Daily Market Outlook, January 19, 2022

Overnight Headlines

  • WHO Warns Covid Pandemic Not Over Yet Amid Europe Case Records
  • Democrats Set Voting Rights Showdown With No Clear Path To Victory
  • US, UK To Announce Plans For Formal Talks On Metals Tariffs On Wed
  • ECB's Villeroy: ECB Can Adapt Policy Faster If High Inflation Persists
  • Germany's New Daily Covid-19 Cases Top 100,000 For The First Time
  • French Covid Infections Hit New Record As Patients Fill Up Hospitals
  • UK PM Johnson Under Pressure Amid Reports Of Leadership Challenge
  • China Reports Fewest Daily Local Confirmed Covid Cases In Two Weeks
  • Australia Consumer Sentiment Slips In January On Omicron Surge
  • Oil Prices Rise To A Seven Year High After Turkish Pipeline Outage
  • Traders Weigh Bigger Fed Hike In March As Yields Continue Climb
  • Chinese Bonds Defy Global Rout As PBOC Pledges More Support
  • MSCI Asia Share Index Falls For A Fifth Session; US Futures Also Drop

The Day Ahead

  • Asian equities are down this morning as a risk-off mood continues to prevail within markets. Concerns about rising interest rates have been cited as a key cause. Meanwhile the oil price has continued to climb with Brent crude touching above $88bbl. Covid cases reached a record high in Japan yesterday prompting a plan to place 13 prefectures under a quasi-emergency for three weeks. In contrast, in the UK the Cabinet will discuss easing restrictions today. Media reports suggest that PM Johnson will report to parliament that many restrictions will lapse in England from next week.
  • December UK CPI data showed annual headline inflation rising by more than expected to 5.4% (from 5.1% in November), and the core rate, excluding food and energy prices rose to 4.2% (from 4.0%). As wholesale gas prices have again moved sharply higher in recent months, inflation seems set to move well 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 that labour costs remain relatively contained.
  • In the US, December housing starts are expected to fall at least modestly after a very strong rise in November. As other December data including retail sales have proved to be weaker than expected, possibly due to Omicron effects, it will be interesting to see whether housing activity also surprises on the downside. This week’s US data calendar is relatively light but next week may be much more interesting particularly as the Federal Reserve will update on monetary policy.
  • Canadian annual CPI inflation is forecast to have moved up to 4.8% in December (from 4.7% in November), which would be its highest in about 30 years. While Canadian inflation is still some way below that in the US it is still more than twice the level of the Bank of Canada’s inflation target which puts pressure on the BoC to consider further policy action. Indeed there has been speculation that it could hike interest rates next week.
  • Several members of the Bank of England’s Financial Policy Committee, including BoE Governor Bailey, will testify to a parliamentary committee about their latest Financial Stability Report. MPs may use the opportunity to ask about the outlook for interest rates particularly considering that rates may impact on financial stability. So far this year there have been few public comments from Bank of England officials on economic developments. However, even with this lack of communication, markets continue to put a high probability on another Bank Rate hike at the BoE’s February monetary policy meeting

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: 1.1375 (346M), 1.1395-05 (410M), 1.1420-25 (280M)

USD/JPY: 113.50-60 (367M), 114.50-55 (945M) 114.85-00 (815M), 116.00-10 (1.43BLN), 116.25 (310M) 116.70 (375M)

GBP/USD: 1.3330 (363M), 1.3600-10 (500M), 1.3695-00 (282M)

AUD/USD: 0.7160-70 (338M), 0.7245-50 (550M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.15 Bullish above

  • EUR heavy across board in Asia with risk still off, most bourses in red
  • This despite strong German data, bump up in EZ yields
  • EUR/USD 1.1319-29 EBS in Asia, holding above 1.1315 low yesterday
  • Also below 1.1342 55-DMA
  • Few large nearby option expiries today but loads tomorrow - 1.1300-35 total E4.5 bln, 1.1345-55 E2 bln, 1.1375-1.1400 E1 bln
  • EUR/JPY heavy despite more buoyant USD/JPY, as longs bail, 129.77-98 EBS
  • EUR/GBP 0.8325-34, support eyed pre-0.8320 recent lows, 0.8300
  • Breaks target 0.8282 Feb 20 low, UK yields on up-up, GBP more desirable?

GBPUSD Bias: Bearish below 1.36 Bullish above.

  • GBP/USD scales intra – day top as UK CPI hits high since 1992
  • Cable rose to 1.3618 after UK Dec CPI hit 30-year high, +5.4% YY vs 5.2% f/c
  • 1.3618 is high since Tuesday's one-week low of 1.3573
  • Tuesday's drop to 1.3573 was fuelled by higher UST yields and equity losses
  • 1.3611 was Asia high (pre-UK CPI data)
  • Hot UK CPI data underpins expectation that BoE will raise rates again in Feb
  • UK PM faces plot to trigger leadership challenge

USDJPY Bias: Bullish above 114.50 Bearish below

  • USD/JPY off with JPY crosses as risk mood continues to sour
  • Tokyo demand sated early, into and after Tokyo fix, off since
  • From 114.79 EBS just after the Tokyo fix, USD/JPY down to 114.27 in PM trade
  • EUR/JPY 129.98 to 129.50, GBP/JPY 156.05 to 155.42, AUD/JPY 82.53 to 82.10
  • Nikkei -2.8% @27,470 into TSE close, AXJ mostly off, E-Minis -0.65% @4542
  • This despite high US yields, Treasury 10s @1.877%, high 1.890% earlier

AUDUSD Bias: Bearish below 0.7250 Bullish above

  • Holds ground as AU yields rise in tandem with US
  • AUD/USD trades in a relatively narrow range in Asia despite risk aversion
  • Higher U.S. yields taken in stride for now as AU yields rally alongside
  • U.S.10-year yield up 33 bps in 2022 while AU-10-year has risen 33 bps
  • Investors bet RBA will follow Fed rate hikes though policy makers skeptical
  • Dalian iron ore rallies 5%, hovers near 3-month high, underpins AUD
  • Support 0.7170, 0.715-55, resistance 0.7205-10, 0.7230-35