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December month employment statistics from the Australian Bureau of Statistics, up for publishing at 00:30 GMT on Thursday, will be the immediate catalyst for the AUD/USD pair traders.

The jobs figures become less important considering the Omicron impact to be seen in January. However, the Reserve Bank of Australia’s (RBA) hawkish bias and the recently in-trend inflation fears keep the employment data on the first-tier catalysts’ list of AUD/USD traders.

Market consensus favors Employment Change to ease to 30K from +366.1K previous on a seasonally adjusted basis whereas the Unemployment Rate is likely to drop to 4.5% from 4.6%. Further, the Participation Rate may also rise from 66.2% to 66.1%.

Ahead of the event, analysts at Westpac said,

How could the data affect AUD/USD?

AUD/USD remains on the back foot around 0.7220, consolidating the week’s first daily gains, ahead of the key event. The pair’s latest losses could be linked to the risk-off mood triggered by US President Joe Biden’s comments, as well as cautious sentiment ahead of the key data.

Given the December jobs report likely preceding the Omicron spread in Australia, today’s jobs report may have a little impact on the AUD/USD, unless being a total disappointment. However, a strong reading may help the Aussie pair to recover some of the latest losses.

Technically, AUD/USD drops towards the 200-SMA and the stated support line, respectively near 0.7190 and 0.7180, amid sluggish MACD and RSI retreat. It’s worth noting, however, that a clear downside break of the 0.7180 will drag AUD/USD towards the monthly low of 0.7129 and August 2021 trough surrounding 0.7105.

Meanwhile, the monthly horizontal resistance near 0.7180 acts as an extra hurdle to the north even if the AUD/USD prices manage to cross the immediate 100-SMA resistance surrounding 0.7225.

Key Notes

AUD/USD retreats towards 0.7200 ahead of Aussie employment, PBOC

Australian Employment Preview: Aussie unlikely to benefit from a strong jobs report

About the Employment Change

The Employment Change released by the Australian Bureau of Statistics is a measure of the change in the number of employed people in Australia. 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 AUD, while a low reading is seen as negative (or bearish).

About the Unemployment Rate

The Unemployment Rate released by the Australian Bureau of Statistics is the number of unemployed workers divided by the total civilian labor force. If the rate hikes, indicates a lack of expansion within the Australian labor market. As a result, a rise leads to weaken the Australian economy. A decrease of the figure is seen as positive (or bullish) for the AUD, while an increase is seen as negative (or bearish).

• NZD/USD fades bounce off monthly support line, consolidates the week’s first daily gains.
• Biden hints at tighter monetary policy, warns Russia while signaling China’s lack of meeting purchase commitments.
• Wider US-NZ rate differentials helped Kiwi gain the previous day.
• PBOC rate action, Aussie jobs report will be important for the day.

NZD/USD returns to the seller’s desks, declining to 0.6780 during the initial Asian session on Thursday.

The Kiwi pair rose for the first time in a week the previous day after the US Treasury yields eased from the multi-day top. However, challenges to the risk appetite and cautious sentiment ahead of today’s key events recalled the sellers.

US President Joe Biden’s press conference was the latest blow to the market’s mood as he touched various risk-sensitive issues ranging from Russia to China, not forget Fed. US President Biden said, “China is not meeting its purchase commitments,” but also mentioned Chief Trade negotiator Katherine Tai’s efforts to placate Sino-American trade tussles.

Biden also praised Fed Chair Jerome Powell’s push to recalibrate the support also raised concerns over faster rate hikes and balance sheet normalization, which in turn exerted additional downside pressure on the NZD/USD prices.

Read: US President Biden: Inflation has everything to do with supply chain

In addition to the aforementioned catalysts, indecision over the People’s Bank of China (PBOC) Interest Rate Decision also weigh on NZD/USD prices. The PBOC is up for conveying its Interest Rate Decision at 01:30 AM GMT with market players equally divided amid the Chinese central bank’s early signals of a rate cut and the latest comments from PBOC Deputy Governor Liu Guoqiang. The PBOC official mentioned that the central bank “will keep yuan exchange rate basically stable.”

It’s worth noting that New Zealand’s plan to review phased border reopening next month and an easing in the US Treasury yields from two-year, coupled with the firmer equities and commodities, favored the NZD/USD buyers the previous day.

Amid these plays, ANZ said, “We changed our call yesterday and now expect the RBNZ to keep hiking till the OCR reaches 3%. Local rates were already itching to go higher, and they capitulated yesterday afternoon, with the 2-yr swap almost back to November’s post-COVID high, which mildly benefitted the NZD.”

Moving on, Australia's employment data and inflation expectations may also direct short-term NZD/USD move ahead of the PBOC. Should the Chinese central bank announce a rate cut, the kiwi pair may have a reason to pare recent losses.

Technical analysis

Despite crossing the weekly resistance line, now support line 0.6775, NZD/USD reversed from the 100-SMA level of 0.6805, which in turn joins sluggish MACD and RSI line to favor sellers. That said, an upward sloping support line from December 20, near 0.6755 by the press time, becomes crucial for the bears.

Alternatively, a sustained break of the 100-SMA level of 0.6805 will aim for the late December 2021 peak near 0.6860 but a two-month-old horizontal area surrounding 0.6890-95 will challenge the NZD/USD buyers afterward.

Overall, failures to cross the short-term SMA join sluggish Momentum indicators to favor bears.

• EUR/USD consolidates the week’s first daily gains, takes offers to refresh intraday low of late.
• Pullback from 100-SMA, bearish MACD signals hints at further weakness.
• 200-SMA, two-month-old support line challenge short-term bears.
• Seven-week-old horizontal area adds to the upside filters.

EUR/USD reverses from 100-SMA to pare the previous day’s gains around 1.1340 amid early Thursday morning in Asia.

The major currency pair flashed the week’s first positive daily closing while bouncing off the 200-SMA by the end of Wednesday. However, the rebound couldn’t cross the 100-SMA and was backed by the bearish MACD signals to trigger the latest pullback.

That said, the quote is on the way to retest the 200-SMA level of 1.1325 but an upward sloping support line from late November, around 1.1300, will challenge the EUR/USD pair’s further downside.

In a case where EUR/USD drops below 1.1300, multiple supports around 1.1230 should gain the market’s attention.

On the contrary, a clear upside break of the 100-SMA level near 1.1355 isn’t a green card for the EUR/USD bulls are a horizontal area from November 30, near 1.1380-85, will challenge the pair’s further advances.

Should the quote rises past 1.1385, the 1.1400 and the monthly peak of 1.1482 should lure the pair buyers.

EUR/USD: Four-hour chart

Trend: Further weakness expected

• AUD/USD consolidates the heaviest daily gains in a week, fades bounce off six-week-old support.
• Pullback in US Treasury yields initially favored buyers but US President Biden’s comments renewed risk-off mood.
• Biden signaled various concerns ranging from Fed to Russia to China suggesting challenges for risk appetite.
• Australia Inflation Expectations, jobs reports and PBOC interest rate will be the key to watch.

AUD/USD takes a U-turn from the weekly top towards 0.7200 during the initial Asian session on Thursday, having cheered softer US Treasury yields the previous day.

The Aussie pair’s latest pullback could be linked to US President Joe Biden’s press conference as the US Leader signals Fed rate hike, Sino-American tussles and geopolitical hardships. Also exerting downside pressure on the AUD/USD prices is the cautious sentiment ahead of the key Australia employment data for December, as well as Inflation Expectations for January, not to forget the interest rate announcement by the People’s Bank of China (PBOC).

Although US President Biden highlights Chief Trade negotiator Katherine Tai’s efforts to placate Sino-American trade tussles, he also mentioned that the US is “'not there yet' on possible easing of tariffs on Chinese goods”. Biden also said, “China is not meeting its purchase commitments.”

Further, comments favoring Federal Reserve (Fed) Chairman Jerome Powell’s push to recalibrate the support also raised concerns over faster rate hikes and balance sheet normalization, which in turn exerted additional downside pressure on the AUD/USD prices.

Additionally, US President Biden directly warned Russia not to invade Ukraine and if they do they’ll lose access to the US dollar.

Read: US President Biden: Inflation has everything to do with supply chain

With the aforementioned headlines suggesting challenges to the market sentiment, the risk barometer AUD/USD couldn’t be saved and pared the previous day’s gains, the first in the week.

Before that, the easing in the US Treasury yields and Australia PM Scott Morrison’s hope of overcoming the grave virus conditions, with the record death toll, seemed to have favored the AUD/USD prices. Also favoring the quote were the strong gold prices that rallied the most since early November to post a three-month high.

It should be noted that firmer US housing numbers helped equities to consolidate earlier losses but couldn’t save the US bond yields that initially refreshed the two-year top.

That said, AUD/USD pair’s further weakness hinges upon the monthly inflation expectations and jobs report, not to forget the PBOC rate actions.

Forecasts suggest, Australia's Employment Change may ease to 30K versus 366.1K prior while the Unemployment Rate is likely to ease to 4.5% versus 4.6%. The same suggests that the labor market is strong enough to help RBA keep the hawkish bias. However, the Consumer Inflation Expectations should overcome the 4.8% prior to favor the bulls. Also, the PBOC is widely expected to act in regards to the 3.8% benchmark rate, which if happens may help the AUD/USD to recover some of the latest losses.

Read: Australian Employment Preview: Aussie unlikely to benefit from a strong jobs report

Technical analysis

Despite bouncing off a seven-week-old support line, AUD/USD fails to cross the 100-SMA on the four-hour chart.

The pullback move gains support from RSI retreat and sluggish MACD, which in turn hints at further drop towards the 200-SMA and the stated support line, respectively near 0.7190 and 0.7180. It’s worth noting, however, that a clear downside break of the 0.7180 will drag AUD/USD towards the monthly low of 0.7129 and August 2021 trough surrounding 0.7105.

Meanwhile, the monthly horizontal resistance near 0.7180 acts as an extra hurdle to the north even if the AUD/USD prices manage to cross the immediate SMA resistance surrounding 0.7225.

US President Joe Biden crossed wires, via Reuters, during a press conference on Wednesday night while speaking on various matters starting from Russia-Ukraine to China, oil and then to inflation.

The US leader initially warned Russia not to invade Ukraine and if they do, “Russia's banks won't be able to deal in dollars,” said US President Biden.

Additional comments

FX implications

Market sentiment turned sour and the Antipodeans adhered to the consolidation of recent gains as US President Joe Biden signals Fed rate hike, Sino-American tussles and geopolitical hardships.

Read: S&P 500 dips again after failing to reclaim 4600 level, now down more than 4.0% on the year

• AUD/JPY spent Wednesday ranging in the mid-82.00s as focus switched to Thursday’s Aussie labour market report.
• Higher base metal prices and resilient January Consumer Sentiment figures from Westpac helped the Aussie outperform on the session.

In the run-up to key Aussie labour market data, AUD/JPY spent Wednesday’s session ranging in the mid-82.00s, bouncing at last Friday’s 82.10 lows but then subsequently failing to sustain an attempted push above the 200-day moving average at 82.62. At current levels just under 82.50, the pair trades with modest gains of about 0.1% on the session. Strength in base metals, as well as resilient January Consumer Sentiment figures from Westpac, helped the Aussie to claim the top spot in the G10 performance table on the day.

Markets expect the Australian economy to have added slightly more than 40K jobs in December, taking the unemployment rate down to 4.5% from 4.6% and lifting the participation rate to 66.2% from 66.1%. Strong labour market figures would likely further stoke already very hawkish RBA rate expectations. On Wednesday, money market futures implied a 77% chance that the RBA lifts rates to 0.25% in May and then follow that up with a further four rate hikes before the end of the year, taking rates to 1.25%. That despite the fact that the RBA has up until now maintained there will be no rate hikes before 2023.

Analysts suspect that the final straw for the RBA that could make them capitulate to market expectations and signal 2022 rate hikes could be if next week’s Q4 Consumer Price Inflation figures surprise to the upside. If so, the central bank may opt to axe its QE programme immediately in February and signal rate hikes this year. One might expect that could send AUD/JPY back towards recent highs in the 84.00 area, but risk appetite (in global equities, anyway) remains ropey amid Fed tightening fears. The S&P 500 dropped another 1.0% on Friday and is nearly 6.0% below record highs printed at the start of the year. This makes it difficult for the risk-sensitive AUD to rally versus the safe-haven JPY. Analysts have warned that stock market sentiment may remain rocky in the run-up to next week’s Fed meeting and this may cap potential AUD/JPY gains.  

• US equities dipped again on Wednesday, with the S&P 500 failing to reclaim 4600 and down over 4.0% in 2022.
• The Nasdaq 100 dipped 0.2% and the Dow fell 0.3%.

US equity markets have been under modest selling pressure on Wednesday, with market commentators citing continued fears about Fed tightening and higher interest rates, but also describing the day as one of consolidation. The S&P 500 dropped about 0.1% to trade close to 4570, after hitting fresh weekly and annual lows in the 4560s, with traders eyeing a test of the 4530ish lows printed back on December 20. The index attempted but failed to recover back above 4600. On the week, the index is now down about 2.0%, taking on the year losses to about 4.3%. The sectoral performance was mixed but indicative of a defensive bias, given outperformance in the S&P 500 GICS Consumer Staples (+1.2%) and Utilities (+0.9%) sectors.

The S&P 500 GICS Financials sector was the underperformer, shedding about 1.1% as US yields pull back from recent highs (the 10-year was down about 4bps to 1.83%) and following recent downbeat earnings. In fairness, Q4 results from Morgan Stanley (+2.2%) and Bank of America (+0.8%) were better received, but not enough to turn the tide for the sector. Meanwhile, the easing in yields gave the recently battered tech sector some respite. Despite the recent upside in crude oil prices, the energy sector was broadly flat.

Looking at the other major US indices, the Dow was down just over 0.3% while the Nasdaq 100 was flat, with the latter recovering back to 15.2K after printing fresh 2022 lows under 15.15K. The indices are down just under 3.0% and nearly 7.0% respectively on the year. In a sign of further choppiness ahead, the S&P 500 CBOE volatility index or VIX hit fresh highs for the year just under 24.0, substantially up from this year’s starting levels in the 16.0s. The VIX remains well below its post-Omicron peaks near 36.0.

• After briefly moving back above 156.00, GBP/JPY fell back to the 155.60s in recent trade, tracking equity market downside.
• If risk appetite remains ropey ahead of next week's Fed meeting, GBP/JPY may remain under pressure.

GBP/JPY spent most of Wednesday’s session going sideways within 155.50 to 156.20ish parameters, with the 21-day moving average and last Friday’s lows around 155.50 offering substantive support. Hotter than expected UK December consumer inflation numbers out early during European trade combined with comments from BoE Governor Andrew Bailey at the US open were unable to support the pair above 156.00. Despite the governor sounding very concerned about inflation and not saying anything that would diminish expectations for a 25bps rate hike next month, GBP/JPY has ebbed back lower to the 155.60s and is eyeing a test of session lows.

The move lower in the pair likely reflects further losses in the US equity space, with the major indices currently down between 0.1-0.5%. Investors continue to fret about the prospect of rapid monetary policy tightening from the Fed which is expected to kick off in March. Equity market downside since the start of the year (the S&P 500 is down over 4.0%) has weighed on risk-sensitive currency/JPY crosses like GBP/JPY. The pair is now flat on the year and about 1.3% below recent near-158.00 highs. Risk appetite may remain ropey ahead of next week’s anticipated to be very hawkish leaning Fed meeting.

That suggests it makes sense for GBP/JPY to remain in its recent bearish trend-channel for now, suggesting a break below the 21DMA and test of support at 155.00 this week seems likely. Risk appetite is going to need to see broader stabilisation for GBP/JPY to revert to trading as a function of central bank divergence, which would decisively favour the pair moving higher. Japan December CPI and UK December Retail Sales figures out on Friday are unlikely to have too much of an impact.

What you need to know on Thursday, January 20:

 Demand for the American dollar eased on Wednesday, with the currency edging lower against most major rivals. Losses were limited across the FX board, with gold outstanding amid rallying beyond $1,840 a troy ounce, its highest since last November.

US Treasury yields inched higher at the beginning of the day to reach fresh 2-year highs but ended the day lower. The yield on the 10-year US Treasury note peaked at 1.902% and currently stands at 1.83%. Fears that inflation will force central banks into tighter monetary policies regardless of economic growth led the way.

Meanwhile, stocks traded with a sour tone in Asia but were up during London trading hours, pushing Wall Street’s futures up. US indexes lost momentum through the session, ending the day mixed and not far from their opening levels.

The EUR/USD pair recovered towards the current 1.1340/50 price zone after Germany confirmed inflation at a multi-decade high of 5.3% in December. GBP/USD trades around 1.3620 after UK inflation posted a whopping 5.4% YoY by the end of 2021.

The aussie advanced vs the greenback, ending the day around 0.7230, while the USD/CAD ended the day little changed in the 1.249’ price zone.

Safe-haven currencies were little changed vs their American rival, with USD/JPY trading marginally lower around 114.25.

Risk-off persists heading into the US Federal Reserve’s monetary policy announcement next week, with investors turning cautious ahead of the event. Volatility may decrease while the dollar may remain under mild pressure.

Crude oil prices kept rallying. The black gold reached levels that were last seen in September 2014, with WTI currently trading at $85.90 a barrel.

 Australia will publish inflation and employment-related figures early on Thursday, while later into the day, the Turkey Central Bank will announce its monetary policy decision.

Crypto.com hits two-month lows as selling pressure accelerates

• Silver is performing into a critical supply area on the daily chart.
• Bulls look to 24.00 while the bears eye a correction back to test the 38.2% fibo. 

The price of silver has tracked gold higher of a sudden, yet not fully explained, at least as far as fundamentals gold rush for gold. US Treasury yields have retreated from near two-year highs on 2-year and 10-year notes.

Consequently, the greenback is pulling back which can explain some of the moves in precious metals, but the speed and distance for which gold and silver have moved are outside of the average ranges we have seen of late. Nevertheless, silver has spiked into what might be expected to be an area of supply as follows:

XAG/USD daily chart

The 24 area is where price has reacted a number of times in the past, so it would be anticipated to offer the bulls a hard time in conquering it. As it stands, the 38.2% Fibonacci retracement level aligns with the prior day's high, so this could be a compelling level of support for the sessions ahead. 

• Gold momentum has waned in recent trade, with the precious metal consolidating at session highs just above $1840.
• XAU/USD burst above resistance in the low-$1830s earlier in the session amid what appeared to be a stop run.

Spot gold (XAU/USD)’s upside momentum has waned in recent trade, with prices trading in more of a subdued manner near $1842 after bursting above resistance in the low $1830s and then subsequently $1840 for the first time in over two months. The speed of spot gold’s latest advances, especially between the $1830 to $1840 area, is suggestive of a stop run. With market participants amping up hawkish Fed bets in recent weeks, a theme that has weighed heavily on certain parts of the US equity market and sent real and nominal yields surging to multi-month/year highs, many were likely betting on weaker gold prices. Many traders short gold may have had their stop loss sat somewhere in the $1830s.

It is unlikely that spot gold can resist the advances of the US dollar and US real yields forever, and expectations for a very hawkish Fed in 2022 suggest continued upside risks for both. But gold is for now garnering safe-haven demand as geopolitical tensions surrounding Ukraine amp up, market commentators said. US Secretary of State Antony Blinken warned earlier in the day that Russia could attack Ukraine at very short and there are fears this could have a highly inflationary impact on the global economy via higher energy prices. Russia is a key gas supplier to Europe and a key global exporter of crude oil. With WTI at multi-year highs in the upper $80s and further energy price gains likely, investors may be buying gold as an inflation hedge.

• USD/JPY bulls are defending the daily trendline support.
• H1 bulls look to a restest of 114.50 before 115.00. Swing trading bears eye 113 the figure.

USD/JPY is under pressure below the 115.00 psychological level on Wednesday as US Treasury yields retreat from near two-year highs on 2-year and 10-year notes. Consequently, the greenback is pulling back and the yen bulls are taking advantage. 

The following illustrates prospects of a near term test of the mid-point of the 114 area that guards a run back to test the bearish commitments below the hourly trendline resistance as well as daily bearish prospects to 113 the figure:

USD/JPY H1 chart

The M-formation is a reversion pattern for which the price would be expected to move higher to retest the old support, aka, the neckline of the M-formation. This coincides with a trendline taking into account the opens and closes while guarding a run to the trendline based on the highs. 

USD/JPY M5 chart

Traders can look for a scalping opportunity and optimal entry point to target the short term target and the midpoint of the 114 area.114.35 is the current resistance that the price will need to overcome. 

USD/JPY daily chart

Meanwhile, the daily outlook is also showing an M-formation, for which the neckline has already been tested:

The price was heavily rejected on a retest near115 the figure, or, the neckline of the formation. The bears are now battling with the bullish commitments at the rising dynamic support which could give way at some point over the course of this week, potentially following one last effort from the bulls. If the trendline breaks, then the focus will be on the downside towards 113 the figure. 

• AUD/USD pushed back above 0.7200 on Wednesday to trade in the 0.7220s, with the Aussie outperforming in the G10 space.
• China monetary easing hopes helped base metals higher across the board.
• AUD likely derived support from upside in base metals and “remarkably resilient” Consumer Sentiment data.

AUD/USD recovered back above its 50-day moving average near the 0.7200 level to test an uptrend that it broke below earlier in the week in the 0.7220s on Wednesday. The pair’s 0.6% rally from the 0.7180s makes the Australian dollar the best performer within the G10 on the day, with the antipodean currency having shrugged off a deterioration in Westpac’s Consumer Sentiment survey which was released during Asia Pacific hours. The headline sentiment index fell 2.0% MoM to 102.2, showing that optimism still outweighed pessimism by a small margin (a score above 100 shows more consumers are optimistic than pessimism). Westpac called the data a “remarkably resilient result” given the recent spread of Omicron, contrasting it with previous much larger deteriorations during “Covid-19 events” (prior outbreaks). This could well be supporting the Aussie.

Upside in base metals was a key driver of the Aussie’s outperformance on Wednesday. US copper futures are up over 2.0% on the day, whilst the Bloomberg Industrial Metals subindex, which tracks a basket of copper, zinc, aluminum and nickel prices, is about 1.8% higher. Iron ore futures also saw substantial gains in Chinese markets during Wednesday’s Asia Pacific session, with the complex deriving a boost not only from a weaker US dollar but also hopes for more monetary easing from the PBoC. The central bank’s vice governor Liu Guoqiang said on Tuesday that more policy measures would be rolled out to stabilise the economy, after surprising markets with a 10bps Medium-term Lending Facility rate cut on Monday.

Looking ahead this week, Australia's December jobs data will be released during the upcoming Thursday Asia Pacific session. If strong, it may encourage markets to bring forward already very hawkish RBA rate hike expectations. For reference, during Wednesday’s session, money market futures implied a 77% chance that the RBA lifts rates to 0.25% in May and then follow that up with a further four rate hikes before the end of the year, taking rates to 1.25%. But analysts think that the straw that could break the camels back (regarding a potential RBA capitulation to hawkish market pricing) could be if next week’s Q4 2021 Consumer Price Inflation data comes in hotter than expected. If AUD/USD can break above the recent short-term uptrend, that could open the door to a move back above 0.7250.

• GBP/USD holds in bullish territory as the US dollar and yields pullback. 
• UK politics, the BoE and the Fed are the main focus. 

GBP/USD is trading at 1.3627 and higher by some 0.24% after rising from a low of 1.3585 to a high of 1.3648. Besides domestic drivers, the pound has benefitted from a pullback in UIS yields and the greenback. US Treasury yields are retreating from near two-year highs on 2-year and 10-year notes.

The focus this week, in the absence of many data drivers, has been the surge in US yields and a recovery in the UIS dollar. Investors are prepared for a widely expected interest rate increase in March. Sterling, meanwhile, edged higher after UK data on Wednesday showed British inflation rose 5.4% in December, to its highest level in 30 years.

The Bank of England is a major focus in this regard and it had expected CPI inflation to be 4.5% in December, so today’s print represents another material upside miss relative to the central bank’s view, analysts at Nomura explained.

''While that’s not enough by itself to dictate further interest rate increases (after all, the BoE is focused on keeping inflation at target over the medium term and can do little about the current ‘baked-in-the-cake’ elevated inflation rates), we continue to see rates rising throughout 2022 to a terminal rate of 1.50% by H2 2023 as the Bank attempts to dampen the impact of rising current inflation on second-round effects – namely inflation expectations and crucially wages. We continue to see the next hike of 25bp on 3 February.''

The Bank of England governor, Andrew Bailey, confirmed the central bank's view on the economy at the Treasury Select Committee, although he stressed that his comments today were not intended to indicate a view on interest rates. He did say that the labour market was tight and he said the BoE is seeing some evidence of second-round inflation effects. 

''For God's sake, go!''

Elsewhere, UK politics is keeping traders on their toes with an ear to the ground surrounding the ''Partygate'' scandal. Talks of a leadership challenge to Prime Minister Boris Johnson is likely keeping the pound hamstrung. Conservative MP David Davis, from the same party as Prime Minister Boris Johnson, called on the British leader to step down from office as Johnson faces a torrent of criticism from lawmakers and citizens over his alleged participation in a party held at 10 Downing Street in breach of Covid-19 rules. ''In the name of God, go,'' MP David Davis exclaimed.

Johnson, in response, evaded the issue in Parliament today and has requested everyone waits for the results of the investigation into the scandal. If he has misled Parliament, he will have to resign if he is not toppled by his own MPs in a no-confidence vote. However, the markets are not seeing an obvious alternative that may go in Johnson's favour and see him through a no-confidence vote. 

In additional politics, in what is positive for UK business, confidence and the outlook for growth, Boris Johnson announced the easing of Covid Plan B measures today. 

Current measures in England, including guidance to work from home and the widespread use of face coverings, were brought in to halt the spread of Omicron last month and will be reviewed again on January 26. he said the pandemic is not over and Omricon is not a mild disease, especially if you are not vaccinated or boosted.

Focus turns to the Fed

Across the pond, markets are getting set for next week's Fed that will meet. Traders and investors will be looking for further clarity and details on the end of quantitative easing, which will likely be in March. The US central bank could also signal it will raise interest rates in March as well right after ending QE. Fed funds futures have fully priced in a rate hike in March and four in all for 2022.

At this week meeting, the Central Bank of the Republic of Turkey (CBRT) is expected to maintain the key interest rate at 14.00% following a 500bp cut since September 2021. Analysts at MUFG Bank, expect the CBRT to reluctantly reverse course and hike rates by 600bp in 2022.

Key Quotes:

“The Central Bank of Turkey (CBRT) is expected to maintain rates at 14.00% (MUFG and consensus expectations are aligned) this week. A clear distinction is warranted between what the CBRT should and will do. With a policy rate at 14% and an inflation rate of 36.1%, a significantly tighter stance is necessary to anchor expectations and strengthen price stability. That is what we and broader markets believe the CBRT should do. However, the authorities resoluteness in keeping policy rates lows with their willingness to introduce heterodox measures in an effort to limit TRY volatility arising from exceptionally loose monetary policy, is what the CBRT will likely continue doing.”

“From a monetary policy perspective, our base case is that the CBRT will change course and tighten policy this year, but do so reluctantly by raising rates from a trough of 14% to 20% by end-2022. This will be akin to 2018 (sharp recessions) and late 2020/early 2021 (soft landing) when the CBRT reacted to stymie Lira volatility by raising rates sharply.”

“Our conviction behind our narrative is that with real policy rates that are acutely negative (-22%), the current monetary policy stance is unambiguously unsustainable and the pressure on the TRY is likely to continue in the absence of a policy U-turn. Whilst our core scenario is that the policy adjustment will be in an orthodox fashion, we acknowledge that unorthodox measures could materialise.”

“We view that a U-turn on monetary policy is necessary to bring stability to the currency (even though we forecast that such a 600bp hike in base case will still not be suffice to reduce inflation towards signal digits this year).”
 

According to analysts at Wells Fargo, there is no imminent rate hike from the Bank of Canada, taking into account Wednesday’s higher than expected inflation numbers. They see weakness ahead for the Canadian dollar versus the greenback. 

Key Quotes: 

“Even as inflation continues to move higher, with the December CPI edging up to 4.7% year-over-year and the average of the core inflation measures firming to 2.9%, we do not expect an imminent rate increase at the Bank of Canada January monetary policy announcement.”

“Our outlook for a 25 bps rate hike by April is more conservative than current market pricing, which anticipates 52 bps of rate increase during the next three months.”

“More broadly we forecast 75 bps of rate increase from the Bank of Canada over the next 12 months, compared to the 152 bps of rate increase anticipated by market participants. Thus even though there are some positive factors for the Canadian dollar, including a recent rise in oil prices, considering the aggressive market expectations for Bank of Canada policy, and the prospect of relatively rapid tightening (at least by international standards) from the Federal Reserve in 2022, we still expect the Canadian dollar to show renewed weakness versus the greenback as the year progresses.”

In their yields outlook analysis, economists at Danske Bank point out that while a European Central Bank rate hike in 2022 is not their baseline scenario, they expect markets to increase price rate hikes in 2023 and 2024. They expect the 10Y US Treasury yields to hit 2.25% in 2022 and they see potential for the 10Y Bund yields to increase to 0.3% in 2022.

Key Quotes: 

“As a consequence of our new forecast predicting four rate hikes from the Federal Reserve in 2022 and with QT likely to be launched in Q3 22, we have decided to raise our forecast for the 10Y US Treasury yield to 2.25% from 2.0% previously”.”

“Our overall expectation remains that the ECB will keep policy rates unchanged in 2022, though a rate hike late in the year is no longer unlikely. However, in the past month, the ECB has become much more likely to begin raising interest rates in 2023. Our assumption is that the market will continue to price rate hikes into the curve in 2023 and 2024, putting continued upward pressure on monetary policy-sensitive yields in the 3Y-5Y segment. We now expect the 10Y German government bond yield to increase to 0.3% in 2022 compared to 0.2% earlier.”

Economic numbers released on Wednesday surpassed expectations in the US with Housing starts rising 1.4% in December to 1.70 million (annual). Analysts at Wells Fargo point out a milder than usual weather allowed more construction to take place in what is normally a seasonally slow month.

Key Quotes: 

“Home building finished 2021 on a high note and appears to have strong momentum headed into the new year. Overall housing starts rose 1.4% to a 1.702 million-unit pace. Multifamily starts surged 13.7% during the month and accounted all of December's increase. Single-family starts fell 2.3% but remains at a high level at a 1.172 million-unit pace. Milder than usual weather allowed work to begin on more projects than usual during December, which explains the stronger-than-consensus print in overall starts. The consensus estimate had called for a modest drop to a 1.65 million-unit pace.”

“With the December data, we now have preliminary data for 2021. Home builders began construction on 1,595,100 homes in 2021, with single-family starts totaling 1,123,100 units. That marks the best year for single-family starts since 2006.”

“Housing permits, which tend to lead starts by 30 to 90 days, rose even more this past year. Overall permits jumped 17.2% in 2021 to 1.725 million. Single-family permits rose 13.4% to 1.111 million, while multifamily permits surged 24.9% to 614,000 units. The strength in permits suggests homebuilding is set for another strong year, even with rising mortgage rates. We expect overall starts to rise 4% to 1.660 million units. Inventories of new and existing homes remain near historic lows, while apartment vacancy rates recently fell to an all-time low.”
 

• WTI hit $87.00 for the first time since September 2014 on Wednesday.
• A momentary outage of an Iraqi-Turkish pipeline was attributed as driving the most recent gains.
• But the broader themes of tighter than expected market conditions and rising geopolitical concerns are also keeping oil underpinned.

Oil prices scaled fresh multi-year highs on Wednesday with front-month WTI futures hitting the $87.00 per barrel level for the first time since September 2014. Market commentators have cited news of disruption in oil flows along a pipeline carrying crude from Northern Iraq to Turkish port Ceyhan as behind the latest run of gains. Oil flows along the Kirkuk-Ceyhan pipeline (estimated at about 150K barrels per day) have since resumed on Wednesday, with the disruption as a result of a falling power pylon, not an attack as some had feared.

So all in all, the one-day disruption amounts to little more than a drop in the ocean in terms of global oil supply. But the news was enough to add further momentum to the idea that global oil markets at the start of 2022 are significantly tighter than expected just a few months ago, whilst demand remains resilient. Recall that smaller OPEC+ nations have struggled to keep up with rising output quotas in recent months, leading to excessively and involuntarily high levels of compliance to the group’s output cut pact (about 127% at the end of 2021).

Meanwhile, geopolitical concerns about supply security have amped up this week amid fears that Russia (the world’s third-largest supplier of roughly 11M barrels per day) might be on the brink of invading Ukraine. Meanwhile, tensions in the Middle East and around the Gulf Strait between the Saudi-led Sunni coalition and Iran-backed Shia militias based in Yemen rose earlier in the week after the former launched a surprise attack on the latter’s oil infrastructure.

Though the IEA, in its monthly report released on Wednesday, said that oil markets would return to surplus after Q1 2022, the agency raised its global demand growth forecast for the year. The agency also warned that commercial oil and fuel stocks in developed countries had fallen to their lowest levels in seven years and, as a result, any potential dents to supply this year could result in higher than usual levels of oil market volatility. Analysts continue to call for tighter than expected oil market conditions in 2022 to result in (Brent) hitting $100 per barrel.  

Ahead, attention now turns to the release of weekly US private API inventory figures which will be released at 2130GMT and are likely to show crude oil stocks being drawn on for an eighth consecutive week.

Data released on Wednesday showed the Canadian CPI rose in December to 4.8% (annual), the highest level since 1991. According to analysts at the National Bank of Canada core inflation will likely continue to run around 2.3% and 3%. They see the Bank of Canada raising rates five times during 2022. 

Key Quotes:

“The Canadian CPI print for December was in line with consensus expectations. As a result, annual inflation rose one tick to 4.8%, its highest level in just over 30 years. The food component remained vigorous this month and resultingly year on year growth reached 5.2%, its strongest gain since 2009. Excluding food and energy, month over month price increases were slightly stronger than the headline (+0.37%).”

“On a month-over-month basis, our in-house replication shows an acceleration for CPI-Trim (+0.30%) and CPI-Median (+0.24%), as seen for CPI ex-food & energy. On a three-month annualized basis, those two measures are running respectively at 3.0% and 2.3%. This is essentially the pace we are expecting for core inflation over the next few months given current supply chain disruptions and labor shortages.”

“The BoC Business Outlook Survey released earlier this week suggests the persistence of high inflation. Indeed, nearly all firms polled expected inflation above the 2% mark for the next two years with two-thirds expecting above 3% inflation over that same period. What does this mean for the Central Bank and the upcoming normalization of monetary policy? Given this backdrop, the central bank appears to be late in its normalization of monetary policy. We expect five rate hikes this year with the kick-off occurring in March.”

• Pound among top performers supported by UK CPI numbers.
• EUR/GBP extends slide, start looking at 0.8300.

EUR/GBP extends slide and approaches 0The EUR/GBP broke to the downside and fell to 0.8312, reaching the lowest level since February 2020. It remains near the low, under pressure, looking at the 0.8300 area on the back of a stronger pound.

Data from UK boost GBP

Earlier on Wednesday, CPI data from the United Kingdom came in above expectations, with the annual rate reaching 5.4%, above the 5.1% of the previous month and also surpassing the 5.2% expected. The numbers helped anchor expectations about another rate hike from the Bank of England.

“WIRP now suggests that another hike February 3 is fully priced in, followed by hikes at every other meeting that would take the policy rate to 1.25% by year-end. Furthermore, the market now sees 40% odds of a fifth hike this year to 1.50”, said analysts at Brown Brothers Harriman.

Another week, another slide?

The cross is falling for the sevenths consecutive week. The following key level stands at 0.8300, and below attention would turn to 0.8270/75 (2019 and 2020 lows). On the upside, the key resistance is seen at 0.8380. If the euro recovers above it would alleviate the bearish pressure.

Technical levels

• Technical buying has seen XAU/USD break out to fresh multi-month highs above $1835 as the dollar and US yields ease.
• There was likely a run on stops of bears betting on Fed tightening related gold weakness in the low $1830s.

With the dollar taking a breather from its earlier weekly gains and US yields either flat or seeing some modest retracement of recent gains, spot gold (XAU/USD) prices have taken the opportunity to rally to fresh multi-month highs in the $1830s. Technical buying as XAU/USD broke to the north of a negative trendline that has been capping the price action since last Friday has been the main driver of the move. At current levels around $1836, spot gold trades with gains of about 1.3% on the day. Now that the $1830 resistance area has been cleared, gold bulls will likely target a return to Q4 2021 highs near $1880.

Some macro strategists will be surprised at the extent of gold’s gains on Wednesday, which takes the precious metal's weekly gains to more than 1.0%. That’s because, on the week, the US Dollar Index is up about 0.4% and 10-year TIPS (real) yields are up more about 6bps. The moves in FX and bond markets reflect a further pricing of hawkish Fed policy expectations for 2022 and beyond and would typically weigh on gold. A stronger dollar makes USD-denominated gold more expensive for holders of foreign currency, thus reducing its demand, while higher real yields increase the opportunity cost of holding non-yielding precious metals, also reducing demand.

The latest move higher might well represent a stop-run, with gold bears having placed stops just above resistance somewhere in the low-$1830s. These traders would have been caught off guard by the recent move, but that doesn’t mean the threat of higher real yields and a stronger dollar can’t still deliver spot gold prices some damage. If gold markets continue to move higher in a way that is out-of-sync with bond and FX markets, the precious metal is at risk of becoming relatively “expensive” and vulnerable to a retracement lower.

• DXY comes under pressure and flirts with 95.50.
• US yields correct lower and collaborate with the weak dollar.
• US Housing Starts, Building Permits surprised to the upside.

The US Dollar Index (DXY), which gauges the buck vs. a bundle of its main rival currencies, keeps trading in the negative territory around the mid-95.00s in the wake of the opening bell in Wall St on Wednesday.

US Dollar Index weaker on lower yields

The index comes under pressure after climbing as high as the 95.80/85 band earlier in the week, all against the backdrop of the strong rebound in US yields, which saw yields across the curve renew the uptrend and record fresh tops.

Other than higher yields, the constructive view on the greenback also finds support on the prospects of the start of the Fed’s tightening cycle as soon as at the March meeting coupled with the perception that the balance sheet runouff could also begin sooner than many anticipates.

Wednesday’s US calendar saw results in the housing sector coming above expectations in December after Building Permits rose by 1.873M units, or 9%, and Housing Starts rose by 1.702M units, or 1.4%. Earlier in the session, MBA Mortgage Applications rose 2.3% in the week to January 14.

US Dollar Index relevant levels

Now, the index is losing 0.19% at 95.54 and a break above 95.83 (weekly high Jan.18) would open the door to 96.46 (2022 high Jan.4) and finally 96.93 (2021 high Nov.24). On the flip side, the next down barrier emerges at 94.75 (100-day SMA) followed by 94.62 (2022 low Jan.14) and then 93.27 (monthly low Oct.28 2021).

Bank of England Governor Andrew Bailey, who is currently testifying before the UK Parliament's Treasury Select Committee, said on Wednesday that regional agents are seeing some evidence of second-round inflation effects. 

Further Remarks:

"Since November, financial markets have pushed back when they expect energy prices to fall."

"Tension on the Ukrainian border with Russia has elevated since November and is a concern for inflation."

"There is a concern that there could be second-round effects on wages."

"BoE regional agents are seeing some evidence of second-round inflation effects."

"There is an argument that higher inflation could restrain demand in the economy and bring inflation back down."

"I would not want to suggest that the Bank of England will not take action on interest rates if necessary."

"Please do not think the BoE does not view inflation pressures as serious."

"We do not see changes in the world economy that would bring interest rates back to levels seen before the global financial crisis."

"Quantitative tightening probably won't have that big an impact on yields if undertaken at a normal time."

"We can and will do everything we can to control inflation."

The EUR is following the dollar-negative tone with a modest 0.2% gain, which has recovered only about a quarter of Tuesday’s decline. As long as EUR/USD trades below 1.1350, economists at Scotiabank expect the pair to eventually break under 1.13.

Euro remains at risk of losses on Russia and Ukraine tensions

“Further to a weak outlook on the basis of monetary policy divergences, the EUR remains at risk of losses on Russia and Ukraine tensions, with the former not letting up in its military pressure.”

“We target a break under 1.13 in the coming weeks to an eventual test of 1.10 as the Fed’s tightening cycle kicks off.”

“EUR/USD will have to break past the mid-1.13 zone and then 1.1375/85 to indicate a possible rebound into the 1.14s.”

“For now, the pair is holding above/around its 50-day MA at 1.1322 that may keep it supported. The big figure and ~1.1280/85 follow as support.”

GBP/USD closed just under 1.36 on Tuesday after three consecutive daily declines that have been met with a decent bounce off the figure during Wednesday’s session. Economists at Scotiabank expect cable to extend its bullish trend.

Cable may continue to be bought on dips below the 1.36 mark

“After weakening from overbought above 1.37, the GBP’s trend remains relatively bullish, particularly as it manages to hold above the 1.36 level and may continue to be bought on dips below this mark.”

“Support after the 1.3590/00 area stands at yesterday’s low of ~1.3575 followed by the mid-figure zone where the 100-day MA at also stands.” 

“Above 1.3650/60, resistance is 1.3690/700 and 1.3740/50.”

• USD/CAD has rebounded after briefly dipping below 1.2450 to near 1.2500 despite hotter than expected inflation and higher oil prices.
• Technical support and fading momentum after good recent performance likely explain CAD’s struggles to keep pace with AUD and NZD.

Despite an upside inflation surprise that will likely trigger further speculation about a surprise BoC rate hike next week and further crude oil price upside on Wednesday, USD/CAD was not able to sustainably break below 1.2450. Indeed, the Canadian dollar lags its antipodean counterparts in terms of on-the-day performance and is currently up just 0.1% on the day against the buck versus gains of over 0.5% for the kiwi and Aussie.

The loonie difficulties to keep pace with its non-US dollar peers seem to be driven by technical buying in USD/CAD after the pair bounced at last week’s 1.2450 low, combined with a reluctance to break convincingly below the 200DMA, which resides at bang on 1.2500. At present, the pair trades just under 1.2500.

Waning momentum/difficulties to keep the bearish drive in USD/CAD alive shouldn’t be to surprising given the fact that, on the month, CAD is amongst the best performing G10 currencies and has already come a long way. USD/CAD is already lower by about 1.2% on the month and is over 2.0% below this month’s highs above 1.2800.

Technical support aside, however, with crude oil prices substantially above last week’s levels (when USD/CAD last tested 1.2450) and following further strong domestic data, the case for a lower USD/CAD remains strong. Traders well may see rallies as an opportunity to sell and even if the buck does continue to broadly strengthen this week, are unlikely to express bullish USD views against the loonie so long as the threat of a surprise BoC hike is on the table.

Bank of England Governor Andrew Bailey, who is currently testifying before the UK Parliament's Treasury Select Committee, said on Wednesday that the very tight UK labour market is a concern and has the potential to put upwards pressure on wage negotiations. 

Further Remarks:

"Some aspects of current inflation ought to be transitory, such as energy and supply chains."

"Need to keep in mind inflation pressure from the labour market, this influenced my thinking on December rate rise."

"The UK labour market is very tight in terms of supply."

"This week's labour market data shows unemployment broadly back at pre-covid levels, inactivity higher."

"We don't know if people will come back to the labour market or retire early."

"Public sector expansion has created more competition for labour."

"The total labour force is probably smaller than we anticipated, cannot separate out covid and Brexit effects."

"The very tight labour market is a concern."

"The tight labour market has the potential to put upward pressure on wage negotiations."

• USD/TRY remains cautious in the mid-13.00s so far.
• Investors and the lira remain vigilant on the CBRT event.
• The decision on interest rates by the CBRT remains a close call.

The Turkish lira extends the range bound theme and motivates USD/TRY to keep business around the 13.50/60 band so far on Wednesday.

USD/TRY focused on the CBRT

Price action around USD/TRY remains muted for yet another session midweek, always in the mid-13.00s and against the backdrop of increasing cautiousness ahead of the monetary policy meeting by the Turkish central bank (CBRT) on Thursday.

Consensus ahead of the key CBRT event remains well divided, although it seems to prevail, albeit by a scarce margin, the call for an “on hold” decision. In such scenario, it will be the first meeting the CBRT would refrain from acting on rates following the 500 bps rate cuts since the September meeting.

Still around the CBRT, the central bank announced it clinched a 3-year swap deal with the central bank of the United Arab Emirates (CBUAE) worth TL64B and AED18B.

What to look for around TRY

The pair keeps the multi-session consolidative theme well in place, always within the 13.00-14.00 range at least until the CBRT meeting on Thursday. Higher-than-expected inflation figures released earlier in the year put the lira under extra pressure in combination with some cracks in the confidence among Turks regarding the government’s recently announced plan to promote the de-dollarization of the economy. In the meantime, 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 domestic currency under intense pressure for the time being.

Key events in Turkey this week: CBRT Meeting (Thursday) – Consumer Confidence (Friday).

Eminent issues on the back boiler: Progress (or lack of it) of the government’s new scheme oriented to support the lira via protected time deposits. 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. Earlier Presidential/Parliamentary elections?

USD/TRY key levels

So far, the pair is gaining 0.11% at 13.5397 and a drop below 12.7523 (2022 low Jan.3) would pave the way for a test of 12.5482 (55-day SMA) and finally 10.2027 (monthly low Dec.23). On the other hand, the next up barrier lines up at 13.9319 (2022 high Jan.10) followed by 18.2582 (all-time high Dec.20) and then 19.0000 (round level).

Bank of France head and ECB governing council member François Villeroy de Galhau said on Wednesday that the ECB will gradually adjust its monetary policy to firmly ensure that inflation recedes soon and stabilises around 2.0% in the medium-term. Villeroy added that this gradual and sequential approach to monetary stimulus withdrawal, starting with tapering, then rate lift-off, then eventually downsizing, is appropriate. We keep full optionality about the speed of this sequence, he added, saying that the ECB will be data-driven. 

Market Reaction

The euro has not reacted to Villeroy's latest remarks, which did not reveal anything new on ECB policy. 

• Building Permits rose 9.1% and Housing Starts rose 1.4% in December. 
• The DXY did not react to the strong housing numbers. 

Building Permits shot higher by 9.1% MoM in December to 1.873M over the last 12-months, whilst Housing Starts rose 1.4% MoM to 1.702M over the last 12-months, according to the latest data published jointly by the US Census Bureau and the US Department of Housing and Urban Development on Wednesday. Median economist forecasts had been expecting the December data to show that there had been 1.701M Building Permits in the past 12-months and 1.65M Housing Starts, so the latest numbers were significantly better than expected. 

Market Reaction

The DXY did not react to the latest strong housing numbers. 

• Headline CPI was in line with expectations at 4.8% YoY. 
• But Core CPI was hotter than expected, rising unexpectedly to 4.0% YoY from 3.6% last month.
• The data will likely boost speculation that the BoC hikes rates next week. 

Headline Consumer Price Inflation (CPI) in Canada rose to 4.8% YoY in December from 4.7% in November according to the latest release from Statistics Canada on Wednesday. That was in line with consensus economist forecasts. The MoM rate came in at -0.1%, also in line with consensus forecasts for a slight decline from 0.2% in November. 

Core CPI, meanwhile, was up 4.0% YoY, a surprise rise from 3.6% in November. The median forecast had been for a slight decline to 3.5% on the month. The BoC's core measures all also rose, with Common coming in at 2.1% YoY, Median at 3.0% (versus 2.8% last month) and Trim at 3.7% (versus 3.4% last month). 

Market Reaction

USD/CAD has seen a choppy reaction to the latest data, initially dropping under 1.2450 before retracing to the 1.2460s again, with the hotter than expected inflation data likely to boost speculation that the BoC hike rates next week.   

EUR/CAD’s weak tone is extending towards the late November low (lowest since 2017) at 1.4165. A break below here would open up the 1.37/38 region, economists at Scotiabank report.

Key resistance aligns at 1.4615

“We note that technical trend (DMI) oscillators are aligned bearishly for the EUR at this point across the intraday, daily and weekly signals, suggesting limited scope for counter-trend EUR corrections (higher) and ongoing pressure on the downside for the cross.”

“A retest of 1.4165 seems just a matter of time and we continue to see downside risks extending towards 1.37/1.38 (at least) on a break below this point.”

“EUR/CAD resistance is 1.4375/80, with 1.4615 still the level the EUR needs to beat in order to stabilize from a longer run, technical point of view.”

• With the US dollar taking a breather on Wednesday after Tuesday’s gains, GBP/USD has recovered back above 1.3600.
• Sterling remains unfazed by political uncertainty, though did derive some support from hot inflation figures which boosted BoE tightening calls.

Despite growing political uncertainty as momentum builds towards a vote of no-confidence within the UK Conservative Party that has the potential to oust UK PM Boris Johnson from the top spot, sterling has been a beneficiary of recent USD weakness. The buck is taking a breather on Wednesday after hitting one-week highs on Tuesday on hawkish Fed bets and widening rate differentials irrespective of weak NY Fed manufacturing survey data, enabling GBP/USD to recover back above 1.3600. At current levels near 1.3640, the pair trades about 0.6% above Asia Pacific session lows and nearly 0.4% higher on the day and is eyeing a test of resistance at 1.3650.

Sterling has been getting independent bullish impetus from another inflation surprise on Wednesday plus confirmation from PM Johnson that “Plan B” Covid-19 restrictions will end next week, as expected. In terms GBP’s reluctance to reflect the risk that Johnson is unseated from the top spot, traders seem to be reasoning that even if the UK PM does go, his likely replacement wouldn’t herald a major economic policy shift.

Turning to Wednesday’s inflation data; headline Consumer Price Inflation hit 5.4% YoY in December, above the expected 5.2%, while core inflation surprisingly rose to 4.2% YoY versus expectations for a drop to 3.9% from 4.0% in November. Traders said the data boosted the likelihood that the BoE hikes rates at its February 3 meeting and UK money markets on Wednesday are impling a 90% likelihood of a 25bps rate hike to 0.5% the week after next. Its also likely that PM Johnson’s as expected confirmation on Wednesday that “Plan B” Covid-19 restrictions will be eased as planned next week will strengthen the BoE’s conviction that the economic impact of the variant will be short-lived.

“The Bank of England was already feeling uncomfortable about its monetary policy stance” one analyst at JP Morgan told Reuters. “Today's upside surprises to both the headline and core inflation readings will certainly not have helped,” the analyst. “The strength of the labour market will give the Bank of England the confidence to continue to remove support for the economy as it looks to get a better handle on inflation” they continued.

AUD/USD continues to edge lower. A close below the well-defined channel uptrend at 0.7174/69 would rule out further corrective strength, economists at Credit Suisse report.

Aussie to turn bearish again on a closing break below 0.7174/69

“A break below the short-term channel bottom at 0.7174/69 would now be sufficient to end the corrective recovery potential and turn the risks directly lower. 

“Our medium-term bearish view is based on the major top completed last year and the clearly negative trend following setup. With this in mind, next supports are seen at 0.7129, then 0.7089/82, below which would trigger a retest of next support at 0.6992/91. Below here would then open up an eventual move to 0.6758, which remains our core medium-term objective.” 

“Short-term resistance moves to 0.7229/31, above which would reassert the potential for a test of the back of the broken channel and retracement resistance at 0.7349/60, which we look to cap if reached.”

“Only a weekly close above 0.7349/60 would negate the very large topping structure that we have been highlighting recently, which is not our base case.”

UK Prime Minister Boris Johnson on Wednesday confirmed that, as expected, "Plan B" Covid-19 restrictions in England will expire next week and the country will return to "Plan A". That means the recommendation for people to work from home will be dropped and that face mask requirements will be eased. The PM said the data vindicated the government's decision not to go with even tougher restrictions back in December, with the spread of Omicron looking to have peaked nationally and hospital admissions having stabilised.    

Market Reaction

GBP has been advancing in recent trade, boosted by hot Consumer Price Inflation data and perhaps also be Johnson's latest announcement. The pair currently trades in the 1.3640 area, up nearly 0.4% on the day. 

The Mexican peso has recovered well after the double-whammy of the Omicron news in late November and the surprise announcement of Victoria Rodriguez Soja as the new Banxico Governor. Looking ahead, economists at ING expect the USD/MXN to trade around the 21.00 level.

Will the new Banxico governor back a big hike?

“The December Banxico meeting saw a surprise 50bp adjustment to 5.50%, helping the Peso, but 10 February is the first meeting with Rodriguez in charge. Will she back another 50bp hike?”

“Our core view on the MXN this year is that as long as Banxico keeps a 550-600bp spread over the Fed, then USD/MXN should be comfortable trading near 21.00.”

“2022 growth is expected at 2.8% (much better than Brazil) and the Mexico remittance story should remain strong.”

• EUR/USD has stabilised just under 1.1350 on Wednesday after Tuesday’s sharp yield differential widening fuelled drop from above 1.1400.
• With market participants expecting the ECB’s transitory inflation call to prove correct but upping hawkish Fed bets, EUR/USD risks further downside.

After Tuesday’s sharp downside that saw EUR/USD shed as much as 0.7% (its worst day since January 3) and slide from above 1.1400 to as low as the 1.1320s, the pair is stabilising just under 1.1350 on Wednesday. At current levels near-1.1340, EUR/USD is up about 0.1% on the day and for now seems content to range close to the 21 and 50-day moving averages at 1.1343 and 1.1324 respectively. Traders attributed a sharp rise in long-term US/Eurozone bond yield spreads on Tuesday which saw the US 10-year’s rate advantage over the German 10-year hit its highest levels since late-November above 188bps as weighing on the pair. Ahead, it should be a reasonably quiet session with just US Building Permits data at 1330GMT worth noting.

Much attention was made of German 10-year yields surpassing 0.0% for the first time since May 2019 on Wednesday and indeed, the US/German 10-year spread is unchanged in the 188bps region on Wednesday, suggesting that EUR/USD consolidation is appropriate. But heading into next week’s Fed meeting which is unanimously expected to be a hawkish affair, EUR/USD traders will be keeping an eye on whether the US/German 10-year spread can rally further to test November highs above 192bps which could coincide with EUR/USD pushing back towards recent lows in the 1.1200 area.

A Reuters poll released on Wednesday suggested that market participants agree that Eurozone inflation will drop back under 2.0% by the year’s end and do not view the ECB as likely to begin hiking interest rates before 2023. That suggests markets continue to buy heavily into the story that while the exit from extraordinary ECB stimulus is on the horizon, the central bank’s monetary tightening plans are set to lag the Fed by a large margin. Indeed, consensus Fed calls are for as many as eight rate hikes by the end of 2023. It is thus not surprising to see that the US/German 2-year spread continues to surge and is on Wednesday trading at its highest since March 2020 at near 165bps. With some analysts calling for the US 2-year yield to hit 1.5% in the coming months (currently at 1.05%), further widening of US/Eurozone 2-year spreads is another reason to favour a lower EUR/USD.

• EUR/USD regains the smile following recent strong pullback.
• The YTD low at 1.1272 emerges as the next support.

EUR/USD regains some buying interest after bottoming out in the proximity of 1.1310 on Tuesday.

The bias appears tilted to further retracement in the very near term. That said, a deeper decline remains on the cards if spot breaks below the weekly low at 1.1314 (January 18). Such a move should open the door to a test of the so far YTS low at 1.1272 (January 4).

The longer term negative outlook for EUR/USD is seen unchanged while below the key 200-day SMA at 1.1722.

EUR/USD daily chart

• DXY meets some decent resistance in the 95.80 region.
• The upside remains underpinned by the 4-month line near 95.30.

DXY gives away part of the recent strong advance and returns to the 95.50 zone on Wednesday.

The intense upside in the dollar has recently surpassed the 4-month line, today around 95.25, and in doing so it has reinstated the bullish bias in the near term. That said, the next target of note should now come at the YTD high at 96.46 recorded on January 4 ahead of the 2021 high at 96.93 (November 24).

Looking at the broader picture, the longer-term positive stance in the dollar remains unchanged above the 200-day SMA at 93.17.

• EUR/JPY extends the leg lower to new 2022 lows near 129.40.
• Next on the downside comes the Fibo level at 128.82.

EUR/JPY struggles for direction around 129.80 after the earlier bullish attempt ran out of steam near the 130.00 barrier on Wednesday.

Price action in the cross now seems to favour extra decline in the short-term horizon, particularly after EUR/JPY remains unable to retest/surpass the YTD peaks in the 131.50/60 region (January 5). Against that, extra losses could retest the Fibo level (of the October-December drop) at 128.82.

While below the 200-day SMA, today at 130.53, the outlook for the cross is expected to remain negative.

EUR/JPY daily chart

• Gold is edging modestly higher during the European trading hours.
• 10-year US Treasury bond yield continues to rise toward 2%.
• XAU/USD could struggle to gather recovery momentum if $1,820 resistance holds.

Gold lost 0.3% on Tuesday and seems to have gone into a consolidation phase during the first half of the day on Wednesday. XAU/USD was last seen rising 0.2% on the day at $1,817 and investors remain focused on US Treasury bond yields.

The benchmark 10-year US T-bond yield reached its highest level in two years at 1.9% on Wednesday with investors reacting to speculations that the Fed could opt for a 50 basis points rate hike in March. Supported by surging yields, the US Dollar Index has already erased the majority of the losses it suffered last week. In case the 10-year yield rises above the key 2% mark, the dollar could continue to find demand and trigger another leg lower in XAU/USD.

Later in the day, December Housing Starts and Building Permits will be featured in the US economic docket but these data are unlikely to cause a noticeable market reaction.

Gold technical analysis

Gold continues to trade above the 100-period SMA on the four-hour chart, which is currently located near $1,810, suggesting that sellers remain on the sidelines for the time being. Supporting that view, the Relative Strength Index (RSI) indicator on the same chart has recovered to 50.

$1,820 (Fibonacci 23.6% retracement of the latest uptrend) aligns as first resistance. In case the pair manages to flip that level into support, it could target $1,824 (static level) and $1,830 (static level). On the downside, supports align at $1,810 (100-period SMA), $1,808 (Fibonacci 50% retracement) and $1,804 (Fibonacci 61.8% retracement).

The krone has started the year on the front-foot. Prospects of Norges Bank tightening should drift the EUR/NOK pair lower towards the 9.80 zone, according to economists at ING.

The case for four hikes may get increasingly strong

“Norges Bank should not be in any rush to hike again in January, and may use the meeting to merely signal a move in March.” 

“We think the case for four hikes may get increasingly strong, and we expect NOK to remain supported in the coming months, with EUR/NOK that may approach the 9.80 region already in 1Q.”

FX option expiries for January 19 NY cut at 10:00 Eastern Time, via DTCC, can be found below.

- EUR/USD: EUR amounts        

• 1.1375 348m
• 1.1400 327m

- GBP/USD: GBP amounts        

• 1.3330 363m
• 1.3600 410m

- USD/JPY: USD amounts                     

• 114.50 663m
• 115.00 512m
• 116.00 1.2b

- AUD/USD: AUD amounts

• 0.7245 440m

EUR/JPY has bounced back into the middle of its long-term 128-134 range. Economists at ING expect the pair to turn back higher by year-nd and reach the 140 level in 2023.

The equity market hedge

“EUR/JPY only seems to hit the headlines when equities start to sell off sharply and the JPY briefly outperforms. What of equity markets? Yes, higher US bond yields may favour value over growth stocks, but we favour 2022 being another year of (more modest) equity gains.”

“EUR/JPY could have a slight wobble around European politics in Italy (late January) or France (late April).”

“By year-end, EUR/JPY should be back on the up as the ECB prepares for a March-23 rate hike. EUR/JPY can hit 140 in 2023.”

• EUR/USD reclaims some ground lost in the mid-1.1300s.
• The knee-jerk in the greenback helps the recovery in the pair.
• German final December CPI rose 0.5% MoM and 5.3% YoY.

Finally, some respite for the single currency now motivates EUR/USD to leave behind the area of recent lows and retake the 1.1350 region on Wednesday.

EUR/USD focused on dollar, yields

EUR/USD sees some light at the end of the tunnel after three consecutive daily pullbacks that dragged spot from YTD highs around 1.1480 to Tuesday’s so far weekly low in the 1.1315/10 band.

Once again, dollar dynamics were the exclusive catalyst for the price action around the pair, always tracking the solid performance of US yields across the pond, which keep navigating in fresh tops. In addition, yields of the key German 10y Bund returned to the positive territory for the first time since May 2019.

Data wise in the region, final December inflation figures in Germany showed the CPI rose 5.3% over the last twelve months and 0.5% vs. the previous month. In addition, the Current Account surplus in Euroland widened to €26B in November and the Construction Output expanded 4.4% in the year to November.

Later in the US calendar MBA Mortgage Applications, Building Permits and Housing Starts will be in the limelight.

What to look for around EUR

EUR/USD came under pressure after hitting new YTD highs in the 1.1480 region earlier in the month, finding some contention in the low-1.1300s so far this week. In the meantime, the Fed-ECB policy divergence and the performance of yields are expected to keep driving the price action around the pair for the time being. ECB officials have been quite vocal lately and now acknowledge that high inflation could last longer in the euro area, sparking at the same time fresh speculation regarding a move on rates by the central bank by end of 2022. On another front, the unabated advance of the coronavirus pandemic remains as the exclusive factor to look at when it comes to economic growth prospects and investors’ morale in the region.

Key events in the euro area this week: Germany Final December CPI (Wednesday) – EMU Final December CPI, ECB Accounts (Thursday) - ECB Lagarde, EC’s Flash Consumer Confidence (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. Italy elects President of the Republic in late January. Presidential elections in France in April.

EUR/USD levels to watch

So far, spot is gaining 0.16% at 1.1342 and faces the next up barrier at 1.1482 (2022 high Jan.14) followed by 1.1491 (100-day SMA) and finally 1.1510 (200-week SMA). On the other hand, a break below 1.1314 (weekly low Jan.14) would target 1.1272 (2022 low Jan.4) en route to 1.1221 (monthly low Dec.15 2021).

The Swiss franc remains super-strong and the Swiss National Bank (SNB) does not seem to mind too much at all. Economists at ING think the EUR/CHF pair is set to move downward in the first half of the year.

SNB seems to welcome FX strength 

“Despite continuing to refer to the CHF as ‘highly valued’ and willing to intervene against it, December’s press conference also saw SNB’s Thomas Jordan welcoming CHF strength as a means to limit import prices!”

“Perhaps like Chinese authorities the SNB is happy to ride out the commodity boom with a stronger currency. This suggests there is no EUR/CHF line in the sand for the SNB – or at least based on real exchange rate levels, the line is nearer 1.00.” 

“Italian and French politics and Russian tensions could keep EUR/CHF pressured in 1H22. Pricing of 2023 ECB hikes could help later in 2022.”

EUR/RON continues to struggle to surpass the 4.95 mark. Economists at ING believe that the pair will be able to reach the 5.00 level in the last quarter of the year.

Hitting a wall at 4.95

“The NBR continued with rate hikes ‘at its own pace’, which currently means that Romania has the lowest key rate of the CE4 group. Given the large twin deficits and high inflation, we believe that this situation is sustainable for only the very short term.”

“As expected, 4.95 is a very strong resistance as official offers seem to prop the leu by as much as needed. We expect much of the same for most of 2022.” 

“EUR/RON will not depart from the current levels before inflation is safely on a downward trend. This seems to be a matter for the last quarter of 2022 when we expect the pair to hit the 5.00 level.”

• GBP/USD continues to find strong support sub-1.3600 levels.
• Hotter UK inflation and softer US dollar help the rebound in cable.
• Impending bulls cross and bullish RSI add credence to the corrective upside.

GBP/USD is bouncing back above 1.3600, snapping a four-day winning streak after bulls faced rejection at the 200-Daily Moving Average (DMA), now at 1.3735.

The turnaround in the sentiment around the pound comes on the back of a higher-than-expected UK annualized inflation figure for December, which came in at 5.4%. Hotter UK inflation lifts odds for a Bank of England (BOE) rate hike at its February 3 meeting, the first for this year.

Meanwhile, a recovery in the risk sentiment seems to be weighing on the safe-haven US dollar, collaborating with the upside in the cable pair. The greenback drops despite the fresh two-year highs in the US 10-year Treasury yields, as swap markets now price in a more than 25-bps Fed rate hike in March.

However, it remains to be seen if GBP/USD manages to stand ground amid looming UK political and Brexit risks. “The PM's attendance at the “bring your own booze” Downing Street Garden party during England’s first lockdown in May 2020, is throwing his premiership in jeopardy and the political uncertainty is a weight for the pound. Some MPs are refusing to accept his claim that he thought it was a “work event,” FXStreet’s Analyst Ross Burland notes.

Technically, the downtrend in the major has stalled just ahead of critical support at 1.3545, where the 21-DMA is set to cross the horizontal 100-DMA for the upside.

A bull cross in the making could keep GBP buyers hopeful, as the bullish 14-day Relative Strength Index (RSI) also adds credence to a potential move higher in the spot.

Further upside will gain traction only on a sustained move above 1.3650 should the daily highs of 1.3618 give way.

GBP/USD: Daily chart

GBP/USD: Additional technical levels

The People’s Bank of China (PBoC) wanted to slow down yuan appreciation, and it has had some success at this. USD/CNY has now stabilised at 6.37. In the first half of the year, the Chinese yuan is set to remain resilient thanks to inflows, according to economists at ING.

Portfolio inflows support yuan strength

“We expect the yuan to remain stable during the Chinese New Year despite the likelihood of more hawkish news from the US Fed.”

“Appreciation pressure on the yuan cannot be wiped out totally as portfolio inflows into the China onshore market are likely to continue the trend started in 2021.”

“We expect inflows will keep the yuan strong in 1H22.”

GBP/USD has struggled to gather recovery momentum after UK inflation data. As FXStreet’s Eren Sengezer notes, the next bearish target aligns at 1.3530.

Cable is unlikely to stage a convincing rebound in the near-term

“The UK's Office for National Statistics announced that the Consumer Price Index (CPI) climbed to 5.4% on a yearly basis in December from 5.1% in November. This print surpassed the market forecast of 5.2% but the Producer Price Index - Input (PPI) declined to 13.5% from 15.2% in the same period, not allowing GBP/USD to gain traction.”

“GBP/USD needs to hold above 1.3600 (Fibonacci 23.6% retracement level of the one-month uptrend) and confirm it as support in order to shake off the bearish pressure. 1.3640 (20-period SMA, 50-period SMA) align as the next hurdles.”

“Additional losses toward 1.3530 (Fibonacci 38.2% retracement) could be witnessed if a four-hour candle closes below 1.3570, where the 100-period SMA is located.”

In its monthly oil market report published Wednesday, the International Energy Agency (IEA) that a steady rise in oil supply could see a significant surplus materialize in Q1 2022 and going forward.

Additional takeaways

Market reaction

WTI picks up fresh bids on the IEA report, rebounding from daily lows of $84.99.

As of writing, the US oil is trading at $85.48, adding 0.08% on the day.

• AUD/USD keeps its range play below 0.7200 amid tepid sentiment.
• US Treasury yields resume the uptrend, fails to lift the greenback.
• Focus shifts to the Australian employment data due on Thursday.

AUD/USD is moving back and forth in a familiar range just below 0.7200, lacking a clear directional bias, as investors remain divided amid a retreat in oil price and the resumption of the rally in the US Treasury yields.

The risk sentiment remains edgy, as investors continue to weigh in aggressive Fed rate hike expectations for the March meeting, which have propelled the US Treasury yields to the highest levels in two years. The benchmark 10-year US rates trade close to 1.90%, up 1.25% so far.

The renewed upside seen in the yields has failed to put a bid under the US dollar, helping keep the aussie afloat. However, with the key Iraq-Turkey oil pipeline resuming at full flow, WTI oil prices correct from seven-year highs of $86.31, capping the upside attempts in the resource-linked AUD.

On the domestic front, the Australian Westpac Consumer Confidence Index dipped to 102.2 in January while New South Wales (NSW) registered a record daily surge in new covid infections.   

In the day ahead, while the yields’ price action will dominate the broader market sentiment, investors turn their attention towards the Australian labor market report due Thursday at 0030 GMT. The country’s Unemployment Rate is seen a tad lower at 4.5% in December vs. 4.6% previous. Australia is likely to add 30K jobs in the reported month.

AUD/USD: Additional levels to consider

• The upside momentum in DXY falters near 95.80 midweek.
• US yields keep the march north unabated so far.
• Building Permits, Housing Starts next of relevance in the docket.

The greenback, when measured by the US Dollar Index (DXY), seems to have met some initial barrier around the 95.80 region on Wednesday.

US Dollar Index looks to yields, data

After three consecutive daily advances, the strong rebound in the index appears to have run out of steam near the 95.80 level so far on Wednesday. The greenback looks to have regained the upside pressure following the recent breakout of the 4-month resistance line, today near 95.25.

The intense climb in the buck came pari passu with the strong recovery in US yields across the curve, as market participants continue to recalibrate the imminent start of the hiking cycle by the Federal Reserve, with the March meeting a likely candidate as per recent Fedspeak, Powell’s testimony and persevering elevated inflation.

Indeed, yields of the 2y note approach the 1.08% level for the first time since February 2020, while the key 10y note already flirts with 1.90% and the 30y already surpassed the 2.20% mark.

In the US data space, MBA will publish its usual weekly Mortgage Applications into January 14 seconded by December Building Permits and Housing Starts.

What to look for around USD

The index regained composure and reclaimed the 95.00 mark and well above in past sessions, partially reversing the intense selloff witnessed during most of last week. Higher US yields propped up by firmer speculation of a sooner Fed’s lift-off and supportive Fedspeak helped the buck to regain part of the shine lost in past sessions, all against the backdrop of persistent elevated inflation and the solid performance of the US economy.

Key events in the US this week: Building Permits, Housing Starts (Wednesday) – Initial Claims, Philly Fed Index, Existing Home Sales (Thursday).

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 losing 0.08% at 95.64 and a break above 95.83 (weekly high Jan.18) would open the door to 96.46 (2022 high Jan.4) and finally 96.93 (2021 high Nov.24). On the flip side, the next down barrier emerges at 94.75 (100-day SMA) followed by 94.62 (2022 low Jan.14) and then 93.27 (monthly low Oct.28 2021).

USD/JPY stands on slippery grounds. However, economists at OCBC Bank believe that the pair’s picture has brightened and spots a tough resistance at the 115.30 mark.  

Turning positive

“Still range-bound between 114.00 to 115.00 for now, but the posture has turned more positive.”

“115.30 may be a firmer resistance for now.”

Open interest in natural gas futures markets increased for the second session in a row on Tuesday, this time by around 3K contracts according to advanced prints from CME Group. On the other hand, volume dropped for the third session in a row, now by around 12.7K contracts.

Natural Gas looks side-lined near term

Tuesday’s small uptick in prices of natural gas was accompanied by rising open interest, which is supportive of further upside going forward. However, the persistent decline in volume warns against the sustainability of this trend and could point to some near-term consolidation.

AUD/USD has lost its support level at 0.7200. Economists at OCBC believe that this move opens the door to see more downside towards 0.7100.

Upside momentum faded

“The loss of the 0.7200 support could imply more downside for the AUD/USD in the immediate horizon.”

“Supports neatly layered on the way down to 0.7100.”

“Positive moves by the PBoC to support the Chinese economy could ultimately be AUD-supportive at the margins.”

EUR/USD fell sharply on Tuesday and lost more than 0.70%. Economists at OCBC expect the world’s most popular currency pair to test the 1.1280/70 support, then 1.1230/20. 

Turn negative

“EUR/USD finally started to react to yield differentials on Tue after the bounce higher in UST yields. 

“The sharp decline puts the 1.1270/80 and 1.1220/30 supports back into the picture, and the downside move may not have fully played out just yet.” 

“Expect the pair to be USD-driven for now.”

The Australian dollar failed to cash in on USD weakness and commodity currency momentum at the start of the year. Economists at ING expect the AUD/USD pair to hover around the 0.72 level over the next motnjs.

Watch the China risk

“China’s zero-Covid policy and the implications for the region’s growth outlook should continue to put a cap on any sustained rally in AUD.”

“Domestically, we expect some re-pricing of RBA rate expectations, as 100bp of tightening currently priced in by yearend appear way too aggressive.” 

“We expect AUD/USD to stabilise around 0.72 in the coming months, but the balance of risks is skewed to the downside.”

Economists at Credit Suisse preview this week’s Norges Bank rate decision. They retain a 9.90 EUR/NOK target.

Inflationary risks remain the main driver for a more hawkish Norges Bank

“Risks ahead of the 20 Jan Norges Bank rate decision tilt in a hawkish direction.

“We continue to target EUR/NOK at 9.90, as inflationary risks prevail and fiscal headwinds for EUR/NOK downside have been removed.”

“We would sell rallies towards 10.12 if the Norges Bank fails to sound hawkish, as we ultimately think patience would reward EUR/NOK shorts.”

Economists at Credit Suisse preview next week’s Bank of Canada (BoC) rate decision, where risks of a hike have increased. However, they still stick to their 1.25 target for the USD/CAD pair.

Range dynamics to become prevalent again in USD/CAD

“Ahead of next week’s Bank of Canada rate decision on 26 Jan, risks of a 25bp hike are on the rise. We are however not looking to lower our 1.2500 USD/CAD target, as we ultimately see range dynamics becoming prevalent again in USD/CAD.”

“With energy prices as a key marginal driver of inflation expectations in both the US and Canada, we are fundamentally sceptical of lasting policy divergence prospects between the Fed and the BoC.”

“In the event of a rate hike, we see scope for USD/CAD to undershoot our 1.2500 target as far as the Oct ’21 lows around 1.2300, at which point positioning for a bounce-back towards 1.2500 will become attractive.”

“USD/CAD rallies in the event of an unchanged BoC outcome will likely meet sellers around 1.2630.”

See – Canadian CPI Preview: Forecasts from five major banks, on a thread to stay below 5%

Economists at ING believe that economic data from New Zealand is not going to help the kiwi to recover. Subsequently, they expect the NZD/USD pair to remain below the 0.70 level in the next months.

Period of soft data ahead

“The data flow is set to be – for a change – not so supportive of NZD in the coming weeks as the economy faced the strains of the long Auckland lockdown in 4Q21. That said, the Kiwi economy had already moved above its pre-pandemic levels before the 4Q restrictions, and elevated inflation (4.9% in the 3Q reading) combined with very high house prices are still supporting the case for fast tightening by the RBNZ.” 

“Markets are pricing in six hikes in 2022 (we expect five), an expectation that may imply some easing of NZ border restrictions later in the year.”

“We think the risks for NZD are mostly stemming from its exposure to China, and NZD/USD may stay below the 0.70 mark for the rest of the first quarter.”

AUD/USD fell below 0.7200 and seems to be having a tough time staging a convincing rebound. In the opinion of economists at Westpac, the pair is at risk of declining into the 0.7100 level by end-March.

The Aussie’s headwinds have strengthened early in 2022

“US inflation at 7% and unemployment below 4% have reinforced the Fed’s tightening bias, with a March rate hike almost fully priced. This should provide solid support for the US dollar, helping cap AUD/USD rallies into the 0.73 area.” 

“The 1 Feb RBA meeting is major event risk but Omicron has dampened Australia’s hoped-for summer economic revival, suggesting no hawkish turn.”

“The Aussie’s commodity price support is mostly still elevated, with large trade surpluses continuing. But China’s rate cut only adds to investor unease over its growth outlook.” 

“Risks to the 0.70 handle multi-week, end-March forecast 0.71.”

EUR/USD has staged a modest recovery early Wednesday following Tuesday's sharp decline but the pair could find it difficult to continue to edge higher in the near-term. As FXStreet’s Eren Sengezer notes, a drop below 1.1320 could spell trouble for the euro.

1.1350 aligns as the first resistance

“In case a four-hour candle closes below 1.1320, additional losses toward 1.1300 (psychological level) and 1.1270 (the starting point of the uptrend coming from early January).”

“On the upside, 1.1350 (100-period SMA, Fibonacci 61.8% retracement) aligns as the first resistance ahead of 1.1380 (Fibonacci 50% retracement) and 1.1400 (Fibonacci 38.2% retracement).”

In the final two months of last year, the USD was the best performing G10 currency, with the NZD trailing towards the bottom of the pack on this horizon. Economists at Rabobank expect the NZD/USD pair to bounce back towards 0.71 over the next three months.

USD to remain firm in the first half of 2022

“We anticipate that the greenback will remain firm in the first half of this year on the back of Fed policy tightening. Later in the year, we expect that some of the USD’s advantage will be sapped by economic recoveries elsewhere in the G10 and anticipate that this will allow scope for NZD/USD to drift higher.”

“On the assumption the RBNZ remains hawkish we see scope for NZD/USD to creep back to 0.71 on a three-month view.”

Statistics Canada will release December Consumer Price Index (CPI) data on Wednesday, January 19 at 13:30 and as we get closer to the release time, here are the forecasts by the economists and researchers of five major banks regarding the upcoming Canadian inflation data. Annual CPI in Canada is expected to edge higher to 4.8% in December from 4.7% in November. A stronger-than-expected inflation reading could provide an additional boost to the CAD in the second half of the day and vice versa. 

TDS

“We look for inflation to hold at 4.7% in December as prices see their monthly first decline for 2021. Energy and clothing are expected to drive the pullback, while food and shelter provide a source of strength. Prices should see modest gains on a SA basis for a deceleration from the recent trend, while core inflation is expected to hold stable at 2.7%.”

ING

“In Canada, the CPI report is the key release and with headline inflation set to break above 5%, we could see growing expectations of a January Bank of Canada interest rate hike. We are more cautious on the timing at this stage given some uncertainty over the Omicron hit to economic activity, but higher interest rates are certainly coming.”

NBF

“While we expect strong prints for CPI ex-food and energy in the next few months given labour shortages and supply chain issues, the headline index could have been negatively impacted by a drop in gasoline prices in the final month of the year. This should have been partially compensated by the food segment, which continued to be impacted by rising commodity prices. We expect prices to have dropped 0.3% MoM before adjustments for seasonality. This would translate into a one tick decline of the annual rate, to 4.6%. The common core index, meanwhile, could have increased 2.1% on a 12-month basis.”

CIBC

“A flat reading for the CPI index in non-seasonally adjusted terms would translate into a seasonally adjusted gain of 0.3%. That’s weaker than the recent trend, but still a little stronger than what would be consistent with a 2% inflation target. While energy prices were lower, monthly house price gains appear to have accelerated again and food prices are also likely to have been a source of inflationary pressure. The 4.9% YoY pace forecasted would be the highest since the early 1990’s.” 

Citibank

“CPI NSA MoM (Dec) – Citi: -0.1%, median: -0.1%, prior: 0.2%; CPI YoY – Citi: 4.8%, median: 4.8%, prior: 4.7% – the key part of the December inflation report will be core inflation measures. In December Governor Macklem acknowledged CPI-common at 2% as a sign that remaining slack has been substantially absorbed.”

Inflation figures from the UK seem to be helping the British pound stay resilient against its rivals. Economists at ING expect the EUR/GBP pair to continue edging lower towards the 0.8270/80 region.

Another upside surprise for UK inflation

“UK December CPI has just come in at 4.8% YoY and core 4.2% YoY – both surprising on the upside. Combined with better November activity data and better jobs data, we favour a 25bp BoE hike on Feb 3rd.”

“An awful lot is priced for the BoE cycle – yet we think it is too early to 'fade' the GBP rally on a fully-priced BoE cycle – just in the same way it is too early to fade the dollar rally.

“For today, look out for testimony from BoE Governor Bailey on financial stability. Presumably, we should hear hawkish comments as to how the BoE will address inflation.”

“Expect EUR/GBP to continue working its way towards the 0.8270/80 area - despite intense speculation over PM Johnson's future.”

The rise in yields reinforces the existing bearish “reversal week” in the S&P 500. Analysts at Credit Suisse continue to look for further weakness to the 4495 December low and now more realistically the 200-day moving average (DMA), currently placed at 4421.

Break above 4748/58 is needed to ease the threat of further corrective weakness

“With US bond and real yields reinforcing their large yield bases, we continue to look for a deeper corrective phase.”

“We stay biased lower for a test of important support from the December low at 4495 and now we think more likely the 200-DMA at 4421.”

“Whilst we would look for the 200-DMA to ideally hold, a weekly close below would suggest we have seen a more important peak with supports seen next at 4279, then the 38.2% retracement of the rally from last October at 4213.”

“Above 4748/58 is needed to ease the threat of further corrective weakness for strength back to the 4819 high.”

See – S&P 500 Index set to hit the 5,000 level in June – UBS

USD/JPY has been trading up to 116.00. Economists at ING believe that the pair could surge as high as 120.00.

BoJ will be the last to embrace a stronger currency

“Unlike many nations embracing currency strength to ride out the inflation hump, Japanese policymakers have shown little resistance to JPY weakness.” 

“Given its battle with deflation, arguably Japan could do with some imported inflation and the BoJ’s recent shift to a balanced view on inflation risks still leaves it several years from tightening.”

“Fossil fuels make up around 85% of Japan’s energy consumption – all imported. Terms of trade losses and 2% US yields favour 120.”

The Iraq-Turkey oil pipeline is reportedly said to restart soon, Bloomberg reported, citing a Turkish official.

The official said the pipeline flow will resume in about an hour, adding that Turkey is investigating whether the blast in the south of the country, near the Syrian border, was caused by sabotage.

The key pipeline, carrying oil supplies from Iraq to Turkey was knocked down on Tuesday after an explosion hit in the province of Kahramanmaras, at kilometer 511 on the route to Ceyhan.

The pipeline moved more than 450,000 barrels a day last year, per Bloomberg.

Market reaction

WTI extends its retreat from seven-year highs of $86.31 on the pipeline restarting news, currently trading at $85.28, almost unchanged on the day.

Here is what you need to know on Wednesday, January 19:

Wall Street's main indexes suffered heavy losses and the 10-year US Treasury bond yield climbed to its highest level in more than two years near 1.9% on Tuesday, allowing the greenback to continue to outperform its major rivals. Safe-haven flows continue to dominate the financial markets early Wednesday amid escalating Russia-Ukraine tensions, inflation fears and the rising number of coronavirus cases in Asia. Later in the day, Building Permits and Housing Starts will be featured in the US economic docket and Statistics Canada will release December Consumer Price Index (CPI) data. 

The US Dollar Index, which tracks the dollar's performance against a basket of six major currencies, seems to have gone into a consolidation phase above 95.50 after rising 0.5% on Tuesday. 

EUR/USD fell sharply on Tuesday and already erased all the gains it recorded last week. The pair continues to stay afloat above 1.1300 so far but the risk-averse market environment could make it difficult for the shared currency to find demand. The data published by Destatis showed on Wednesday that the annual HICP was up 5.7% in December, matching the flash estimate and the market expectation.

GBP/USD is trading near 1.3600 following Tuesday's steep decline as inflation figures from the UK seem to be helping the British pound stay resilient against its rivals. The UK's Office for National Statistics reported that the Consumer Price Index rose to 5.4% on a yearly basis in December from 5.1% in November. This reading beat the market expectation of 5.2%. 

USD/JPY rose above 115.00 on rising US T-bond yields but reversed its direction in the second half of the day with the JPY attracting investors as a safe haven. The Bank of Japan noted in its quarterly outlook report that the pass-through of rising raw material costs to consumers had not spread to a broad range of items.

Gold closed in the negative territory on Tuesday but the key support area that is located near $1,800 remains intact. Additional losses could be witnessed if another leg higher in yields causes the yellow metal to drop below that level.

Despite the broad-based dollar strength, USD/CAD continues to fluctuate around 1.2500 as surging crude oil prices support the loonie. Annual CPI in Canada is expected to edge higher to 4.8% in December from 4.7% in November. A stronger-than-expected inflation reading could provide an additional boost to the CAD in the second half of the day and vice versa.

AUD/USD fell below 0.7200 and seems to be having a tough time staging a convincing rebound. Australian Bureau of Statistics will release January Consumer Expectations and Unemployment Rate data in the early trading hours of the Asian session on Thursday.

Bitcoin continues to edge lower toward the critical $40,000 mark after closing flat on Tuesday. Ethereum is falling for the third straight day on Wednesday and looks to test $3,000.

Gold price is attempting a tepid bounce so far this Wednesday. But the rebound in the yellow metal appears shallow. FXStreet’s Dhwani Mehta notes that the $1,806 support holds the key.

Gold remains vulnerable while within a symmetrical triangle on the 4H chart

“A sustained move below the 100-DMA at $1,811 will fuel a fresh decline towards the rising trendline support at $1,806. Gold will chart a symmetrical triangle breakdown on a four-hourly candlestick closing below the latter, opening floors for a test of the upward-sloping 200-SMA at $1,800.”

“The last line of defense for gold buyers is seen at the January 10 lows of $1,790.”

“Recapturing the bullish 50-SMA at $1,814 is critical for attempting any meaningful recovery. The downward-pointing 21-SMA at $1,818 will then get tested, above which the falling trendline resistance at $1,821 will be eyed. Further north, the previous day’s high of $1,823 will act as the next relevant upside barrier.”

See – Gold Price Forecast: XAU/USD to sink towards $1,650 by end-2022 – UBS

• UK CPI rises by 5.4% YoY in December vs. +5.2% expected.
• Monthly UK CPI arrives at +0.5% in December vs. +0.3% expected.
• GBP/USD edges higher above 1.3600 upbeat UK CPIs.

The UK Consumer Prices Index (CPI) 12-month rate came in at 5.4% in December when compared to +5.1% registered in November while beating expectations of a +5.2% print, the UK Office for National Statistics (ONS) reported on Wednesday. 

Meanwhile, the core inflation gauge (excluding volatile food and energy items) rose by 4.2% YoY last month versus +4.0% booked in November, outpacing the consensus forecast of +3.9%.

The monthly figures showed that the UK consumer prices arrived at +0.5% in December vs. +0.3% expectations and +0.7% prior.

Main points (via ONS):

“The largest upward contributions to the December 2021 CPIH 12-month inflation rate came from housing and household services (1.31 percentage points) and transport (1.29 percentage points, principally from motor fuels and second-hand cars).”

“The largest upward contributions to the change in the CPIH 12-month inflation rate between November and December 2021 came from food and non-alcoholic beverages, restaurants and hotels, furniture and household goods, and clothing and footwear.”

“These were partially offset by large downward contributions to change from transport, and recreation and culture.”

GBP/USD reaction

In an initial reaction to the upbeat UK CPI numbers, the GBP/USD pair ticked a few pips higher to clinch fresh daily highs of 1.3617 before reversing quickly to pre-data release levels of around 1.3605. The spot is up 0.08% on the day.

GBP/USD technical levels

Central bank will do what it takes to get inflation back to 2% level.

French economic growth is good but there is too much inflation.

more to follow ...

• USD/CAD keeps bounce off daily bottom but stays negative on a day around weekly low.
• Oil prices step back from multi-year high on news that Iraq-Turkey oil pipeline will re-open soon.
• Market sentiment dwindles with yields trimming early Asian gains but the stock futures keep the red.

USD/CAD dribbles around 1.2500, down 0.12% intraday heading into Wednesday’s European session.

The loonie pair dropped to the weekly bottom surrounding 1.2485 earlier in Asia before the latest rebound to 1.2512. Even so, the pair remains negative for the third consecutive day amid mixed concerns.

The quote’s latest weakness could be linked to the pullback in Canada’s main export item, WTI crude oil. The oil benchmark refreshed an eight-year high earlier in Asia on news of a pipeline explosion, as well as Russia-Ukraine tussles. However, the latest comment from the Turkish officials, stating that the oil pipeline will reopen in an hour, is likely to have triggered the black gold’s pullback to $85.26.

Elsewhere, the US 10-year Treasury yields also retreat from a two-year high of 1.89%, flashed earlier in the day, to 1.87% at the latest, which in turn add to the US dollar’s pullback from the weekly high. Though, the stock futures in the US and Europe remain negative and probe the greenback bears.

That said, USD/CAD pair traders will keep their eyes on the US Housing Starts and Building Permits for December for immediate direction ahead of the BOC Consumer Price Index (CPI) data.

Given the escalating odds of the BOC’s rate hike, firmer prints of the Canadian inflation data will exert additional downside pressure on the USD/CAD prices. However, oil prices and Treasury yields are also important catalysts to watch for clear direction.

Read: Yields and oil continue to move higher hurting equities

Technical analysis

USD/CAD bears need to conquer the 200-DMA and an upward sloping support line from June, close to 1.2500 and 1.2460 in that order to excel. On the contrary, the 100-DMA and a monthly resistance line restrict the short-term upside of the USD/CAD prices respectively around 1.2620 and 1.2635. Overall, sluggish oscillators and failures to rebound keep the pair sellers hopeful.

• Gold price licks its wound amid a pause in the US Treasury yields rally.  
• US dollar tracks yields pullback amid a risk-off market environment.
• Gold 2022 Outlook: Correlation with US T-bond yields to drive yellow metal.

The price action around gold remains driven by the US Treasury yields and the dollar, as the narrative of aggressive Fed’s tightening of its monetary policy remains in play. The benchmark US 10-year yields ease from a new two-year high near $1.90%. The prevalent risk-off market mood also aids the rebound in gold price. Investors continue to fret over the outlook for Fed rate hikes. The Fed speculation and US housing data will be closely followed for a fresh trading impetus on gold price.

Read: Gold Price Forecast: XAU/USD eyes additional declines amid firmer yields, $1,806 support holds the key

Gold Price: Key levels to watch

The Technical Confluences Detector shows that the gold price is struggling to extend the bounce above a strong hurdle around $1,814, which is the convergence of the Fibonacci 38.2% one-day, Fibonacci 23.6% one-month and SMA200 one-hour.

A firm breakthrough the latter could fuel a fresh upswing towards $1,820, the confluence of the SMA5 one-day and Fibonacci 23.6% one-week.

Further up, the previous day’s high of $1,823 will challenge the recovery. At that level, the pivot point one-day R1 coincides.

On the flip side, powerful cushion is seen around $1,807, the point of intersection of the Fibonacci 61.8% one-week, the previous day’s low and pivot point one-day S1.

The additional downside will call for a test of the Fibonacci 38.2% one-month at $1,800.

The pivot point one-week S1 at $1,795 will be the level to beat for gold bears.

Here is how it looks on the tool

About Technical Confluences Detector

The TCD (Technical Confluences Detector) is a tool to locate and point out those price levels where there is a congestion of indicators, moving averages, Fibonacci levels, Pivot Points, etc.  If you are a short-term trader, you will find entry points for counter-trend strategies and hunt a few points at a time. If you are a medium-to-long-term trader, this tool will allow you to know in advance the price levels where a medium-to-long-term trend may stop and rest, where to unwind positions, or where to increase your position size.

Bank Indonesia (BI) should keep the monetary policy unchanged at its meeting later this week, while it could raise rates in the second half of the year, commented Lee Sue Ann, Economist at UOB Group.

Key Quotes

“Since inflation is still below the 2%-4% of BI’s target range, the central bank will have the policy space to remain accommodative to support the economic recovery.”

“We keep our BI rate forecast to stay at current level of 3.50% in the near term and to start hiking its benchmark interest rates in the latter half of 2022.”

Considering preliminary readings from CME Group for crude oil futures markets, traders added around 14.4K contracts to their open interest positions on Tuesday, extending the uptrend in place since the beginning of the new year. Volume, instead, remained choppy and shrank by around 26.6K contracts.

WTI on its way to $100/bbl?

Crude oil prices extended the rally on Tuesday on the back of rising open interest, which remains indicative of further gains in the very near term at least. However, the decrease in volume seems to support the likeliness of a corrective move soon in WTI. The latter is reinforced by the current overbought levels in the commodity, as per the daily RSI around 71.

• NZD/USD extends bounce off weekly low to rise the most among G10 currency pairs.
• 200-SMA, one-week-old descending trend line restricts short-term upside.
• Bears need validation from monthly upward sloping support line.
• RSI rebound, easing bearish bias of MACD adds strength to the recovery hopes.

NZD/USD pokes the short-term key resistance while grinding higher around 0.6790 heading into Wednesday’s European session.

The Kiwi pair carries the previous day’s bounce off a one-month-old ascending trend line to lead the G10 currency pair gainers, up 0.32% intraday at the latest.

However, a convergence of the 200-SMA and a one-week-long descending trend line, around 0.6790-95, become the short-term key hurdles to test NZD/USD rebound.

In a case where NZD/USD bulls cross 0.6810, a run-up towards the two-month-old horizontal area surrounding 0.6890-95 will gain the market’s attention.

Meanwhile, NZD/USD pair’s further declines hinge on the clear break of an upward sloping support line from December 20, near 0.6750.

Following that, a slump to the year 2021 trough surrounding 0.6700 will be imminent while the 61.8% Fibonacci Expansion (FE) of the pair’s moves between November 15 and December 24, near 0.6650, will be in focus afterward.

NZD/USD: Four-hour chart

Trend: Further recovery expected

Bank Negara Malaysia (BNM) could start its tightening cycle in the second half of the current year, suggested Economist at UOB Group Lee Sue Ann.

Key Quotes

“Given further fiscal policy support from Budget 2022 and a nascent recovery, we continue to expect BNM to stand pat on OPR until mid-2022 and thereafter, we expect a 25 bps rate hike to 2.00% in 3Q22.”

“We think potential triggers for earlier rate hikes would be a more robust and stable domestic growth in coming months and signs of wider pass-through of higher costs to consumers as the economy recovers.”

CME Group’s flash data for gold futures markets noted open interest rose for the second session in a row on Tuesday, this time by around 9.5K contracts. In the same line, volume reversed the previous daily pullback and went up by around 278.4K contracts to more than 485K contracts, the largest volume since November 22 2021.

Gold poised to challenge $1,800

Gold continued to correct lower after hitting tops near $1,830 during last week. Tuesday’s downtick was on the back of declining open interest and volume and opens the door to the continuation of the downtrend in the very near term with the immediate target at the $1,800 mark per ounce troy.

One-month risk reversal (RR) of AUD/USD drops the most since November 26 on weekly basis, per data source Reuters. That said, the spread between call and put options prints -0.150 level at the latest.

The daily print, however, shows an easing bearish bias with the -0.25 level for Wednesday, versus the -0.150 figure for the previous day.

Although the options market portrays the trader’s bearish bias on the weekly format, AUD/USD prices consolidate the recent losses around 0.7200 by the press time of the pre-European session on Wednesday.

That said, risk-off mood and firmer US Treasury yields are the key catalysts that seem to weigh on the AUD/USD prices of late. However, cautious optimism by the Aussie policymakers and an absence of major data/events seem to limit the pair’s further downside.

Read: AUD/USD Price Analysis: Bounces off six-week-old support towards 0.7200

India’s retail inflation rate is likely to stay elevated between 5% and 7% through the next six months, Pronab Sen, Chairman of India’s Economic Statistics Panel, said on Wednesday.

Key quotes

“As long as the wholesale price index inflation is high, it means the costs of inputs are rising.”

“Sooner or later, this is going to get passed on, else the manufacturers of finished goods will be taking a huge hit on the margins.”

“The current wave will not impact the government revenue as it affects the unorganized sector more.”

“So, the GDP impact could be fairly small as the impact of Omicron is likely to be over by March.”

Market reaction

Despite the discouraging comments on inflation, the Indian rupee retreats from three-week lows against the US dollar.

The spot is now trading at 74.60, almost unchanged on the day, having spiked to three-week highs of 74.88 on aggressive Fed rate hike calls for March.

Lee Sue Ann, Economist at UOB Group, expects the PBoC to leave the policy rate unchanged at its next event on Thursday.

Key Quotes

“We have updated our forecast for the 1Y LPR and the 5Y & above LPR to be further lowered to 3.70% and 4.55% respectively by 2Q22.”

“While this reflects monetary policy divergence between PBoC and other major global central banks (which are either tightening or on the cusp of tightening interest rates), it should be noted that the cuts from PBoC are very minor and limited.”

• GBP/JPY extends the previous day’s pullback from 10-DMA, stays pressured at weekly low.
• RSI retreat, U-turn from short-term moving averages favor further sellers.
• 153.35-30 becomes the key support, bulls need validation from three-month-old horizontal area.
• When are the UK CPIs and how could they affect GBP/USD?

GBP/JPY stays depressed near the weekly bottom, down 0.17% intraday near 155.50 as traders await UK Consumer Price Index (CPI) data during early Wednesday.

That said, the cross-currency pair’s failure to cross the 10-DMA level during the early Tuesday’s advances joins RSI retreats to direct traders to attack the 21-DMA.

It should, however, be noted that the quote’s daily closing below the 21-DMA level of 155.65 will direct the GBP/JPY bears towards the mid-November highs near 154.75.

Following that, a convergence of the 100-DMA, 50-DMA and 50% Fibonacci retracement level of July-October 2022 upside, near 153.35-30 will be crucial to watch.

Meanwhile, the corrective pullback will again aim to cross the 10-DMA level of 156.50 before jostling with multiple resistances around 157.30.

Even so, a horizontal area comprising multiple levels marked since late October, near 157.70-80, could challenge the GBP/JPY bulls before allowing them to test the year 2021 peak of 158.22.

GBP/JPY: Daily chart

Trend: Further weakness expected

Indonesian Finance Minister Sri Mulyani Indrawati said on Wednesday, “the risks to the economy in 2022 and 2023 include tapering in us and EU, China economic policy, supply disruption.”

Additional comments

“High commodity prices have begun to affect Indonesia’s inflation, but inflation now still mild.”

“Indonesia consumption and production have returned to pre-pandemic levels.”

“Indonesia Q4 GDP seen around 5% YoY, taking 2021 full year growth to 4%.”

Market reaction

In reaction to these above comments, the Indonesian rupiah came under renewed selling pressure, as USD/IDR rose to fresh two-day highs of 14, 377.

The UK CPIs Overview

The cost of living in the UK as represented by the Consumer Price Index (CPI) for December month is due early on Wednesday at 07:00 GMT. Given the recently strong employment data, coupled with the cautious optimism at the Bank of England (BOE), today’s inflation numbers will be watched closely by the GBP/USD traders.

It’s worth noting that BOE Governor Andrew Bailey is also up for a speech following the inflation data release and hence adds extra importance to the scheduled economics.

The headline CPI inflation is expected to rise to 5.2% YoY versus 5.1% prior while the Core CPI, which excludes volatile food and energy items, is likely to ease to 3.9% from 4.0% in December. Talking about the monthly figures, the CPI could ease to 0.3% MoM from 0.7% marked in November.

It’s worth noting that the supply crunch also highlights the Producer Price Index (PPI) as an important catalyst for the immediate GBP/USD direction. That being said, the PPI Core Output YoY may jump from 7.9% to 8.6% on a non-seasonally adjusted basis whereas the monthly prints may remain unchanged at 0.8%. Furthermore, the Retail Price Index (RPI) is also on the table for release, expected to remain intact as 7.1% YoY and 0.7% MoM.

In this regard, analysts at TD Securities said,

How could it affect GBP/USD?

GBP/USD snaps four-day declines to bounce off the weekly low, picking up bids to 1.3600 ahead of Wednesday’s London open. In doing so, the cable pair cheers the US dollar pullback amid mixed concerns over the Fed’s next move and uncertainty over the US stimulus.

Political angst and Brexit woes joined increasing odds of the Fed’s faster rate hike, not to forget Omicron woes in the UK, to weigh on the GBP/USD prices in the last one week. However, the BOE hawks stay on the table and hence today’s inflation data will be crucial to follow.

In this regard, FXStreet’s Yohay Elam says

Key notes

GBP/USD is firming in Asia despite UK political angst

UK Inflation Preview: Hot inflation to send sterling surging, as BOE could go beyond rate hike

About the UK CPIs

The Consumer Price Index released by the Office for National Statistics is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. The purchasing power of GBP is dragged down by inflation. The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as positive (or bullish) for the GBP, while a low reading is seen as negative (or Bearish).

• USD/JPY drops the most in a week following bearish candlestick, refreshes intraday low.
• 50-DMA offers immediate support ahead of an ascending trend line from October.
• Bearish MACD, pullback from 20-DMA also favors sellers.

USD/JPY stands on the slippery grounds to refresh intraday low around 114.35, down 0.25% on a day heading into Wednesday’s European session.

In doing so, the yen pair justifies the previous day’s bearish candlestick formation, as well as a pullback from 20-DMA, amid a downbeat MACD histogram.

It’s worth noting, however, that the 50-DMA level near 114.30 restricts the pair’s immediate declines ahead of the key support line from near 114.00.

During the quote’s weakness past 114.00, the 100-DMA level of 113.15 and December’s low of 112.56 will be in focus.

Alternatively, a 20-DMA level of 115.00 limits the quote’s immediate upside ahead of November’s high near 115.55 and the monthly peak of 116.35.

Overall, USD/JPY buyers are at the test near the key support line.

USD/JPY: Daily chart

Trend: Further weakness expected

The Bank of Japan (BOJ) publishes its full version of the quarterly outlook report, highlighting that “Japan’s import prices continue to show a clear rise.”

Additional takeaways

Market reaction

USD/JPY is testing lows near 114.30, down 0.25% amid an extended pullback in the Treasury yields across the curves, as the risk-off trades intensify.

• Gold pares the biggest daily gains in a week, refreshes intraday low of late.
• Yields stay firmer amid escalating hopes of monetary policy normalization, easing virus woes.
• German inflation data will be important for the day after ECB’s Villeroy cited the need for easing price pressure.

Gold (XAU/EUR) takes offers to refresh intraday low near €1,599 heading into Wednesday’s European session. In doing so, the gold prices in Euro drops the most in a week, down 0.21% intraday by the press time.

That said, the quote refreshed weekly top the previous day after the Euro dropped on the broad US dollar rally tracking the firmer Treasury yields.

It should be noted, however, that the follow-on run-up by the German Bund yields and chatters from the ECB policymakers triggered the XAU/EUR pullback afterward.

France's central bank head and ECB governing council member François Villeroy de Galhau reiterated on Tuesday that French inflation is likely to fall back under 2.0% by the end of 2022. However, should inflationary pressures prove more persistent, he added, he has no doubt that the ECB would adapt its monetary policy faster. 

While reacting to the aforementioned catalysts, EUR/USD pays a little heed to Reuters poll stating, “Eurozone inflation is set to burn hotter throughout 2022 than expected a month ago, which could pressure the European Central Bank to tighten policy once the Omicron wave of the pandemic passes.”

Moving on, the second reading of the German Harmonized Index of Consumer Price (HICP) for December, expected to confirm 5.7% YoY initial forecasts, will be important.

Read: Why $10,000 an ounce for gold may not be that far away

Technical analysis

Gold prices remain pressured around intraday low after failing to cross a downward sloping resistance line from November 19.

Given the sluggish Momentum line and a pullback from the key resistance, XAU/EUR may witness further declines.

However, a confluence of the 50-DMA and 21-DMA, near €1,595 by the press time, will challenge the short-term declines ahead of an ascending trend line from August, close to €1,582.

It should be noted, though, that a clear downside break of €1,582 will make gold prices vulnerable to slump towards the lows marked during November and September 2021, respectively around €1,520 and €1,480.

Alternatively, the aforementioned resistance line limits the quote’s short-term rebound near €1,603.

Following that, the monthly high near €1,614 may act as an intermediate halt during the run-up to the late 2021 peak of €1,654.

To sum up, XAU/EUR remains sidelined for now but the upside momentum seems to have been exhausted in recent days.

Gold: Daily chart

Trend: Further weakness expected

• EUR/USD consolidates the biggest daily loss in two weeks, snaps three-day downtrend with mild gains.
• US Treasury yields keep Fed hawks hopeful ahead of next week’s FOMC, underpinning USD.
• ECBSpeak adds to trading barriers amid sluggish session, mixed sentiment.
• German inflation data, US housing numbers will decorate calendar but bond moves, risk catalysts are the key for fresh impulse.

EUR/USD licks its wounds past 1.1300 after strong US Treasury yields caused the heaviest daily fall in a fortnight. That said, the major currency pair gains 0.10% intraday near 1.1330, rising for the first time in four days by the press time of the pre-European session on Wednesday.

The latest corrective pullback could be linked to the US dollar’s hesitance to track the firmer Treasury at a multi-month high.

That said, the US Dollar Index (DXY) refreshes intraday low near 95.70 while easing from the weekly top. On the other hand, the US 10-year Treasury yields added 1.5 basis points (bps) to 1.88% after refreshing the two-year top to 1.89% during the early Asian session. Coupons of the other key US bond variants, like 2-year and 5-year, also renewed multi-day peaks during the early Asian session during the four-day uptrend before recently grinding higher.

It’s worth noting that the softer US data and slightly hawkish comments from the ECB policymaker, published the previous day, can be cited for the pair’s latest rebound.

The NY Empire State Manufacturing Index slumped to negative for the first time in two years in December, -0.7 versus 25.7 expected and 31.9 prior, whereas US NAHB Housing Market Index eased to 83 versus 84 market forecasts and previous readouts.

On the other hand, France's central bank head and ECB governing council member François Villeroy de Galhau reiterated on Tuesday that French inflation is likely to fall back under 2.0% by the end of 2022. However, should inflationary pressures prove more persistent, he added, he has no doubt that the ECB would adapt its monetary policy faster. 

While reacting to the aforementioned catalysts, EUR/USD pays a little heed to Reuters poll stating, “Eurozone inflation is set to burn hotter throughout 2022 than expected a month ago, which could pressure the European Central Bank to tighten policy once the Omicron wave of the pandemic passes.”

Amid these plays, stock futures in the US and Eurozone remain offered and market sentiment stays sluggish in search for fresh clues.

As a result, the second reading of the German Harmonized Index of Consumer Price (HICP) for December, expected to confirm 5.7% YoY initial forecasts, will be important. Following that, the US Housing Starts and Building Permits for the stated month should be eyed carefully for clear direction.

Above all, the Treasury yields and covid updates are crucial ahead of next week’s Federal Open Market Committee (FOMC) verdict.

Technical analysis

The EUR/USD pair’s slump on Tuesday dragged MACD towards teasing the bears while breaking a two-month-long resistance-turned-support area of around 1.1380-85. However, the 50-DMA level surrounding 1.1325 restricts immediate declines ahead of an upward sloping support line from late November, close to 1.1300 at the latest.

On the contrary, corrective pullback remains elusive below the horizontal area from November 16, near 1.1380-85.

• Asian markets remain track their global counterparts as Treasury yields remain firmer ex-China.
• PBOC’s readiness to defend the world’s second-largest economy keeps buyers hopeful.
• Australia witnesses record virus-led deaths, New Zealand pushes back border reopening.
• Tokyo and the other 12 prefectures are up for quasi-emergency, geopolitics also plays their roles.

Asian shares print losses, just like the rest, as market players brace for faster monetary policy normalization in the US during early Wednesday.

While portraying the mood, MSCI’s index of Asia-Pacific shares ex-Japan drops 0.30% whereas Japan’s Nikkei 225 declines 1.80% heading into the European session.

That said, 10-year Treasury yields of China government bonds dropped to the fresh low since June 2020, around 2.733% by the press time, after the People’s Bank of China (PBOC) official cited readiness to act.

“China's central bank will roll out more policy measures to stabilize the economy and move ahead of the market curve as downward pressure persists,” People’s Bank of China (PBOC) Vice Governor Liu Guoqiang said on Tuesday per Reuters. With this, the US-China 10-year bond coupon spread turns narrowest since 2019.

However, the same can’t defend Chinese equity bulls as markets in Beijing and Hong Kong stay red, which in turn drown shares from South Korea, India, Indonesia.

It’s worth noting that Australian PM Scott Morrison’s failures to placate investors following the record virus-led deaths join hidden fears from New Zealand as the nation pushes back border reopening. Further, odds of quicker RBNZ rate hikes exert additional downside pressure on the NZX 50, down 1.75% daily at the latest.

On a broader front, the US 10-year Treasury yields rose 1.5 basis points (bps) to 1.88% after refreshing the two-year top to 1.89% during the early Asian session. Coupons of the other key US bond variants, like 2-year and 5-year, also renewed multi-day peaks during the early Asian session during the four-day uptrend before recently grinding higher. That said, S&P 500 Futures decline 0.43% intraday at the latest.

In addition to the yields and covid fears, escalating chatters concerning Russia-Ukraine and an Iraq-Turkey oil pipeline explosion also weigh on the market’s sentiment, which in turn drag equities and commodities. Though, the US dollar’s hesitance to track strong Treasury yields help Antipodeans to pare recent losses amid a sluggish session.

Moving on, US Treasury yields and other risk catalysts are crucial for markets while the US housing data and German inflation numbers may offer extra direction.

Read: S&P 500 falls under 4600 to hits fresh annual lows as Fed tightening fears, weak Goldman earnings weigh

• USD/INR Bulls have eyes on 75.20 on US dollar strength. 
• US yields are keeping the US dollar underpinned.

USD/INR is currently trading at 74.7150 and higher by some 0.20% at the time of writing after rising from a low of 74.56 to a high of 74.72. US yields have marked a fresh cycle high in the 10-year Treasury yield which has lifted the greenback, if only marginally.  DXY is testing the psychological 95.80 level:

DXY daily chart

The US dollar could be forming an inverse head and shoulders at this juncture. This will be a bullish scenario around the Federal Reserve next week and should keep USD/INR elevated.

The current resistance has been pierced and would be expected to act as a support if the price breaks and closes above it. In doing so, then the next layer of resistance is near 75.20 for the bulls to target. 

• USD/CHF eases from weekly top after three-day uptrend, inside bearish chart pattern.
• 100-HMA, 23.6% Fibonacci retracement adds to the downside filters, bulls need validation from monthly peak.

USD/CHF pauses weekly rebound, easing to 0.9167 ahead of Wednesday’s European session. In doing so, the Swiss currency (CHF) pair steps back from the 200-HMA inside a short-term rising wedge bearish chart pattern.

Given the pair’s failure to cross the key HMA, coupled with the firmer Momentum and bearish chart pattern, its further declines are likely on the table.

However, a clear downside break of the stated wedge’s support line, near 0.9155, becomes necessary for the USD/CHF sellers to aim for the theoretical target of 0.9070.

Though, a convergence of the 100-HMA and 23.6% Fibonacci retracement (Fibo.) level of January 11-13 downside, near 0.9135, becomes a crucial intermediate halt to test bears.

Meanwhile, the 200-HMA and upper line of the stated wedge, respectively around 0.9180 and 0.9185, guard the quote’s short-term rebound.

Following that, the 61.8% Fibo. level and the monthly high, close to 0.9205 and 0.9280 in that order, will be in focus.

USD/CHF: Hourly chart

Trend: Pullback expected

Amid the booster vaccination shots campaign running across New Zealand, the country’s COVID-19 Response Minister Chris Hipkins told at a briefing on Wednesday that the government will review whether to begin a phased reopening of its border in February.

Key quotes

“We want to give New Zealanders time to get their boosters.” 

“We will be moving to a self-isolation model; the question is exactly what the date is.”

“We want to keep omicron out of the community.”

“Our plan is to move to self-isolation” for arrivals and “that’s exactly what we are working towards. We’ve still got decisions to make about the end of February date and whether there are any changes to that.”

Related reads

• Border closures create trouble for New Zealand’s dairy farms, escalating labor shortage
• NZD/USD leads G10 gainers below 0.6800 as USD struggles to cheer strong yields

• GBP/USD is a mix of bad UK political situation and cleaner bill of covid health. 
• The BoE will be the focus for the day ahead along with UK CPI and PM Johnson's question time in Parliament. 

GBP/USD is a touch higher in Asia in a subdued market setting with the US dollar and yields stealing the show so far. At 1.3604, the price is 0.07% higher after rising from a low of 1.3585 to reach a high of 1.3605 so far. The US dollar, meanwhile, is attempting to make its claim to the 95.80s, but is lacking momentum is a quiet start to Wednesday's trade. 

The focus on the domestic front is political. The ''Partygate'' scandal has taken the tabloids front pages in the UK for some time for which PM Boris Johnson has denied any wrongdoing. However, the public is of a different opinion, and so too are the Conservative party rebels. 

The PM's attendance at the “bring your own booze” Downing Street garden party during England’s first lockdown in May 2020, is throwing his premiership in jeopardy and the political uncertainty is a weight for the pound. Some MPs are refusing to accept his claim that he thought it was a “work event”.

''Johnson will attempt to contain the rebellion by announcing a lifting of Covid-19 restrictions in England — a move popular with Tory MPs — but one ally said there was a “50-50 chance” he could soon face a confidence vote, the FT recently reported.

''Downing Street is eyeing the prospect of a northern rebellion nervously, and some rebel Tory MPs claim they will soon have the necessary 54 letters required to trigger a confidence vote in Johnson.''

Today, Johnson is going to be setting out plans to end many Covid-19 restrictions in England when they legally expire on January 26. The pound will likely find solace in that as the positive sentiment around improving trends recently in Covid infection rates and hospital admissions will be sure to boost consumer and business confidence in the UK.  According to the latest NHS data, Covid-related hospital admissions are falling in every region of England.

With that being said, if Johnson is found to have misled Parliament about the Downing street parties, then the expectations would be for him to resign. Meanwhile, markets will be eagerly awaiting the Gray report which will not be published until next week.  

Sue Gray, a UK civil servant, has been tasked to investigate the Partygate scandal and depending on what Sue Gray's report finds, it could lead to officials facing disciplinary proceedings and possibly even dismissal. Her inquiry matters for one key reason: it may provide the spark and the ammunition that brings Johson’s government to an end.

UK data and BoE in focus

Meanwhile, the UK economic calendar has been and will continue to be important this week. On Tuesday, the British employers added a record number of staff in December failed to prop up sterling, despite the Unemployment Rate that fell slightly to 4.1% (vs. expectations: 4.2%). Both headline and ex-bonus wage growth continued to fall as more base effects disappear from the data, with headline wage growth falling slightly.

''Employment data for the three months ending in November continued to confirm the MPC's view that the transition from the furlough scheme went relatively smoothly,'' analysts at TD Securities explained. 

Markets will now turn to today's inflation release, ''but as it stands'', the analysts at TDS said, the ''labour report should pave the way for another rate hike in February—in line with our expectations—especially as Omicron appears to have had a relatively benign impact on the economy compared to previous waves.''

Headline UK inflation is seen ticking up to 5.2% year from 5.1%, with core inflation at 3.9%. 

Separately, Governor Bailey appears before the Treasury Select Committee at Parliament alongside Deputy Governor Jon Cunliffe and two other FPC members to discuss the latest Financial Stability Report.

''While monetary policy is not on the agenda, this is the first public appearance by an MPC member (other than external member Catherine Mann) since the week of the MPC's December rate hike, and comes just a week before the blackout period for February's MPC meeting kicks in,'' analysts at TD Securities said.

''As such, it's a prime opportunity for the Governor to provide some guidance for the February meeting, for which markets currently see about a 90% chance of a 25bp rate hike (it's our base case as well).''

Despite the latest uptick in NZD/USD, growing concerns in New Zealand’s dairy sector could provide headwinds to the kiwi dollar going forward.

According to Bloomberg, coronavirus pandemic-induced border closures and the country’s tightening labor market have led to a shortage of as many as 6,000 workers in New Zealand’s dairy industry.

Tim Mackle, Chief Executive of DairyNZ, said in a statement Tuesday, “the government is granting exemptions that will allow 200 foreign dairy workers to come into the country, but that is insufficient to fill the shortfall.”

Additional quotes

“Border closures and an unemployment rate at 3.4% are creating ongoing stress for dairy farmers.”

“Without the right number of people on farm, it puts animal welfare at risk, constrains the sector’s ability to make environmental progress, and places a greater burden on increasingly stretched teams, with staff often having to work extraordinary hours.”

“There is no point having the class exception if people can’t actually then get into the country due to border restrictions.”

“We are exploring on-farm isolation as an option. Farms are already away from communities, and farmers are used to maintaining good hygiene standards.” 

Market reaction

NZD/USD has defied the discouraging news, as kiwi bulls cheer ANZ's latest forecast for a higher Reserve Bank of New Zealand (RBNZ) cash rate.

ANZ bank now expects the RBNZ 'Official Cash Rate' (OCR) to peak at 3% in April 2023.

The pair was last seen trading at 0.6778, higher by 0.14% on the day.

• US 10-year, 5-year T-bond yields poke January 2020 tops, 2-year coupons remain sturdy around 22-month high.
• China’s 10-year Treasury yields drop to fresh low since June 2020.
• Stock futures refrain from tracking Wall Street losses amid sluggish sessions.
• Geopolitics, Omicron will join US housing data to also direct market moves.

Market sentiment dwindles during early Wednesday, following the heavy risk-off day, as Fed hawks seek confirmation of the previously hawkish bias from the Fed during a non-event Asian session.

That said, the US 10-year Treasury yields rose 1.5 basis points (bps) to 1.88% after refreshing the two-year top to 1.89% during the early Asian session. Coupons of the other key US bond variants, like 2-year and 5-year, also renewed multi-day peaks during the early Asian session during the four-day uptrend before recently grinding higher.

On the other hand, 10-year Treasury yields of China government bonds dropped to the fresh low since June 2020, around 2.733% by the press time, after the People’s Bank of China (PBOC) official cited readiness to act.

“China's central bank will roll out more policy measures to stabilize the economy and move ahead of the market curve as downward pressure persists,” People’s Bank of China (PBOC) Vice Governor Liu Guoqiang said on Tuesday per Reuters.

With this, the US-China 10-year bond coupon spread turns narrowest since 2019.

It’s worth observing that the virus-led deaths are gradually rising and the geopolitical tension between Russia and Ukraine also escalates of late, which in turn weighs on the US stock futures and Asia-Pacific equities.

Even so, major attention is given to the Fed’s rate hikes as markets await the next week’s Federal Open Market Committee (FOMC) verdict. Per the latest data, the Fed rate is likely to cross the 1.0% threshold during early 2023, which n turn favor yields and the US dollar. As a result, commodities and Antipodeans have additional downside to trace.

Read: FX risk aversion intensifies as yields hit pre-covid highs

• WTI grinds higher around multi-year top during four-day uptrend.
• Sluggish markets test bulls even as Russia-Ukraine tussles, Iraq-Turkey oil pipeline explosion favor further upside.
• Omicron fears battle China’s readiness for more stimulus amid a non-event Asian session.
• Weekly private inventory data, risk catalysts are the key.

WTI crude oil stays on the front foot around the highest levels since October 2014, recently taking rounds to $86.20-30 during Wednesday’s Asian session.

Market’s optimism to overcome the Omicron woes and hopes of further stimulus from China join geopolitical risks to keep the oil buyers hopeful. Recently adding to the bullish bias is the US dollar’s refrain from tracking multi-year high yields.

It should, however, be noted that the US policymakers are worried over the price rally and wants to tame the energy boom and are also showing readiness to seek help from the Organization of the Petroleum Exporting Countries (OPEC). “We still have tools at our disposal to deal with rising oil prices and will engage OPEC as needed,” said White House (WH) Spokesperson, per Reuters.

On a price-positive side, Turkish state-owned media Botas reported an oil pipeline explosion and fire that carries around 450kb/d of crude oil from Iraq to Turkey. Furthermore, Russia’s aggression towards Ukraine and Iran’s repeated rejection of the global push towards denuclearization are some other favorable factors that favor WTI oil bulls of late.

Read: Russia’s aggression toward Ukraine could escalate into conflict

It’s worth noting that hints of more stimulus from the world’s largest energy consumer, China, also add strength to the oil prices. “China's central bank will roll out more policy measures to stabilize the economy and move ahead of the market curve as downward pressure persists,” People’s Bank of China (PBOC) Vice Governor Liu Guoqiang said on Tuesday per Reuters.

Moving on, the weekly industry inventory figures from the American Petroleum Institute (API), -1.077M prior, will join the US Housing Starts and Building Permits for December to decorate today’s calendar. However, major attention will be given to the risk catalysts.

Technical analysis

Unless dropping back below the 2021 peak of $85.40, WTI crude oil prices are likely to aim for January 2014 low near $91.30. During the run-up, the $90.00 psychological magnet will act as the key hurdle.

The US and UK trade teams are expected to announce intent on Wednesday to launch formal talks to resolve trade disputes over steel and aluminium tariffs, Reuters reports, citing a source familiar with plans.

US Commerce Secretary Gina Raimondo and UK Trade Secretary Anne-Marie Trevelyan will meet Wednesday to discuss the same, the source added.

Market reaction

GBP/USD catches a fresh bid on the above headlines and recaptures 1.3600, currently trading at 1.3604, up 0.07% on the day.

Analysts at Morgan Stanley remain neutral on the GBP/USD pair despite potential four Bank of England (BOE) interest rate hikes over the next 12 months.

Key quotes

"We remain neutral on GBP/USD but see increasing downside risks on crosses as growth headwinds from surging inflation, Brexit adjustment, and substantial fiscal consolidation, alongside market expectations for 4 rate hikes and already long positioning, means GBP is likely to lag its G10 peers."

"Markets are now pricing in four hikes over the next 12 months, which we think is overdone given the tepid growth outlook. We will be watching the February BoE meeting closely too, particularly for guidance on how it sees the future rate path and the effects of QT."

A 50-basis point (bps) interest rate hike is warranted at the Fed’s March meeting, Anna Wong, Chief US Economist for Bloomberg Economics said on Wednesday.

“Our in-house model of a Fed reaction function -- the Bloomberg Economics rule ("BE rule") -- suggests that a 50 basis-point rate hike at the March meeting is warranted, followed by another five 25 basis-point rate hikes the rest of the year,” she explained.

developing story ....

• US dollar firms as US yields are on the rise in Asian markets. 
• The US ten-year Treasury yield prints a fresh cycle high and the DXY takes on the prior daily support. 

In recent trade, despite the quiet Asian session, US yields have marked a fresh cycle high in the 10-year Treasury yield which has lifted the greenback, if only marginally. At the time of writing, DXY is testing the psychological 95.80 level. This is a significant area as per the following technical analysis below. 

Meanwhile, the price is back above support levels that have held for the past few months in anticipation of rising US interest rates. The US Federal Reserve meets to set policy next week. In the absence of Fed speakers during the blackout period, the markets have been second-guessing what the outcome of the meeting might be. The greenback has been performing in tow with rising US yields and bouts of risk-off in broader financial markets which are gearing up for the potential of another hawkish surprise.

The yield curve bear flattened as traders have put their focus on Fed hikes, pricing in the first-rate hike in March 2022, and four hikes throughout 2022. The 2-year government bond yields rose from 1.00% to 1.063%, and the 10-year government bond yields rose from 1.80% to 1.89% over the past 24 hours or so.'' With the 10-year breakeven inflation rates stuck below 2.50%, the real US 10-year yield rose to -0.66%, the highest since April 2021.

''This week’s price action reaffirms our view that last week’s drop in yields and the dollar were a countercyclical correction, not a trend change as many dollar bears believed,'' analysts at Brown Brothers Harriman explained. 

''Given this way US yields are moving, it’s clear that the Fed’s full-court press last week made a significant impression on the bond market. We fully expect a hawkish hold next week that sets up liftoff at the March 15-16 meeting,'' the analysts added further.

''WIRP suggests a hike then is now fully priced in, followed by hikes in June, September, and December.  The expected terminal Fed Funds rates is also starting to move towards 2.0%, which is a key part of the market repricing.  That said, we feel that this repricing still has some ways to go.''

DXY technical analysis

The US dollar could be forming an inverse head and shoulders at this juncture which is a bullish pattern that leads us into the Federal Reserve meeting. The right-hand shoulder is yet to form and it will be worth monitoring over the coming days. 

• AUD/USD portrays corrective pullback around weekly low, snaps four-day downtrend.
• Short-term support break joins bearish MACD signals, downbeat RSI to favor sellers.
• Bulls need validation from 0.7280 to retake control.

AUD/USD picks up bids to refresh intraday high around 0.7190, up 0.11% on a day during Wednesday’s Asian session.

In doing so, the Aussie pair not only recovers from a one-week low flashed the previous day but also prints daily gains for the first time in five days.

The corrective pullback could be linked to the pair’s U-turn from an upward sloping trend line from early December. However, a clear downside break of the weekly support line joins bearish MACD signals and sluggish RSI to keep sellers hopeful.

That said, the latest recovery may aim for the previous support line near 0.7215 but monthly horizontal resistance near 0.7280 becomes the key hurdle to watch afterward.

Should the quote rises past 0.7280, the latest peak of 0.7315 and a descending resistance line from May, near 0.7400 will be crucial to watch.

On the flip side, the stated support line near 0.7170 precedes an ascending trend line from December 20, close to 0.7155, to limit short-term AUD/USD downside.

Following that, 61.8% Fibonacci retracement of December-January upside, near 0.7115, as well as December 20 trough near 0.7080, will challenge AUD/USD sellers.

AUD/USD: Four-hour chart

Trend: Further recovery expected

• NZD/USD picks up bids towards intraday high, rebounds from weekly low.
• DXY grinds higher even as Treasury yields refresh multi-day tops.
• NZ policymakers will hold cabinet meeting to discuss traffic light restrictions.
• US housing data, risk catalysts eyed for fresh impulse.

NZD/USD rises to 0.6775, up 0.14% daily while consolidating the previous day’s losses during early Wednesday. In doing so, the Kiwi pair snaps a three-day downtrend to bounce off the weekly low flashed the previous day.

The quote’s recent rebound could be linked to the US dollar’s resistance to track the strong Treasury yields, as well as cautious sentiment ahead of New Zealand policymakers’ cabinet meeting.

“There are 24 Covid-19 cases in the community - the last data Cabinet ministers will consider before meeting this afternoon to discuss current traffic light settings. There are 56 new cases detected at the border,” per NZ Herald.

That said, the US Dollar Index (DXY) seesaws around 95.75-80, up 0.03%, following the biggest daily jump in 12 days the previous day.

It should be noted the US 10-year Treasury yields gained one basis point (bps) to refresh the highest levels since early 2020 around 1.88% by the press time. Coupons of the other key US bond variants, like 2-year and 5-year, also renewed multi-day peaks during the early Asian session during the four-day uptrend before recently grinding higher.

Firmer US Treasury yields exert downside pressure on the equities and commodities but the DXY’s refrain from rising further allows the Kiwi pair traders to pare the previous day’s losses.

In addition to the virus conditions and US Treasury yields, geopolitical risks concerning Russia and Ukraine also challenge NZD/USD traders.

Even so, a corrective pullback can’t be ruled out considering the absence of major data/events, except for the US Building Permits and Housing Starts for December. Also likely to favor the short-term rebound is the absence of Fedspeak ahead of next week’s Federal Open Market Committee (FOMC). However, yields are the key catalysts to watch for clear direction.

Technical analysis

Despite the latest corrective pullback, NZD/USD stays below the 200-SMA on the four-hour chart, backed by bearish MACD signals and downbeat RSI, not oversold. However, the kiwi pair’s further declines hinge on the clear break of an upward sloping support line from December 20, near 0.6750.

On the flip side, 200-SMA and a one-week-long descending trend line, respectively around 0.6790 and 0.6810, will be short-term key hurdles to test NZD/USD rebound.

In recent trade today, the People’s Bank of China (PBOC) set the yuan (CNY) at 6.3624 vs the estimated 6.3606 and the prior 6.3521.

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 consolidates biggest daily gains in a week within $13.57-50 range.
• Turkish President Erdogan braces for 2022 to be Turkey's "brightest year".
• US Treasury yields seesaw around two-year high amid Fed rate hike concerns.
• Virus woes, yields and geopolitics can entertain traders ahead of Thursday’s CBRT rate decision.

Having cheered the biggest daily run-up in a week, USD/TRY seesaws near $13.50-55 during Wednesday’s Asian session.

In doing so, the Turkish lira (TRY) pair struggles to justify President Recep Tayyip Erdogan’s confidence to overcome the inflation fears and mark 2022 as the “brightest year”. The reason for the pair traders’ skepticism could be linked to the pre-CBRT caution and strong US Treasury yields.

“President Tayyip Erdogan said that he was pleased with the lessening in lira volatility and that the government was working on steps to increase interest in the Turkish currency, state media reported on Tuesday,” per Reuters. The news also stated Erdogan’s expectations suggesting that the interest rates, exchange rates and inflation will gradually fall.

It should be observed that the Turkish central bank (CBRT) is reportedly said to hold an extraordinary general assembly on February 3, Reuters reports, citing a newspaper advertisement on Tuesday.

Elsewhere, the US 10-year Treasury yields gained one basis point (bps) to refresh the highest levels since early 2020 around 1.88% by the press time. Coupons of the other key US bond variants, like 2-year and 5-year, also renewed multi-day peaks during the early Asian session during the four-day uptrend before recently grinding higher.

Looking forward, the firmer US Treasury yields can keep USD/TRY buyers hopeful but Thursday’s CBRT decision will be the key. Forecasts suggest no change in the headline 14% rate but Erdogan is known to push the central bank towards more rate changes and might reveal the surprise.

Technical analysis

Although the 20-DMA level near $13.05 restricts the short-term downside of the USD/TRY prices, a weekly resistance line near $13.65 holds the key to the pair’s run-up to challenge the monthly peak of $13.94.

• Bears are lined up for downside extensions from the critical daily resistance. 
• The bulls need to engage at this important juncture. 

As per the prior analysis, USD/CAD Price Analysis: The hourly 61.8% golden ratio is eyed for the opening sessions, the pair had been in the hands of the bears before the bulls took over for a probe of the recent highs.

USD/CAD prior analysis

The 4-hour chart was showing that the price was meeting the 4-hour resistance structure and was being rejected. This was expected to give rise to a deeper correction into the prior resistance that had a confluence of the 61.8% ratio at 1.25 the figure.

The price has since deteriorated to the mark and slightly beyond as follows:

The price is now at a crossroads. Should the bulls fail to keep control at this juncture, then the CAD would be expected to continue with its trajectory higher vs the US dollar given the resistance at the daily 38.2% Fibonacci:

• USD/JPY seesaws near intraday high, reverses pullback from weekly peak.
• US Treasury yields renew two-year top at the day’s start but stay sidelined of late.
• Escalating fears of faster Fed rate hike, virus woes underpin yields, softer US data, light calendar restricts market moves.
• Second-tier US housing numbers, virus updates may entertain traders.

USD/JPY dribbles near the daily peak of 114.70 during the initial hour of Wednesday’s Tokyo open. The risk barometer pair recently benefited from the firmer US Treasury yields. However, concerns relating to the South African covid variant, namely Omicron, join geopolitical tensions and a light calendar to test the pair buyers.

That said, the US 10-year Treasury yields gained one basis point (bps) to refresh the highest levels since early 2020 around 1.88% by the press time. Coupons of the other key US bond variants, like 2-year and 5-year, also renewed multi-day peaks during the early Asian session during the four-day uptrend before recently grinding higher.

A jump in the Fed Fund Futures indicates faster rate hikes and monetary policy normalization of late, which in turn propel the US Treasury yields in the run-up to the next week’s  Federal Open Market Committee (FOMC).

Read: Fed preview: End of money printing brrrrr – Four 25bp rate hikes this year and QT in September

Even so, a two-year low of the NY Empire State Manufacturing Index slumped to negative in December, -0.7 versus 25.7 expected and 31.9 prior, joined the US NAHB Housing Market Index that eased to 83 versus 84 market forecasts and previous readouts to probe the Fed hawks.

It’s worth observing that escalating geopolitical tensions between Russia and Ukraine, as well as worsening covid conditions in China, Japan and Australia, seem to challenge the USD/JPY bulls despite the firmer yield favor further upside. “Japan on Wednesday will decide to place Tokyo and 12 other areas under a coronavirus quasi-state of emergency as the rapid spread of the Omicron variant lifts nationwide COVID-19 cases to new records and threatens to stretch the health care system,” said Kyodo News.

Also read: Russia’s aggression toward Ukraine could escalate into conflict

Amid these plays, S&P 500 Futures print mild losses while Japan’s Nikkei 225 drops 1.85% at the latest.

Looking forward, US Treasury yields and other risk catalysts are the keys for the USD/JPY traders while the US housing data may offer extra direction.

Technical analysis

Tuesday’s Gravestone Doji candlestick below the 10-DMA level of 114.90 suggests the USD/JPY pullback towards an ascending support line from early October, near 114.15.

• GBP/USD bulls could start to engage at a discount. 
• Bulls will be looking for a break into fresh highs on the daily chart.

As per the prior analysis, GBP/USD Price Analysis: To follow in the euro's footsteps, 1.3690 is critical, cable has moved in on a deeper layer of support.

GBP/USD prior analysis

The price was under pressure in the above analysis and the US dollar flexed its muscles in overnight trade, sending cable down a notch as follows:

If bulls start to engage at this juncture at a discount to the prior levels, then demand could build and see the price rally in days to follow in a bullish extension. 

GBP/USD 4-hour chart

The bulls will need to get over the 4-hour structures near 1.3650 and 1.3690.

“Eurozone inflation is set to burn hotter throughout 2022 than expected a month ago, which could pressure the European Central Bank to tighten policy once the Omicron wave of the pandemic passes,” per the latest Reuters poll published during Wednesday’s Asian session.

Key quotes

Read: EUR/USD Price Analysis: Bears take a breather ahead of 1.1300 key support

• AUD/USD licks its wounds near one-week low after four-day downtrend, retreats from daily high.
• Aussie PM tries to defend record virus-led deaths, surge in hospitalizations in NSW.
• Australia Westpac Consumer Sentiment eased in January, US NY Empire State Manufacturing Index drops to two-year low.
• Second-tier US housing data will decorate calendar but higher attention will be given to yields and Fed rate-hike expectations.

AUD/USD consolidates recent losses around the weekly bottom, recently grinding at the intraday top near 0.7190 during Wednesday’s Asian session.

The pair’s recent corrective pullback, which snapped a four-day downtrend, could be linked to cautious optimism by Australia PM Scott Morrison and a pause in the US Treasury yields after refreshing multi-day high. Even so, softer Aussie data and concerns over the Fed’s next moves, as well as relating to South African covid variant, namely Omicron, keep the AUD/USD prices capped.

The risk barometer pair dropped for the fourth consecutive day by the end of Tuesday’s North American session, also poked the lowest levels since December 11, as market sentiment turned sour amid increasing hopes of faster Fed rate hikes. Adding to the bearish bias was escalating Omicron's fears.

That said, Aussie PM Morrison recently said that Australia is still "doing better than almost every other country in the world when it comes to even the large number of more than 350 deaths in the course of the past week," per ABC News. The national leader appeared for a press conference after the virus-led deaths rose past 50 for the last two days. It’s worth noting that the nation’s most populous state New South Wales (NSW) recently reduced booster wait time to three months.

Read: Australian PM Morrison: Have not received advice to shorten the isolation rules

Talking about the data, Australia Westpac Consumer Confidence eased to 102.2 versus 104.30 for January. It’s worth noting that, NY Empire State Manufacturing Index slumped to negative for the first time in two years in December, -0.7 versus 25.7 expected and 31.9 prior, whereas US NAHB Housing Market Index eased to 83 versus 84 market forecasts and previous readouts.

Amid these plays, US 10-year Treasury yields refresh two-year high near 1.88%, up 1.8 basis points (bps) whereas S&P 500 Futures remain directionless after a negative performance of the Wall Street benchmarks.

Moving on, increasing confidence over the Fed’s faster monetary policy normalization can keep fueling the yields and weigh on AUD/USD prices. Also challenging the quote are the virus woes and geopolitical tensions between Russia and Ukraine.

Technical analysis

Having reversed from the 100-DMA, AUD/USD stays directed towards an ascending support line from December 03, around 0.7165 at the latest. The bearish bias takes clues from the downbeat MACD and RSI conditions.

However, a monthly ascending trend line near 0.7150 adds to the downside filters before giving controls to the sellers targeting the 2021 bottom surrounding 0.6990. During the fall, August month’s low near 0.7105 will act as a buffer.

Meanwhile, the 100-DMA and the monthly top, respectively around 0.7285 and 0.7315, restrict the short-term AUD/USD upside.