Risk assets tried to tune in to rebound in yesterday's session, but later, the decline in US stock indices, led by tech stocks, thwarted these plans. Demand for defensive assets rose on Friday, the yen, dollar and franc advanced, currencies sensitive to fluctuations in the business cycle were under pressure. The relative stability of oil quotes to risk-off partially protects the CAD and NOK from a stronger fall.

NOK yesterday barely reacted to the decision of the Norwegian Central Bank to keep the rate unchanged. The bank has hinted that the increase will take place in March and that it plans to raise rate by 100 bp in 2022. Such a policy stance will likely draw more attention to NOK from investors looking for yield.

Equity pessimism appears to be under control so far as seen from US equity futures holding generally steady which somewhat curbs dollar recovery to recent highs. However, the fact that USD recovered very quickly from the long squeeze seen last week, suggests that upside potential of the US currency is far from being exhausted. At the upcoming meeting the Fed, in fact, will formulate plans for policy changes for this year, which include not only a series of rate hikes, but also the sale of assets from the balance sheet. With US inflation around 7% and the rate near the bottom (there has never been such a gap between the two variables), there is a high risk that the announced pace of policy tightening will exceed expectations. It follows from this, that investors are unlikely to sell the dollar before the Fed meeting.

It is also worth looking into the minutes of the December meeting of the ECB, published yesterday. The regulator not only completely dropped the concept of temporary inflation from the wording, but also talked about structural shifts and a possible change in the inflation regime from low to high, which implies that models based on pre-pandemic data may be of little use for predicting near-term and medium-term inflation. The hawkish camp in the ECB's Governing Council is growing, but Lagarde continues to insist on a cautious approach, in contrast to, for example, the Fed, which is already outspoken about the need to tighten policy.

Today Lagarde is speaking at the International Economic Forum, which will be held online. There are expectations that the ECB head will hint that a rate hike this year isn’t ruled out, but proponents of such a policy outcome are likely to suffer a mini-defeat again today, as Lagarde is likely to try to stop premature speculations.

EURUSD attempted to go below 1.13 yesterday, but failed, the pair bounced to 1.133 and stabilizes near the lower border of the recent moderate uptrend:

A break below will likely mean the end of the mini-upturn and the seller's targets will be 1.12 and then 1.105 (the lower border of the bearish channel).

The GBPUSD is also falling on the back of weak retail sales data and consumer confidence slightly below expectations, which dampened the ardor of investors trying to price in the Bank of England's rate hike in February. The UK is also facing high inflation and the latest data for December on higher prices beat expectations. Pressure from the dollar and weak data will probably push the pair to the upper border of the bearish channel (1.35), which has turned from resistance to support, from which one can expect continuation rebound ahead of the BoE rate decision in early February: