Daily Market Outlook, January 18, 2022

Overnight Headlines

  • Sanders Calls Out Manchin, Sinema Ahead Of Filibuster Showdown
  • Eurozone Eyes Slower Debt Reduction Rule, Ways To Boost Compliance
  • UK Inflation Set To Hit 30-Year High As Rate Rise Expectations Mount
  • Britain To Send Ukraine 'Self-Defence' Weapons To Repel Russian Attack
  • China's Spreading Property Contagion Adds Pressure On Xi To Ease
  • Bank Of Japan Raises Price Forecast, Keeps Policy Options Steady
  • Australian PM's Ratings Take A Hit Months Away From Election
  • Brent Crude Oil Climbs To 2014 High As Geopolitical Unrest Returns
  • US Equity Futures Tumble In Asia After 10-Year Yield Tops 1.85%

The Day Ahead

  • Risk sentiment weakened during the Asian trading session as Treasury yields rose, reflecting increasing pressure on the US central bank to raise interest rates, especially with oil prices heading higher. In contrast, the Bank of Japan overnight kept policy unchanged, including short-term interest rates at -0.1%. The inflation forecast was nudged higher, but it was still seen as remaining below target.
  • Just released UK labour market data provided further evidence that the labour market remains tight. The unemployment rate fell to 4.1% in the three months to November (down from 4.2%), its lowest since June 20202, while employment increased by 60k. Unfilled vacancies rose to a record 1.25 million in the final quarter. Annual earnings growth, excluding bonuses, eased to 3.8% and now better reflects ‘actual’ pay growth (and is slightly above pre-Covid levels) after being distorted by the pandemic.
  • In the Eurozone, the German ZEW survey will provide one of the first indications of economic activity in January including the impact of Omicron. Expect the ‘current situation’ index to fall to -9.0 from -7.4. However, the ‘expectations’ were probably little changed from last month’s 29.9.
  • US markets reopen after yesterday’s public holiday. There are relatively limited data releases and no Fed speakers this week. Today sees the release of NY Fed Empire survey, an early regional gauge of manufacturing activity and the NAHB survey of homebuilders.
  • Attention switches back to the UK early Wednesday, with the release of the latest CPI inflation report. After the sharp rise in November to 5.1%, its highest level for almost 30 years, expect annual headline inflation to hold steady in December. However, with gas prices having again moved sharply higher in recent months this is unlikely to be the peak in inflation, which could move above 6% in April when the energy price cap next changes. The consensus expectation is still that, following a spring peak, inflation will start to decelerate but that depends upon several factors including labour costs remaining relatively contained.

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.1250 (1.9BLN), 1.1370-75 (571M), 1.1475 (349M) 1.1500 (510M)

USD/JPY: 113.95-05 (1.76BLN), 114.10-15 (438M) 114.95-00 (840M), 116.00-10 (981M), 116.25 (470M) 117.00 (1.625BLN)

EUR/GBP: 0.8350 (540M).

AUD/USD: 0.7160-65 (320M) 0.7190-00(1.065BLN).

NZD/USD: 0.6650 (592M)

AUD/JPY: 80.60 (596M), 81.50 (269M)

USD/ZAR: 15.50 (577M), 16.00 (284M), 16.50 (422M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.15 Bullish above

  • Poised above key support, as UST yields and oil surge
  • -0.1%, towards the base of a 1.1385-1.1421 range, as rising UST yields weigh
  • 2yr UST up 8bp to 1.053%, 10yr +7bp to 1.850% and 30yr +5bp to 2.177 on TWEB
  • Brent oil +0.97%, $87.32 - 7 year high on middle East tensions
  • Adds up to a likely lively session, as European markets respond
  • Charts; 5, 10 & 21 day moving averages, 21 day Bollinger bands rise
  • Neutral momentum studies - positive setup, but poised above pivotal support
  • Close below close 1.1386 prior range high would suggest consolidation

GBPUSD Bias: Bearish below 1.36 Bullish above.

  • Bid above pivotal support, as uptrend hangs in
  • Up 0.1% - USD a touch softer - at the top of a busy 1.3643-1.3659 range
  • Middle East tensions see Brent +0.99% $87.34 - 7 year high
  • Higher oil and gas prices make it a tough winter - may cap consumer spending
  • Charts; 5, 10 & 21 day moving averages rise, 21 day Bollinger bands contract
  • Momentum studies conflict, which is still a positive trending setup
  • Initial target remains at the 1.3829/34 range top in October
  • Sustained 1.3630 10 DMA break, which is close would undermine topside bias

USDJPY Bias: Bullish above 114.50 Bearish below

  • USD/JPY buoyant in Asia, 114.46 early to 114.83 EBS post-BoJ announcement
  • BoJ stays course as expected, policy likely as is indefinitely
  • As already communicated, growth and price forecasts upped
  • Some Japanese exporter sales on way up but bids thicker below
  • Plenty of Japanese importers, investors on dips towards 114.00
  • Option expiries help contain action - large today 114.00-25, 114.95-115.00
  • Yields on US Treasuries firm, 10s @1.824%, fresh highs of year
  • Tokyo risk mood good, Nikkei +0.85% @28,574, E-Minis +0.1% @4658
  • JPY crosses bids too with focus on Japan-abroad rate differentials

AUDUSD Bias: Bearish below 0.7250 Bullish above

  • Slumps as US yields rally to multi – year highs
  • AUD/USD -0.4% as U.S. yields rally on hawkish Fed expectations
  • Risk of Fed surprise drives bonds, futures lower; 2-year yield above 1%
  • Two-year yield is up 32 bps in Jan so far; 10-year at 1.8520, a 2-year high
  • JPMorgan boss Dimon on Fri told analysts Fed could lift rates seven times
  • S&P E-Mini down 0.3% as traders brace for earnings this week
  • Support 0.7180-85, 0.7155-60, resistance 0.7220-25, 0.7245-50