Daily Market Outlook, February 26, 2021

Asian equity markets are sharply lower this morning after a big decline on Wall Street yesterday. Concerns about the ongoing rise in government bond yields has been cited as a key factor behind the move. Geopolitical concerns may have added to the ‘risk off’ mood as the US launched air strikes against Iran-linked militia in Syria. The just released Lloyds Business Barometer for February showed business confidence up by 9 points to its highest level since last March. Confidence in firms’ own trading prospects and the wider economy both rose strongly. There were improvements for all UK regions and nations and for all economic sectors monitored.

There is no other UK data today. French & in Spanish CPIs will provide the first indications of Eurozone inflation for February ahead of next week's regional aggregate. Markets have been getting anxious that inflation may rebound by more than previously expected. However, today’s releases which are forecast to see a small fall and a modest rise respectively should provide little support for such concerns. Inflation will also be in focus in the US with the release of the consumer expenditure deflator for January. That is the Fed’s preferred inflation measure. It is also expected to post a modest annual rise but only to 1.4% (from 1.3% in December).That will still leave it well below the Fed’s 2.0% target. Inflation may rise further over the next few months. However, the Fed says that it wants to see evidence that inflation is holding above the target for some time before it will consider tightening monetary policy, which suggests any move is a long way in the future.

Consumer spending data for January will also be released and the bumper rise in retail sales during the month points to a big gain. That will provide strong support to GDP growth and points to a Q1 rise. G20 finance ministers and central bank heads meet virtually today. This week several key central bankers, including US Fed Chair Powell and Bank of England Governor Bailey , have strongly emphasised that, while the economic outlook is brightening, monetary policy will probably need to be very supportive for a considerable period of time. However, those comments have so far failed to prevent a further rise in government bond yields. The G20 is likely to echo those comments and it will be interesting to see if they are any more effective.

CITI: The final estimate of month-end flows points to EUR and GBP buying against USD and JPY today. The signal in JPY crosses is stronger than for USD.

· Yesterday’s 2.5% drop in the MSCI US equity index erased nearly half of the month-to-date gain and significantly weakened the USD sell-signal. With US equities up and bonds down by similar proportions, we estimate net rebalancing flows on US asset hedges to be roughly balanced today.

· The signal to buy GBP mainly comes from poor UK fixed income performance which means foreign investors need to buy back GBP to reduce hedges. The 6% month-to-date loss in the FTSE UK Government Bond index is the worst on record. The signal to buy EUR comes from weak bond performance as well as equity hedge rebalancing flows, because we assume Euro Area investors hedge their equities more than elsewhere.

· JPY is the only sell-signal against USD today, driven by both foreigners’ needs to hedge gains in well-performing Japanese equities as well as Japanese investors’ needs to reduce hedges on foreign fixed income. The gap between the EUR buy and JPY sell-signals exceeds 1.6 standard deviations and is the third strongest implied EURJPY buy-signal on record.

G10 FX Options Expiries for 10AM New York Cut

EUR/USD: $1.2100(E682mln), $1.2150(E748mln-EUR puts), $1.2175(E1.6bln-EUR puts), $1.2200-05(E1.1b-EUR puts), $1.2235-50(E894mln), $1.2275(E786mln)

USD/JPY: Y105.00($621mln), Y105.25($750mln), Y105.80-00($1.3bln), Y106.25-35($667mln), Y106.50($755mln)

GBP/USD: $1.3900(Gbp1.3bln), $1.3930(Gbp614mln), $1.4000(Gbp732mln), $1.4030(Gbp2.7bln-GBP puts), $1.4060(Gbp1.2bln-GBP puts), $1.4120(Gbp899mln)

EUR/GBP: Gbp0.8600-20(E2.4bln), Gbp0.8650(E854mln), Gbp0.8665-75(E1.8bln-EUR puts), Gbp0.8700(E571mln-EUR puts)Gbp0.8750-65(E1.2bln-EUR puts)

USD/NOK: Nok8.5375-0.8400($690mln-USD puts)

AUD/USD: $0.7590-0.7600(A$1.2bln), $0.7665-75(A$711mln), $0.7770-80(A$1.6bln-AUD puts), $0.7800(A$788mln), $0.7825(A$847mln), $0.7850(A$1.8bln-AUD puts), $0.7870-75(A$801mln), $0.7900(A$5.3bln-AUD puts), $0.7975(A$2.2bln-AUD puts)

NZD/USD: $0.7100(N$702mln), $0.7400(N$676mln)

USD/CAD: C$1.2500($2.3bln), C$1.2530($2.1bln), C$1.2540-50($948mln), C$1.2630($1.7bln), C$1.2700($867mln), C$1.2750($571mln)

USD/CNY: Cny6.41($550mln), Cny6.44($680mln). Cny6.45($1.1bln)

USD/MXN: Mxn19.70($1.2bln), Mxn20.00($845mln), Mxn20.05($734mln), Mxn20.20($813mln),

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Larger Option Pipeline

EUR/USD: Mar01 $1.2200(E1.3bln), $1.2245-55(E1.6bln); Mar02 $1.2045-65(E1.1bln); Mar03 $1.1900(E1.0bln), $1.2000(E1.4bln), $1.2300(E1.0bln)

USD/JPY: Mar01 Y105.55-57($2.0bln), Y106.20-25($1.5bln), Y106.45($1.65bln); Mar02 Y105.75-80($1.0bln), Y105.90-10($1.7bln); Mar03 Y105.40-60($2.1bln); Mar05 Y105.45-50($1.2bln)

EUR/GBP: Mar03 Gbp0.8600(E1.9bln-EUR puts)

AUD/USD: Mar01 $0.7770(A$1.2bln)

NZD/USD: Mar01 $0.7350(N$1.6bln-NZD puts)

USD/CAD: Mar01 C$1.2500($1.25bln)

Technical & Trade Views

EURUSD Bias: Bullish above 1.2050 targeting 1.2350

EURUSD From a technical and trading perspective, the closing breach of 1.21 and the descending trendline is a bullish development opening a retest of prior highs at 1.2350, only a move back through 1.2040 would suggest further consolidation

Flow reports suggest topside offers 1.2180-1.2220 level with weak stops above the level and increasing on any push above the 1.2250 level with possible strong offers into the 1.2300 level Downside bids light through to the 1.2080 area and possible weak stops appearing through the level and opening the chance of a test to the 1.2000 level in the short term with stronger bids into the 1.1950.

GBPUSD Bias: Bullish above 1.3750 targeting 1.44

GBPUSD From a technical and trading perspective, as 1.40 now acts as support bulls will target a test of 1.44 as the next upside objective. Below 1.40 opens a retest of 1.3750 pivotal trend support.

Flow reports suggest downside bids light through the 1.3950 level and increasing bids into the 1.3900 level with congestion through to the 1.3850 area and a similar pattern through the 1.3800 area and increasing bids through the 1.3750 area. Topside offers light through to the 1.4100 area and then limited offers increasing into the 1.4200 areas to limit a Friday market.

USDJPY Bias: Bullish above 104.50 targeting 107

USDJPY From a technical and trading perspective, as 104.50 supports there is potential for a further squeeze higher to test offers towards 107. A loss of 103.50 would negate further upside and suggest a resumption of trend

Flow reports suggest topside offers through the 106.50 area with increasing offers on any move above the 106.70 area increasing through the 107.00 level with weak stops likely on any break of the 107.20 areas with more offers into the 107.50 level. downside bids light through the 106.00 level and weak stops on a breakthrough the 105.80 area and limited congestion through to the 105.00 areas where stronger bids appear.

AUDUSD Bias: Bullish above .7560 bullish targeting .8000

AUDUSD From a technical and trading perspective, as the major trendline support at .7560 now acts as support, look for target wave 5 upside objective towards .8000. A closing breach of .7730 of the internal descending trendline will encourage the bullish thesis. UPDATE Target achieved, as .7800 now supports look for a test of .8200

Flow reports suggest topside offers into the 0.7900 areas likely to be weak and limited offers beyond however, with the AUD options cleared one way or the other the market opens up in both directions to some extent with bids likely to be strong through to the 78 cents with weak stops on a dip through the 0.7780 area and open through to the 0.7750 area and beyond, topside offers light through to the 80 cents area with strong offers likely anything in front is possibly weak and uninspiring,

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