Market recap & fx update 2/11/22

FX Thoughts on a Friday - February 11, 2022

Good morning and Happy Friday,

Well traders awaited with anxious anticipation for yesterday’s inflation release and the markets certainly were not disappointed. Inflation surged to 7.5% on an annual basis, higher than expected and the highest since February 1982. The monthly rise for January was 0.6%, also nigher than expected. Core inflation rose 6%, which was also slightly above expectations. While no one noticed, as they were completely taken by the inflation report, weekly jobless claims declined to 223,000, below the estimated 230,000. The increase in consumer prices over the last 12 months has pretty much cemented the likelihood of substantial interest rate hikes this year. Following the release, US treasury yields rose above 2% for the first time since August, 2019. The yield on the 2-year Treasury and, which is the most sensitive to interest rates, rose 10 bps to trade at 1.45%. All however was not well as the equity markets took quite the hit. Initially falling, then rising then finally falling, Thursday’s price action can only be described as a rout. The DOW fell 526 points breaking a three0day winning streak with its worst performance since Jan. 18. The S&P 500 and the NASDAQ fell 1.8% and 2.1%, respectfully. Despite this poor performance, the major indices can still post a third positive week as the DOW is still up 0.4%, the NASDAQ is up 0.6% and the S&P 500 up 0.1% after yesterday’s performance. On the earnings side, Under Armour and Newell Brands will be among those companies reporting later today. On the macro side, The University of Michigan releases its consumer sentiment survey for February today at 10:00 am, EST. The consensus estimate is for a 67.5 reading, slightly higher than the 67.2 reading for January. The January reading was the lowest for the survey since November, 2011, and was driven by consumers’ expectations of future inflation and rising housing costs. The USD went on a roller-coaster ride as well yesterday, initially strengthening then weakening, before finally gaining as the trading day ended. After the inflation report, the CME Group’s FedWatch Tool now shows markets are pricing in a 90% probability of a 50 bp hike in rates at their March meeting. FED Governors were speaking after the inflation report and there seems to be some disagreement regarding rate hikes in March. St. Louis FED President Bullard commenting after the inflation release said he’s like to see 100 points “in the bag” by July 1. San Francisco FED President Daly is not yet on board, while Richmond FED President Barkin appears open to the concept but he said he still is not yet convinced. Expect plenty of “FED speak” going forward before the meeting in March. This morning, US equity future remain under pressure, after yesterday’s sell-off. DOW futures are presently down 140 points, while the S&_ 500 and NASDAQ are down 0.5% and 0.7%, respectfully. US Treasury yields are slightly lower this morning, but the 10-year note remains above 2.0119%, after climbing above 2% for the first time since August 2019. The 30-year bond is trading at 2.2687%. The USD has remained firm in overnight trading.

EUR/USD is trading in the middle of its overnight range after testing support levels at 1.1370. Technically, the sellers appear in control, and downside pressure will remain as long as the currency pair closes below resistance levels at 1.1410. The moving averages are converging and the 50-day is about to cross the 100-day one the downside. The bearish shift in the near-term is being reflected the RSI levels which have tested 30 in earlier trade, before bouncing back slightly to the current level of 44. After rising to its highest level in three months yesterday, just below 1.1500, the single currency has lost its traction and has been in “free-fall” ever since. With all the talk of higher US interest rates, ECB President Lagarde has kept her dovish stance as she said in an interview yesterday that “raising interest rates would not solve any of the current problems.” She added that if the ECB “acted too hastily now, the recovery of our economies could be considerably weaker and jobs would be jeopardized.” She added that while the US economy is overheating, the Eurozone economy is far from that and they must proceed with caution to avoid “choking off recovery.” Inflation in the Eurozone is expected to be higher than expected when those numbers are released and the central bank will analyze those numbers when the ECB meets in March. On the macro side, German final CPI rose 4.9% annually in January and 0.4% monthly from the previous month.

GBP/USD is trading near overnight highs after bouncing off support levels at 1.3515 in earlier overnight trade. Technically, the moving averages have consolidated at slightly lower levels near 1.3550. RSI which had been trading around the 40 level for most of the overnight session has jumped in the last few hours to trade above 50 at 53. Earlier this morning, the UK’s Office for National Statistics (ONS) revealed that the UK economy grew by 1% on a quarterly basis in the fourth quarter of 2021. This number came in slightly lower than the market expectation of 1.1%. Also released this morning, the UK’s industrial sector continues to recovery as manufacturing output come in at 0.2% in December on a monthly basis, versus the 0.1% expectation and 0.7% that was booked in November. Industrial output came in at 0.3% versus 0.1% expected and 0.7% the previous month. Also released this morning, the British economy expanded by 1.0% in the fourth quarter of 2021, the same as the third quarter and slightly below the expectation of 1.1%. On an annualized basis, the UK GDP arrived at 6.5% in the fourth quarter vs. 6.4% expected and 6.8% from the prior report. While US treasury yields remain high, the slight easing in early trade have given the pound a little bit of support during the European session.

USD/JPY is trading off overnight highs after testing resistance levels at 116.20, climbing above the 116 level for the first time since early January. Technically, after testing the overnight high the currency pair seems to be moving into a bit of a consolidation phase as the USD/JPY trades above the moving averages. RSI which had jumped above the 70 level during early Asian trade has eased back a bit and is currently trading in the low 50’s at 52. The USD/JPY continues to track the moves of US treasury yields and with those moving higher, the USD/JPY looks to test the upside during the North American trading day. Overnight, the government officially announced a three-week extension to teh “quasi-emergency” status for Tokyo and 12 other prefectures. This appears to be keeping the Bank of Japan policymakers refraining from any hawkish comments so that they can keep easy money on the table for aid. A close today above the 116.35 level, the multi month high seen in January, could get the USD/JPY heading towards 117.00 early next week.

USD/CAD is trading off overnight highs after testing resistance levels during overnight trade at 1.2750. Technically, the currency pair is trading above the moving averages which have consolidated at lower levels as the 50-day has crossed both the 100 and 200-day moving averages, RSI which had been testing the 70 level in earlier overnight trade has eased a bit and is currently trading at 55. Weaker oil prices have undermined the loonie and provided some support for the USD during trading overnight. Growing acceptance of a 50 bp US rate hike have also put some pressure on the Canadian Dollar. Oil prices moved lower in early Friday trading as rate hikes and US-Iran talks that could lead to increased oil supply put some pressure on prices. Brent crude futures fell $0.25 to $91.16 per barrel and US West Texas Intermediate crude futures fell $0.15 to $89.73 per barrel. Oil prices are expected to decline this week after seven consecutive weekly gains. Yesterday’s inflation release adds pressure for the US to act aggressively on rates which should benefit the USD and this is weighing on oil prices and the commodity prices as well as a stronger USD puts pressure on commodity prices. Adding to pressure on oil prices are the US-Iran negotiations which appear to be progressing in a positive manner.

AUD and NZD are both trading in the middle of their overnight ranges. Technically, both currencies are trading below the moving averages as the 50-day appears ready to cross the 100 and 200-day moving averages adding some pressure to the currency pairs. RSI levels for both the currencies remain in the low 40s. RBA Governor Lowe told parliament yesterday that it is “too early” to conclude that inflation is “sustainably in the target range.” He added that the central bank is “prepared to be patient.” The RBNZ released a statement overnight saying there should be another rate hike in the first quarter and possibly four more rate hikes in 2021.

It looks like another turbulent day for the equity markets as we end the trading week. With the FED meeting coming up next month and more and more anticipation of a 50 bp hike as bond yields continue to rise, the pressure should remain on equities. Analysts believe that the move above 2% in the 10-year has market psychology changing and this could be significant. Volatility will remain for equities and we could see a retest of the January low in equities ahead of the FED meeting on March 15-16. Looks like a tough day ahead. Good luck, stay safe and have a great day.