Espresso Morning Call: EUR supported amid hawkish ECB hints

What we are looking for

• USD is struggling to hold any gains: Once more we see a negative bias for the USD on major forex.
• EUR continues to build support: ECB minutes point to further 50bps rate hikes in the meetings to come.
• Indices rebound after recent losses: After two days of correction, there is support forming in equity markets once more. US futures are rebounding well, with European indices opening around +0.5% higher.
• Commodities show a risk-positive bias: Silver is outperforming gold, whilst oil is also around +0.5% higher and is testing key resistance.
• Data traders: EUR may be reactive to any hawkish signals from ECB President Lagarde. CAD positions will react to any surprises in Canadian Retail Sales. USD has a little bit of housing data in the Existing Home Sales, but more attention will likely be given to the two Fed speakers, Harker and Waller.

Overview

The recovery in EUR/USD has been driven by not only the market expectation of a less aggressive Federal Reserve monetary policy, but also that the European Central Bank is leaning hawkish. There have been some suggestions recently that the ECB would hike by maybe just 25 basis points at the next meeting on 2nd February. However, ECB President Lagarde pushed back on this at Davos and the ECB meeting minutes also alluded to the continued 50bps hikes. Although the EUR is not soaring higher, this is helping to generate underlying support for EUR/USD.

Elsewhere in major markets, there is a broad uptick in risk appetite. This is helping the AUD to rebound, whilst JPY and to a lesser extent the USD are underperforming. This positive bias is also reflected in commodities, with silver outperforming gold in a rebound, whilst oil is also higher and is once more eyeing a decisive break to six-week highs. Equity markets have seen two days of decline but are supported this morning.

There is a North American focus on the economic calendar. Canadian Retail Sales are expected to show a decline in core sales of -0.4% in November. This gives back some of the progress of a strong November. US Existing Home Sales are expected to show a -2% decline in December. Elsewhere there are two Fed speakers and another speech from ECB President Lagarde to watch out for.

Today’s news

Market sentiment has improved: JPY and USD are underperforming in forex, with AUD and NZD leading with outperformance. Silver is outperforming gold. Equities are higher.

US Treasury yields have steadied to tick higher: Yields fell sharply earlier in the week from weak US data, but they have ticked higher amid a surprise drop in US jobless claims yesterday.

Chinese interest rates held steady: The People’s Bank of China has maintained its interest rates, as expected. The 1yr Loan Prime Rate is at 3.65% and the 5yr LPR is at 4.30%.

UK Retail Sales worse than expected in December: Core sales (ex-fuel) fell by -1.1% MoM having been expected to grow by +0.4% MoM. This leaves YoY core sales -6.1% (-4.4% exp). YoY sales were adjusted slightly higher to -5.6% in November. GBP is underperforming major currencies this morning.

Fed speakers continue to talk up rates: Lael Brainard is the most dovish member of the FOMC (and a permanent voter). She said yesterday that it would take time to get high inflation lower and suggested that policy needed to be restrictive for some time. John Williams (permanent voter, a shade hawkish) reiterated the line that there is more work to be done by the Fed and it still has a way to go on rate increases.

Cryptocurrencies have steadied: Sharp declines earlier in the week have steadied and coins are consolidating now. Bitcoin is flat at $20945 with Ethereum +0.2% at $1548.

ECB’s Lagarde speaking again: Lagarde will be speaking again at Davos. This means that EUR positions may once more be reactive. There is also a couple of Fed speakers to round off the week.

• Christine Lagarde (ECB President) speaks at Davos at 10:00 GMT.
• Patrick Harker (2023 voter, centrist) speaks at 14:00 GMT
• Christopher Waller (permanent voter, very hawkish) speaks at 18:00 GMT

Major Economic Data:

• Canadian Retail Sales (at 13:30 GMT) Core sales (ex-autos) are expected to have fallen by -0.4% MoM in November (after +1.7% MoM in October).
• US Existing Home Sales (at 15:00 GMT) Sales are expected to fall to 4.00m in December (from 4.09m in November).

Major markets outlook

Forex: A USD negative bias across most major pairs. JPY is underperforming with GBP weak amid disappointing UK Retail Sales.

• EUR/USD has continued to hold the support of the old 1.0785 May 2022 high and is now starting to tick higher. A run of mildly disappointing candles was reversed yesterday with gains and there is further additional upside early today. This is though still part of a consolidation below 1.0887 which needs to be broken to open the upside. We continue to favour buying into weakness with the breakout support between 1.0712/1.0785 a good basis for the next leg higher. Above 1.0887 resistance would continue the recovery to test 1.0935 (the next resistance) and potentially 1.11/1.12. Technically, the outlook remains very strong with RSI momentum in the 60s.

• GBP/USD has continued to drift higher, although there has been a mild pull lower this morning. Despite this, there is still potential for a test of the resistance at 1.2445, as a positive bias to the outlook remains. Momentum is positively configured with the daily RSI into the mid-60s, so still has upside potential. There is support growing between 1.2150/1.2290 with any supported weakness into this area seen as a chance for renewed upside. Support at 1.2080 is a higher low above key support at 1.1840. Above 1.2445 opens 1.2600/1.2660.

• USD/JPY has been consolidating since the spike up to 131.57 on the BoJ and subsequent retracement. The market has been trading under the previous breakdown of 129.50 since but is just creeping back towards a test again. We continue to favour selling into strength with the old support band 129.50/130.60 still a basis of resistance. RSI momentum remains negatively configured to suggest selling into strength for a test of the low at 127.22 in due course.

Commodities: Metals and oil have picked up again.

• Gold rallied through the $1929 resistance with a strong bull candle yesterday. This move once more pulled the price to nine-month highs and continues the rally. Whilst there is still near-term concern that momentum is stretched (RSI above 70) the bulls are still happy to support near-term weakness and prevent profit-taking from doing too much damage. We favour upside but still prefer to buy into supported weakness within the 10-week uptrend. There is good support now at $1896. The next resistance is $1957 and then the key resistance at $1998.

• Silver has once more rebounded from the lows of a one-month consolidation rectangle between $23.11/$24.55. The positive candle yesterday and initial gains today are encouraging for the potential of a rally towards the high again t $24.54. The consolidation has meant that the RSI has been attracted towards 50 but for now, the configuration remains positive. The price is mid-range this morning, but given the appetite to buy into weakness since October we favour a test of the high.

• Brent Crude oil has been choppy in recent sessions. A series of decisive daily candles higher and lower have formed. However, yesterday’s decisive rally has held this morning and the market is once more putting pressure on the resistance between $86.75/$87.75. Support is building around $83.75 and a decisive close above $87.75 would open the recovery once more. There is a mild positive bias to momentum on the RSI but nothing that is leading the move.

Indices: Equities are trying to build support again.

• S&P 500 futures have posted two solid bearish candles in the past two sessions to test the support of the medium-term pivot area between 3912/3945. There is a degree of consolidation that has formed overnight and with the RSI having retreated to 50, this looks to be a near-term crossroads. A close below 3912 would re-open the lows at 3788/3822 within what is increasingly a medium-term consolidation range. A close above 3945 improves again with resistance growing at 4035.

• German DAX has been losing upside momentum in recent sessions and completed a decisive corrective candle yesterday. With the RSI back below 70, this is a near-term sell signal (or at least a profit-taking signal). The market has consolidated overnight but is unable yet to generate recovery momentum again. This plays into the prospect of a near-term unwind into support of the breakouts between 14604/14810. We would still look to buy into supported weakness. The key resistance is building now around 15275.

• FTSE 100 has seen consolidation turn into a correction. However, yesterday’s intraday rebound off 77321 will give the bulls hope that any unwinding move will not be too deep. The RSI is on the retreat from above 70 (a basic sell/profit-taking signal) and there is room to unwind towards 50. The concern will be that the last time the RSI retreated from 75 (late November) resulted in a three-week correction. There is good support from the breakout of all the old highs between 7635/7695 with initial support at 7731. Key resistance has been left at 7844, just shy of a test of the all-time high of 7903. 

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