Market recap & fx update 2/10/22

FX Thoughts on a Thursday - February 10, 2022

Good morning,

Today’s the day!!! All eyes will be focused on the release of the January Consumer Price Index at 8:30 am, EST. Analysts expect the number will be big; almost certainly the biggest since 1982. If the annual advance in the consumer price index comes in above the consensus of 7.2%, according to Bloomberg or 7.3%, according to FactSet, then expectations will quickly point to the Federal Reserve raising rates by a half point, rather than the anticipated quarter point, at its next meeting, in March. The core CPI, which excludes food and energy costs, is expected to come in at an 5.9% annual pace. An extremely high inflation number would likely again create volatility in the market, which has only recently calmed down over the emergence of a newly hawkish Fed. Today, the CME FedWatch tool was pricing in a 25% chance of a rate bump of 50 basis points in March, a slight pullback from yesterday, when it was 29%. According to analysts, since the Fed hasn’t taken a half-point boost off the table, or at least commented that it would be extremely unlikely, the market is going to continue to consider it. The Fed’s has made it clear that it will be reacting to one variable and that is inflation, so today’s release will be fairly significant. And let’s not forget that if this number comes in much lower than expected, investors will once again have to reassess their expectations. That seems unlikely as the consensus for annual CPI has been between 7…0% and 7.4%, according to Bloomberg. Also being released today at 8:30, am EST the Labor Department reports on initial claims for state unemployment benefits for the week ended Feb. 5 and it is expected to ease slightly to 230,000 claims versus last week’s 238,000 claims. US equities had a good day yesterday as all three indices recorded gains, with the DOW rising 305 points, the S&P 500 rising 1.45% and the NASDAQ rising 2.0%. Later today Twitter, Coca-Cola, PepsiCo and Expedia will be among those reporting quarterly results. As we begin trading today, equity futures are mixed with the DOW slightly positive and the S&P 500 and NASDAQ slightly negative. US treasury yields are slightly higher ahead of the inflation release, with the 10-year note trading at 1.9406% and the 30-year bond at 2.2465%. The dollar is trading higher against the JPY this morning, and a bit lower against the EUR and GBP.

EUR/USD is trading just below overnight highs this morning after testing resistance levels near 1.1450. Technically, the currency pair has moved above the moving averages as the 50 and 100-day moving averages consolidate at slightly lower levels. RSI has been rising throughout the overnight period and is currently trading at 61. After trading rather quietly throughout most of yesterday’s session, the currency is edging higher throughout the European session. In an interview with the Die Zeit newspaper yesterday, ECB Council member Joachim Nagel gave his support to a rate hike occurring before the end of the year. According to Nagel, “the economic costs of acting too late are significantly higher than acting early,” His hawkish comments did not seem to affect EUR trading yesterday but it is significant that council members are beginning to speak of rate hikes. The European Commission announced earlier today that it raised the Eurozone 2022 inflation forecast to 3.5% from 2.2% in November’s forecast, as reported by Reuters. For 2023, the Commission sees inflation at 2.2%, compared to 1.7% in November. According to the report, “multiple headwinds have chilled Europe’s economy this winter: the swift spread of Omicron, a further rise in inflation driven by soaring energy prices and persistent supply-chain disruptions,” European Economic Commissioner Paolo Gentiloni said, in an interview published by Reuters. He added that, ”with these headwinds expected to fade progressively, we project growth to pick up speed again already this spring.”

GBP/USD has moved higher this morning, testing resistance levels near 1.3580. Technically, the currency pair has moved above the consolidating moving averages which have settled at slightly lower levels near 1.3550. RSI has been rising throughout the overnight session and is currently trading just below the overbought 70 level at 68. The GBP gained some positive traction in early European trading, after yesterday’s test at lower levels. Traders appeared to have paused in their buying ahead of the US inflation report coming later this morning. BoE Chief Economist Huw Pill spoke yesterday saying even though he voted for the 25bp rate hike last week, “given the inflationary pressures we currently face, I can certainly understand why colleagues on the MPC voted for a 50bp hike.” He added that “a case can be made for a measured rather than activist approach to policy decisions, as the focus should remain on developments in the data that will have lasting implications for the outlook for price stability.” He referred to his comments as a “steady handed” approach to monetary policy.

USD/JPY is trading at overnight highs near resistance levels at 115.90, trading well above the moving averages. Technically, the RSI level is just below the overbought 70 level, trading at 69. Bank of Japan Governor Kuroda was on the wires this morning saying that the acceleration of consumer inflation has been sharp but very small. He added that monetary policy must remain in an easing mode a bit longer as inflation remains short of 2%. He added that he wasn’t sure how widening US-Japan interest rate differentials would affect forex moves. He said it would be premature to debate an exit from easy policy during his remaining term as BoJ governor. On the macro side, Japan’s corporate goods price index rose 8.6% annually in January, slowing slightly from December’s 8.7%, but beating expectations of 8.2%. At 109.5, the index was at the highest level since September 1985. USD/JPY continues to follow the moves of US treasury yields and that should continue. Traders here as well await the inflation report from the US later this morning.

USD/CAD is trading lower this morning testing support levels near 1.2665 as oil prices remain steady and traders react to comments made yesterday by BoC Governor Macklem. Technically the currency pair is trading below the moving averages as the 50 and 100-day have crossed the 200-day. RSI which had tested the oversold 30 level in earlier overnight trade has risen slightly and is currently trading at 39. In a speech given yesterday, BoC Governor Macklem said that current inflation, which is close to 5% is “too high”, but that it is “not the result generalized excess demand in the Canadian economy.” He said that inflation, “largely reflects global supply problems, most of which stem from the pandemic”. As the pandemic recedes, “conditions around the world should normalize, taking pressure off global goods prices.”. The BoC expects inflation to “come down relatively quickly” in the second half of 2022 to 3% by the end of the year. He added that to get the inflation level back to its 2% target, a significant shift in monetary policy will be needed. The economy will need “higher interest rates to moderate growth in spending and bring demand in line with supply”, and “keep inflation expectations well anchored”. Lastly he said that Canadians should expect a rising path for interest rates.” Oil prices eased a bit in overnight trading after rallying following an unexpected drop in US crude inventories. Brent crude futures fell $0.07 to $91.48 per barrel, while US West Texas Intermediate creed futures eased $).4 to $89.62 per barrel.

AUD/USD is trading higher this morning, testing resistance levels at .7200 as the currency pair trades above the moving averages. Australia consumer inflation expectations rose further to 4.6% in February, up from 4.4%. RSI levels have cracked the 70 level, currently trading at 71. NZD/USD is also trading higher testing resistance levels at .6705. The currency pair remains above the moving averages and the RSI level has edged higher during the overnight, now trading at 65.

We shall see how the markets react to the inflation date. It appears that investors should buckle their seatbelts in preparation for some near-term inflation turbulence. Good luck, stay safe and have a great day.