well as on fears of firmer Chinese yuan (CNY), the same can help AUD/USD going forward.

Alternatively, Aussie Treasurer Josh Frydenberg showed commitment to a broad-based, independent review of the Reserve Bank of Australia (RBA) and the nation’s monetary policy settings after this year’s election, per the Australian Financial Review (AFR), challenges the AUD/USD bulls.

On the same line are chatters over Japan and the US dislike for Human Rights violations in Xinjiang and Hong Kong as well as the Global Times (GT) news mentioning the US-China trade tussles. GT cited the China Ministry of Commerce while saying, “China to impose anti-dumping duties on imports of polyphenylene ether (PPE) from the US starting from Friday.”

Above all, cautious sentiment ahead of the US jobs report for Friday and hawkish Federal Open Market Committee (FOMC) Meeting Minutes, as well as the latest Fedspeak, challenge the AUD/USD buyers amid hopes of faster rate hikes and balance sheet normalization.

If we take a look at the US jobs report forecasts, the headline Nonfarm Payroll (NFP) is expected to rise from 210K to 400K while the Unemployment Rate may have eased to 4.1% from 4.2% prior. The underemployment rate, however, is likely rising from 7.8% to 8%. As a result, the AUD/USD is likely set for the first weekly loss in three.

Read: Nonfarm Payrolls Preview: A strengthening labor market backs a tighter monetary policy

Technical analysis

Given the previous day’s confirmation of rising wedge bearish chart pattern, coupled with the bearish MACD signals and downbeat RSI, AUD/USD prices are likely to remain pressured towards the year 2021 low near 0.7000. However, the 23.6% Fibonacci retracement (Fibo.) of the mid-November to early December downturn around 0.7090 may offer an intermediate halt during the fall.

Meanwhile, corrective pullback eyes the support-turned-resistance line of the aforementioned wedge, near 0.7190, a break of which could escalate the recovery moves towards the 61.8% Fibo. level near 0.7230.

The Australian government is “committed to a broad-based, independent review of the Reserve Bank of Australia (RBA) and the nation’s monetary policy settings after this year’s election,” Treasurer Josh Frydenberg said in an exclusive year-ahead interview with the Australian Financial Review (AFR) on Friday.

Additional takeaways

“It was timely to hold a review after the election, which is scheduled for some time between March and May.”

‘Shadow Treasurer Jim Chalmers is also committed to an examination of the RBA if Labor forms government.”

‘The opposition supported a review of the Reserve Bank’s goals and objectives, tools and levers, processes and public commentary, and Labor would “have an open mind” about how best to proceed.”

“The inflation target would probably be a central part of any review, which could also look at the Reserve Bank of New Zealand’s mandate to consider house prices in setting interest rates.”

“The composition of the RBA’s board and its communication strategy would also be likely to be scrutinised.”

more to come ...

Analysts at Goldman Sachs believe that the bond market will be reluctant to lift the terminal rate even as the Federal Reserve hikes rates in the coming year.

Key quotes

“There are two possible explanations” for the new bond market conundrum, “a widely prevalent low terminal rate view, or that the price signal is distorted by supply/demand imbalance.”

“The imbalance between supply and demand is “a more compelling” explanation, adding that it’s “one that will take time, and some rate hikes to resolve, leaving the long end relatively sticky over the course of the year even as front-end yields reprice materially higher.”

“Goldman has increased its year-end estimate for the policy sensitive two-year note yield to 1.35%, from 1.15%, as its economists now project “three hikes by the end of 2022, and a steady three hikes per year pace thereafter.”

“Project the five-year note to end 2022 at 1.8%, the 10-year to climb to 2% and the 30-year to reach 2.25%.”

Commenting on the currency price movements, the Japanese Finance Minister Shunichi Suzuki said that they are “closely watching the impact of FX moves on the economy.”

“FX stability is important,’ Suzuki added.

Market reaction

USD/JPY is flirting with daily lows of 115.82 on these comments, trading 0.06% higher on the day. The pair once again failed to resist above the 116.00 level.

• WTI bulls stay in charge and are extending into the $80 again in supply constraints. 
• While demand is sapped due to covid, there are supply issues that are playing out from Africa, US and Central Asia. 

Covid remains a thorn in the side for West Texas Intermediate (WTI) demand and crude oil prices have climbed on Thursday on supply shortages while Libya exports continue to falter. At the same time, civil unrest in Kazakhstan is troublesome for central Asia production.

On a spot basis, WTI is up by some 0.6% at $80.10bbls and has rallied from a low of $79.49bbls to a high of $80.15bbls. As for futures, WTI crude for February delivery settled up US$1.61 to US$79.49 per barrel, the highest since mid-November, while March Brent crude, the global benchmark, was last seen up US$1.84 to US$82.17.

In central Asia, the political situation in Kazakhstan is becoming increasingly tense. Russia and its allies have sent troops to help quell unrest where riots erupted following a hike to fuel prices. Kazakhstan has been producing 1.6 million barrels of oil per day.

Reuters reported that Libya's output has also dropped by about 500,000 bpd due to repairs to a key pipeline and the closure of the country's largest oilfield by a militia group.

The supply-demand battle is falling into the hands of the bulls despite the spread of the Covid-19 Omicron variant. For instance, the Energy Information Administration on Wednesday reported that while US crude-oil inventories fell for a sixth-straight week, gasoline inventories rose by 10.1 million barrels. This was the largest weekly rise since April 2020.

''In energy markets, supply risk has been mispriced for weeks,'' analysts at TD securities argued.  In line with other growth-oriented commodities, a growing supply risk premium helps to explain the resilience in oil prices, despite the risk-off trading regime sparked by the hawkish Fed minutes,'' analysts at TD Securities explained. 

The analysts added that ''while the omicron variant's higher transmissibility will be more highly correlated with mobility restrictions than its severity, we reiterate that rising geopolitical and operational risks are driving prices higher, despite OPEC+ agreement to raise output by 400k bpd next month. ''

''After all,'' they said, ''flight cancellations for the 12 weeks ahead have shed 4.4% of the global flight schedule since last week, highlighting that the virus is having a noteworthy impact on travel, although resilient global mobility and factory activity is providing an offset for energy demand.''

''Yet, energy supply risks continue to rise irrespectively of the OPEC+ group's decision to raise output, as Libyan production is suffering from clashes amid a contentious presidential election.''

King dollar is expected to reign supreme across the fx board in 2022 as well, thanks to the monetary policy normalization by the US Federal Reserve (Fed), according to the 49 foreign exchange strategists polled by Reuters between January 4-6.

Key findings

Nearly two-thirds of the respondents said “interest rate differentials would dictate sentiment in major FX markets in the near term, with only two concerned about new coronavirus variants.”

“Volatility in FX markets would increase over the coming three months, with well above 80% saying so for both majors and EM currencies.”

“Among the emerging currencies polled on, the tightly-controlled Chinese yuan was predicted to depreciate nearly 2% to 6.5 per dollar in a year.”

“The Philippine peso, Malaysian ringgit and Indian rupee were also expected to weaken about 1% or at best cling to a range.”

“Turkey's battered lira was forecast to drop another 14% this year after plunging 44%.”

“South Africa's rand is set to remain rangebound in the next six months but fall 0.4% to 15.78/$ in a year.”

“The euro, which lost nearly 7% last year was forecast to gain a little under 1.5% by end 2022.”

“Among major safe-haven currencies, the Japanese yen was expected to trade around current levels and the Swiss franc to drop around 3% in a year. “

• USD/CHF eases from two-week high, wavers near 200-SMA and descending trend line from November 26.
• Bullish MACD signals, weekly support line keep buyers hopeful.

USD/CHF consolidates recent gains around 0.9210, down 0.08% intraday while easing from a fortnight top marked the previous day. Even so, the Swiss currency (CHF) pair stays on the way to the first weekly run-up in three by early Friday in Asia.

That said, the latest pullback can aim for the 100-SMA level of 0.9187 before challenging the weekly support line, near 0.9160 by the press time.

It should be noted, however, that a clear downside beak of the 0.9160 will drag the quote towards the last monthly low surrounding 0.9100.

Following that, November’s low near 0.9080 may test the USD/CHF bears before directing them to August 2021 low close to 0.9020.

Given the bullish MACD and the quote’s weekly advances, a clear upside break of 0.9215 is more likely, which in turn could propel the quote towards the December 2021 peak of 0.9296.

After that, a successful rise past 0.9300 becomes necessary for the USD/CHF prices to aim for November’s peak of 0.9373.

USD/CHF: Four-hour chart

Trend: Further upside expected

• USD/CNY consolidates the heaviest daily gains in a month around a fortnight high.
• PBOC withdraws most cash since November, odds of more easing virus-led nationwide lockdown loom.
• China to impose anti-dumping duties on US PPE from Friday, Tokyo-Washington raise concerns over Xinjiang, Hong Kong.
• US jobs report for December will be the key considering hawkish Fed.

USD/CNY bulls take a breather around $6.3800 during Friday’s Asian session, down 0.05% intraday after rising the most in a month the previous day.

The pair’s latest pullback could be linked to the softer US Treasury yields. However, headlines concerning the People’s Bank of China (PBOC), coronavirus and geopolitics keep the USD/CNY bulls hopeful during the first weekly run-up in three.

“China’s central bank injected minimal cash via short-term loans into the banking system on Friday, effectively withdrawing most of the liquidity support lent towards end-2021,” said Reuters. The news adds, “The PBOC drained 660 billion yuan on a net basis – the biggest weekly cash withdrawal since early November.”

Elsewhere, chatters over Japan and the US dislike for Human Rights violations in Xinjiang and Hong Kong seems to challenge the market sentiment and should have favored the USD/CNY buyers. On the same line could be the Global Times (GT) news citing the Ministry of Commerce while saying, “China to impose anti-dumping duties on imports of polyphenylene ether (PPE) from the US starting from Friday.”

Furthermore, escalating fears of the South African covid variant, namely Omicron, as China’s Shenzhen tightens covid controls.

That said, the latest weakness in the US Treasury yields and USD/CNY could be linked to a reduction in the US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data. Also challenging the pair buyers are the recently downbeat prints of the US Factory Orders, Weekly Jobless Claims, ISM Services PMI and Good Trade Balance. It’s worth observing, hawkish Federal Open Market Committee (FOMC) Meeting Minutes and the latest Fedspeak propelled the US Treasury yields to a multi-day high previously.

Looking forward, monthly prints of US jobs report may entertain the USD/CNY traders with upbeat forecasts signaling more advances of the stated quote.

Technical analysis

A daily closing beyond a two-month-old descending trend line and 50-DMA, respectively around $6.3695 and $6.3780, keeps the USD/CNY buyers hopeful even as December’s top near $6.3845 tests the immediate upside momentum.

• Silver is under pressure on a firming US dollar and US yields. Eyes on NFP.
• Constraints to money supply growth should further sap appetite for all collectables, including silver coins.

Silver, XAG/USD, is lower by some 0.3% in Asia and the bulls are being pressured on their attempts to correct the strong bearish impulse that followed the prior day's response to the Federal Open Market Committee minutes. 

The minutes showed that accelerated tapering will give officials the option of raising rates as soon as March. There was a knee-jerk rally but the dollar ran into offers on Thursday which son turned around again in the mid-New York session.

The DXY, an index that measures the greenback vs a basket of major currencies, was holding onto the 96 areas overnight and US 10 -year yields were probing daily highs in the 1.7530s%.

St. Louis Federal Reserve Bank President James Bullard said at a meeting of the CFA Society St. Louis that a rate increase as early as March was on the table. This gave some life to the greenback again.

"The FOMC is in (a) good position to take additional steps as necessary to control inflation, including allowing passive balance sheet runoff, increasing the policy rate, and adjusting the timing and pace of subsequent policy rate increases," Bullard said.

"With the real economy strong but inflation well above target, US monetary policy has shifted to more directly combat inflation pressure," Bullard said, adding that he expects cases of the omicron variant to slow in the coming weeks.

As a result, the FOMC could decide to increase rates sooner and faster than previously expected, Bullard said, echoing statements in the FOMC minutes of the December meeting released on Wednesday.

"The FOMC could begin increasing the policy rate as early as the March meeting in order to be in a better position to control inflation," Bullard said. "Subsequent rate increases during 2022 could be pulled forward or pushed back depending on inflation developments."

For the day ahead, markets will look to the Nonfarm Payrolls data. However, anything outside of a shock is unlikely to move the needle considering the hawkishness at the Fed.

''The late-December COVID surge likely came too late to prevent a pickup in US payrolls after the gain in November (210k) appeared to be held down by an overly aggressive seasonal factor,'' analysts at TD Securities explained. 

In the near term, however, no matter the outcome of the data, markets will continue to pencil in a Fed balance sheet runoff, which should continue to push real rates higher and weigh on precious metals. 

However, analysts at TD Securities argued that while both gold and silver prices are under pressure,  ''constraints to money supply growth should further sap appetite for all collectables, including silver coins.''

''In contrast, some safe-haven demand is potentially providing some offset to global macro headwinds in gold. Instead, silver prices look more vulnerable given the acceleration in liquidations of ETF holdings, while CTA trend followers are also set to add to their shorts in response to firming downside momentum.''

Libya’s state oil company, National Oil Corporation (NOC), said in a statement on Friday, the maintenance work for the main crude transmission line at Al-Waha Oil Company was completed and that the oil output is back to around one million barrels per day (bpd).

Key quotes

“Completion of maintenance work for the main crude transmission line at Al-Waha Oil Company.”

“Work was completed ahead of schedule.”

“Accomplished within two days instead of a week.”

“Contributed to reducing the losses resulting from the halt in production, which was estimated to reach about one million barrels, and the production of the Waha Company was raised by 200 thousand barrels per day.”

Over the last weekend, NOC announced that its oil output could drop by another 200,000 bpd over the next week, as the main pipeline linking the eastern Samah and Dhuhra fields to the country’s biggest export terminal, Es Sider, will be shut for maintenance, per Bloomberg.

Market reaction

Oil prices are little affected by Libya’s production restart news, as WTI is on track to book the third straight weekly advance.

The US oil rebounded on Thursday, now trading around $79.50, higher by 0.56% on the day.

• DXY consolidate the first weekly gains in three amid pre-NFP trading lull.
• Fedspeak backed hawkish FOMC Minutes to propel yields the previous day.
• Virus woes, softer data and US inflation expectations seem to probe bulls during quiet Asian session.

US Dollar Index (DXY) struggles to extend the recent gains, easing to 96.23 during Friday’s Asian session.

Even so, the greenback gauge is up snapping the two-week bearish moves provided the US jobs report refrains from any major disappointment.

The greenback gauge’s weekly strength could be linked to the hawkish Federal Open Market Committee (FOMC) Meeting Minutes and the latest Fedspeak. After Fed minutes conveyed hawkish bias of the policymakers, suggesting a faster rate-hike and plans to discuss balance-sheet normalization, St. Louis Fed President James Bullard pushed for a March rate hike whereas Federal Reserve Bank of San Francisco President and an FOMC member Mary C. Daly marked the need to raise interest rates to keep the economy in balance.

It’s worth noting, however, that a reduction in the US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, seems to challenge the DXY bulls ahead of the key US data. Also challenging the greenback buyers are the recently downbeat prints of the US Factory Orders, Weekly Jobless Claims, ISM Services PMI and Good Trade Balance.

While the Fed signals propelled the US 10-year Treasury yields to poke a nine-month high the previous day, the benchmark bond yields dropped 1.9 basis points (bps) to 1.714% at the latest. The same helps US stock futures and Asia-Pacific equities of late.

To sum up, the Fed-linked signals and US data will be the key for the DXY moves. Adding to the catalysts are updates over Omicron and Sino-American tussles as China struggles recently. If we take a look at the US jobs report forecasts, the headline Nonfarm Payroll (NFP) is expected to rise from 210K to 400K while the Unemployment Rate may have eased to 4.1% from 4.2% prior. The underemployment rate, however, is likely rising from 7.8% to 8%. As a result, the DXY bulls are likely set for the first weekly gains in three.

Read: Nonfarm Payrolls Preview: A strengthening labor market backs a tighter monetary policy

Technical analysis

Although descending trend line from November 24 restricts the short-term upside of the DXY around 96.50, the gauge’s downside is likely to be challenged by the weekly support line near 96.10.

Analysts at Morgan Stanley offer a sneak peek at what to expect from Friday’s US Nonfarm Payrolls release due at 1330 GMT.

Key quotes

“We expect nonfarm payrolls increased by 260k in December with an uptick in participation.”

“The unemployment rate is seen unchanged at 4.2%.”

“We expect average hourly earnings rose 0.3%M, lowering the year-over-year rate to 4.1%.”

In recent trade today, the People’s Bank of China (PBOC) set the yuan (CNY) at 6.3742 vs the last close of 6.3830 and the estimated 6.3720.

About the fix

China maintains strict control of the yuan’s rate on the mainland.

The onshore yuan (CNY) differs from the offshore one (CNH) in trading restrictions, this last one is not as tightly controlled.

Each morning, the People’s Bank of China (PBOC) sets a so-called daily midpoint fix, based on the yuan’s previous day closing level and quotations taken from the inter-bank dealer.

• USD/TRY remains steady around short-term resistance line amid overbought RSI conditions.
• Sustained trading above key SMAs keep buyers hopeful.
• Nonfarm Payrolls Preview: A strengthening labor market backs a tighter monetary policy

USD/TRY treads water around $13.80, down 0.26% intraday while consolidating weekly gains. That said, the Turkish lira pair snaps a three-day uptrend by the press time of Friday’s Asian session.

A downward sloping resistance line from December 21 restricts the immediate upside of the USD/TRY prices as the RSI line nears overbought territory. However, the quote’s successful trading beyond 100 and 200-SMA favor buyers on a key day.

It’s worth noting that a clear run-up beyond the aforementioned resistance line near $13.90 won’t be enough for the USD/TRY bulls as the $14.00 threshold will act as a validation point for the further advances.

Also challenging the pair buyers are the 50% and 61.8% Fibonacci retracement of December 20-23, near $14.30 and $15.25 in that order.

Alternatively, 38.2% Fibonacci retracement joins the 100-SMA and 200-SMA to highlight $13.35 as a tough nut to crack for the USD/TRY sellers.

Following that, the weekly low of $12.75 and 23.6% Fibonacci retracement level of $12.16 will be in focus.

USD/TRY: Four-hour chart

Trend: Further upside expected

• USD/CAD bears are in control and eye a significant downside breakout.
• BoC and Fed are driving NA yields higher and the oil is supporting the CAD also.

Of the dollar bloc currencies, NZD, AUD and CAD, the latter is outperforming by a mile. In fact. ot is the only one that is higher vs the US dollar despite the uber hawkish surprises in the Federal Open market Committee minutes on Wednesday. The following details some of the factors going into the bull trend of the CAD.

At 1.2716, the price in Asia is flat and is stuck in a tight 1.2715 1.2730 range so far for the day. The day ahead will be busy with the North American jobs market's in focus so this could be the quiet before the storm in that regard. 

Meanwhile, the Federal Reserve has laid the groundwork for its initial tapering decision and the accelerated QE wind-down suggests rates will rise in the first half of this year, perhaps as soon as March. 

The US dollar knee-jerked higher following Wednesday's minutes into offers which enabled the CAD t run higher as the market took profits in the greenback. However, in the middle of the US session, the greenback made a slight comeback and the bulls cheered affirmations from St. Louis Federal Reserve Bank President James Bullard who said that a rate increase as early as March was on the table.

"The FOMC is in (a) good position to take additional steps as necessary to control inflation, including allowing passive balance sheet runoff, increasing the policy rate, and adjusting the timing and pace of subsequent policy rate increases," Bullard said.

"With the real economy strong but inflation well above target, US monetary policy has shifted to more directly combat inflation pressure," Bullard said, adding that he expects cases of the omicron variant to slow in the coming weeks.

As a result, the FOMC could decide to increase rates sooner and faster than previously expected, Bullard said, echoing statements in the FOMC minutes of the December meeting released on Wednesday.

"The FOMC could begin increasing the policy rate as early as the March meeting in order to be in a better position to control inflation," Bullard said. "Subsequent rate increases during 2022 could be pulled forward or pushed back depending on inflation developments."

BoC in focus

This sentiment has sunk the likes of the Aussie yet the CAD thrives. It is down to central bank divergences. 

Net speculators’ CAD net short positions have been dropping back and the strong November Canadian jobs report from last month supported the talk of a spring 2022 Bank of Canada rate hike. The BoC would be expected to take the long view and signal rate hikes are coming even with some covid restrictions being reintroduced.

Overall, policymakers expected to view Omicron as a short-term speedbump so there could be some fellow hawkishness to continue with the BoC’s January meeting, likely to signal upcoming rate hikes. The Canadian 10 -year yields have climbed to the highest level since November this week from 1.4250% to a 1.7180% high as a consequence.

''The BoC will provide an early litmus test on how central banks are managing evolving Omicron risks,'' RBC economic wrote in a note recently. ''Even with containment measures set to slow Canada’s recovery early this year, we think the BoC will lean hawkish in January and lay the groundwork for near-term rate increases.''

Canadian data a positive for CAD

Overnight, the Canadian trade balance printed above the market forecast at $3.1bn in November (market: $2bn, TD: $3bn), with both exports (+3.8%) and imports (+2.4%) posting decent gains on the month. ''Export strength was broadly based (8 of 11 categories up), and the expected boosts from autos (+4%) and energy (+2.8%) did materialize. In volume terms exports were up 3.5% while imports rose by 0.8% m/m, while in geographical terms the boost in the trade balance reflected increased trade with the US,'' analysts explained. 

This is good news, especially in light of the rise of the oil price, one of Canada's biggest incomes. ''Rising geopolitical and operational risks are driving prices higher, despite OPEC+ agreement to raise output by 400k bpd next month,'' the analysts at TD Securities noted, 

Meanwhile, the dual employment reports will be the focal point for the day ahead.

''While we are broadly in line with the market for Canadian jobs, we think a positive surprise (particularly on wages) could impact the CAD and OIS pricing (raising odds for January). We look for labour market gains to moderate with 30k jobs added in December, well below the 6m (126k) trend, which should leave the unemployment rate stable at 6.0%.'' the analysts at TD Securities explained, adding, ''we like the risk/reward of legging into CAD longs ahead of this month's BOC meeting.''

USD/CAD technical analysis

As per the prior analysis, USD/CAD Price Analysis: Bears get their discounts, now need to break critical 4-hour support, the CAD is firm and it has marked the price action on the daily chart as follows:

The right-hand shoulder (RHS) of the head and shoulders is taking shape. We now need to see a break out below the 4-hour support for a run to the H&S neckline between 1.2620 and 1.2600:

In its latest China market analysis, Goldman Sachs (GS) cites challenges to the growth should the world’s second-largest economy adheres to nationwide lockdown due to the South African covid variant, namely Omicron.

“China's nominal economic growth could plummet to 1.5% this year if it reintroduces a nationwide lockdown due to the Omicron variant,” said GS.

Key quotes

FX implications

USD/CNY takes the bids to refresh intraday high around $6.3830 by the press time of early Friday morning in Asia.

Read: China may ease monetary policy in Q1 despite hawkish Fed, and that's AUD/USD negative

• EUR/USD struggles for clear direction during the first negative week in three.
• Yields ease from nine-month high as Fed hawks turn cautious ahead of jobs report.
• Downbeat inflation expectations and softer data test the pair sellers.
• Eurozone CPI, US NFP eyed for fresh impulse.

EUR/USD pares intraday gains around 1.1290, stays indecisive after Thursday’s losses, during Friday’s Asian session.

The major currency pair followed firmer Treasury yields to print daily losses the previous day. However, cautious sentiment ahead of the preliminary inflation data for the bloc and the US jobs report for December challenges the pair traders of late.

In addition to the pre-NFP trading lull, a two-week low of the US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, also underpin the latest pullback in the US bond yields.

That said, hawkish Fedspeak and FOMC Minutes have earlier portrayed increasing odds of the Fed’s faster rate hike and balance sheet alteration, which in turn propelled the yields. That said, St. Louis Fed President James Bullard pushed for a March rate hike whereas Federal Reserve Bank of San Francisco President and an FOMC member Mary C. Daly marked the need to raise interest rates to keep the economy in balance.

At home, easing German inflation data tested the Bund yields even as the ECB policymakers recently sounded hawkish. On the other hand, Fed policymakers paid a little heed to the softer prints of the latest Factory Orders, Weekly Jobless Claims, ISM Services PMI and Good Trade Balance.

Against this backdrop, the US 10-year Treasury yields refreshed a nine-month high to poke 1.75% before ending Thursday’s North American session with 2.5 basis points (bps) of a daily gain near 1.728%, easing to 1.725% at the latest. The same weighed on the Wall Street benchmarks even as downbeat data pushed bears to satisfy with smaller losses. That said, S&P 500 Futures print mild gains and so do Japan’s Nikkei 225.

Looking forward, the first estimation of the Eurozone Consumer Price Index (CPI) for December will offer immediate direction to the pair ahead of the US employment data. As per the market consensus, the headline Nonfarm Payroll (NFP) rise from 210K to 400K while the Unemployment Rate may have eased to 4.1% from 4.2% prior. The underemployment rate, however, is likely rising from 7.8% to 8%.

Read: Nonfarm Payrolls Preview: A strengthening labor market backs a tighter monetary policy

Technical analysis

EUR/USD seesaws between the weekly resistance line and an ascending support line from November 24, respectively around 1.1320 and 1.1260, with sustained trading below the key SMAs and bearish MACD signals keeping sellers hopeful.

• AUD/USD licks its wounds near two-week low, picks up bids of late.
• Bearish MACD signals, rising wedge confirmation keep sellers hopeful.
• RSI conditions test the fall towards 0.7090, rebound remains doubtful below 0.7190.
• Nonfarm Payrolls Preview: A strengthening labor market backs a tighter monetary policy

AUD/USD refreshes intraday high to 0.7172, up 0.11% on a day, as traders consolidate recent losses around a fortnight low during the pre-NFP trading lull on early Friday.

Having confirmed a monthly rising wedge bearish chart pattern, AUD/USD bears flirt with the 200-SMA amid nearly oversold RSI. Given the pre-NFP trading lull, the quote is likely to seesaw around the key moving average, close to 0.7160 by the press time, for a while.

However, the quote remains liable to test the 23.6% Fibonacci retracement (Fibo.) of the mid-November to early December downturn around 0.7090. Following that, the year 2021 bottom surrounding 0.6995 will be next to watch.

Meanwhile, corrective pullback eyes the support-turned-resistance line of the aforementioned wedge, near 0.7190, a break of which could escalate the recovery moves towards the 61.8% Fibo. level near 0.7230.

Even so, the wedge’s upper line around 0.7290 and the 0.7300 threshold will challenge the AUD/USD bulls from retaking the control.

AUD/USD: Four-hour chart

Trend: Further weakness expected

• USD/JPY portrays corrective pullback after declining the most in three weeks.
• Yields pare gains around multi-day top amid pre-NFP caution, Fed hawks keep bond bears hopeful.
• Japan’s real wages fall for the third month, Nikkei tracks S&P 500 Futures to print mild gains.
• US jobs report is the key, virus updates may offer intermediate moves.

USD/JPY picks up bids to refresh intraday high around 115.90 as Tokyo opens for Friday.

The risk-barometer pair dropped the most since mid-December the previous day as market fears of a faster rate hike by the US Federal Reserve (Fed) and coronavirus propelled the safe-haven demand for the Japanese currency. However, the cautious sentiment ahead of the key US jobs reports for December probes the pair sellers of late.

After witnessing a steady rise in the covid infections at home and abroad Japan PM Kishida signaled to reinstate a few virus-led restrictions during Friday’s “Two-Plus-Two Talks”. “Prime Minister Fumio Kishida is set to place three Japanese prefectures under a quasi-state of emergency on Friday after surges in COVID-19 cases that local governors say are attributable to the spread of the Omicron strain at U.S. military bases,” said Kyodo news.

On the other hand, a two-week low of US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, joined hawkish Fedspeak and FOMC Minutes to also portray the risk-off mood. That said, St. Louis Fed President James Bullard pushed for a March rate hike whereas Federal Reserve Bank of San Francisco President and an FOMC member Mary C. Daly marked the need to raise interest rates to keep the economy in balance.

It’s worth noting that the recent geopolitical tussles between Japan and North Korea join a fall in Japan’s real wages to exert additional downside pressure on the USD/JPY. “Japan's real wages fell in November for a third month as inflation outstripped stagnant nominal wages, a government data showed,” said Reuters.

Even so, the recent data from Japan has been mixed as Tokyo Consumer Price Index (CPI) jumped in December but the Overall Household Spending eased in November. For the US, the Factory Orders, Weekly Jobless Claims, ISM Services PMI and Good Trade Balance all came in downbeat but couldn’t stop the US dollar bulls amid strong favor for the faster Fed rate hike, which in turn propelled the yields.

Amid these plays, the US 10-year Treasury yields refreshed a nine-month high to poke 1.75% before ending Thursday’s North American session with 2.5 basis points (bps) of a daily gain near 1.728%, easing to 1.725% at the latest. The same weighed on the Wall Street benchmarks even as downbeat data pushed bears to satisfy with smaller losses. That said, S&P 500 Futures print mild gains and so do Japan’s Nikkei 225.

Moving on, a covid update from Japan PM Kishida will offer immediate direction ahead of the US employment report. Forecasts suggest the headline Nonfarm Payroll (NFP) rise from 210K to 400K while the Unemployment Rate may have eased to 4.1% from 4.2% prior. The underemployment rate, however, is likely rising from 7.8% to 8%. Given the upbeat expectations from the US employment data, Fed’s hawkish rhetoric is likely to be justified, which in turn could propel yields and the USD/JPY.

Read: Nonfarm Payrolls Preview: A strengthening labor market backs a tighter monetary policy

Technical analysis

USD/JPY seesaws between the weekly resistance line and an ascending support line from December 17, respectively around 116.10 and 115.60. Given the bullish oscillators and sustained trading above November’s high surrounding 115.50, the yen pair is up for further gains.

A Chinese article by Chinese agency China Economic, 'CE',  is doing the rounds that say the minutes of the Fed’s December 2021 meeting was like a blockbuster “bomb” affecting markets in the Asia-Pacific region.

The article in the Chinese news agency website states that the Chinese renminbi exchange rate may become an important balancer for internal and external equilibrium, and exchange rate flexibility is expected to further increase.

Key notes (translated on Google Translate)

''Amidst the changes, the "self-oriented" characteristic of China's monetary policy will become more prominent.''

''Institutions generally believe that domestic monetary policy in 2022 will not follow overseas tightening. Not only that, under the requirement of "more proactive and promising", there is a high probability that monetary policy will be further loosened on the margin, and there is a possibility of reducing the RRR and interest rates in 2022.

This also means that in the future, the spread between Chinese and foreign interest rates is likely to narrow, which in turn may have a certain impact on capital flows and asset prices.''

''Some organizations believe that my country’s proactive fiscal policy will enhance efficiency and play a more critical role in stabilizing the macroeconomic market.''

''Monetary policy needs to grasp the rhythm and intensity, make good use of the "time window" before accelerating overseas tightening, and move forward. At the same time, the RMB exchange rate flexibility should be strengthened, and the functions of exchange rate adjustment macroeconomic and balance of payments automatic stabilizer should be brought into play.''

Market implications

This is good news for Asia-Pac markets but a potential headwind for the Aussie should the central bank divergences continue to play out as follows:

AUD/USD slams into weekly support ahead of critical NFPs

''The Fed's communication meant that there will be a much quicker timeline between rate hikes and balance sheet runoff than the last time, as such, it is full steam ahead with respect to the central bank divergences. Overall, that spells a lower Aussie for the weeks ahead which leaves the weekly technical outlook intact as follows:

On a break of weekly support, near 0.7150, the prospect of a downside continuation will be in play. Meanwhile, there is room for a correction to the old daily support near 0.72 the figure.''