Daily Market Outlook, January 21, 2022

Overnight Headlines

  • Biden Approval Rating Drops To 43%, Lowest Of His Presidency: Ipsos
  • Yellen: Fed, Biden Administration Will Take Steps To Control Inflation
  • Pelosi: Build Back Better May Need To Be 'More Limited,' Renamed
  • Some US Hospitals See Covid Patients Decline As Omicron Retreats
  • French PM: France To Lift Most Of Covid-19 Restrictions In February
  • UK Foreign Secretary Calls On Allies To Curb Rise Of Russia And China
  • Russia Announces Plans To Hold Major Navy Drills Involving Its Fleets
  • China Seen Cutting Rates Once More Before July, Analysts Predict
  • Japan's Inflation Hovers Around 2-Year High, BoJ Flags Price Pressure
  • Bitcoin Tumbles Below $40,000 To Its Lowest Level In Five Months
  • Oil Falls As Inventory Build Prompts Profit-Taking; Gold Edges Higher
  • Nasdaq 100 Futures Extend Loss On Rate Concerns, Netflix Plunge
  • Global Bond Slump Reverses Amid Tech Selloff And Russia Tensions

The Day Ahead

  • Asian equity markets are trading lower this morning, following the sharp reversal seen in US markets late on yesterday. Overall risk sentiment continues to be sensitive to the prospect of a tighter US monetary policy stance, while bubbling geopolitical tensions between the West and Russia have also contributed to the risk-off tone. In the UK, the GfK measure of consumer confidence dropped four points to -19 in January to register its weakest print since last February. Declines were registered across all the five components, although the biggest contribution to the drop came from falls in perceptions about the economy, while concerns over the cost of living saw the measure of people’s expectations of their own situation fall below zero for the first time since November 2020.
  • The ONS has just released its December retail sales report, which showed a sharper-than-expected drop in retail activity. Sales volumes fell by 3.7%m/m to register their largest monthly decline since last January led primarily by a 7.1% monthly dip in non-store sales, which some retailers attributed to the rapid spread of the Omicron variant. Sales at food stores were also down, albeit by much less (-1.0% m/m). Notwithstanding these softer UK data prints, financial markets continue to attach a very high probability to the Bank of England delivering a second-successive increase in interest rates at its next meeting in just under two-weeks’ time. The near certainty assigned to a quarter-point increase in Bank Rate by financial markets has followed a number of strong UK data releases since the start of the year, including the December inflation report which saw headline CPI rise up to a near 30-year high. Outside of Bank of England Governor, Andrew Bailey and Deputy Governor Cunliffe earlier this week, there have been a noticeable dearth of comments from members of the Monetary Policy Committee (MPC) since the December meeting, which has meant the move higher in market expectations has continued unopposed. However, today’s speech by external MPC member Catherine Mann on the UK economy and the outlook for monetary policy should provide markets with some food for thought. While Mann is seen as less hawkish than some of her colleagues, as she wasn’t calling for an increase in interest rates as early as Saunders and Ramsden last year, he is also not one of the most dovish either given that she supported the hike in December (as opposed to Tenreyro). While her comments may do little to alter market expectations for the February meeting, they may provide some indication over how much policy tightening centrists view as appropriate, particularly with markets now pricing in UK Bank Rate at 1.25% by the end of the year.
  • U.S. Treasury Secretary Janet Yellen said on Thursday she was confident the Fed and the Biden administration would take steps needed to bring down inflation during 2022.
  • One market not feeling the inflation angst are sovereign bonds. Germany's Bund yield is back below 0% and U.S. Treasury yields are down 5 basis points early in London. After all investors need somewhere safe to hide from carnage elsewhere.
  • Key developments that should provide more direction to markets on Friday: Top diplomats for U.S. Russia meet in Geneva on soaring Ukraine tensions. Rio Tinto shares plunge as Serbia pulls plug on its $2.4 bln lithium project. Euro zone flash consumer confidence. ECB president Christine Lagarde speak at Davo

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 (1.05BLN), 1.1450 (266M), 1.1470-75 (582M) 1.1500 (283M)

USD/JPY: 113.50-55 (1.0BLN), 113.80-90 (1.26BLN) 114.00 (266M), 115.00 (620M)

USD/CAD: 1.2450-60 (720M), 1.2500 (655M), 1.2545-50 (1.15BLN) 1.2555-60 (1.52BLN), 1.2600 (1.02BLN), 1.2650 (420M)

AUD/USD: 0.7195-00 (1.2BLN), 0.7270 (343M)

AUD/JPY: 83.50 (295M), 85.00 (448M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.15 Bullish above

  • Drifts higher after early dip as US yields slip
  • EUR/USD opened -0.28% at 1.1311 after a bearish outside day
  • It eased to 1.1301 early Asia before tracking higher the rest of the morning
  • The 10-year US yield eased to 1.77% and underpinned the EUR/USD
  • EUR/USD traded as high as 1.1335 before settling around 1.1325/30
  • Support is at a trend-line at 1.1284 with buyers tipped between 1.1230/50
  • Resistance is at the 100-day MA at 1.1481 and break renews upward pressure

GBPUSD Bias: Bearish below 1.36 Bullish above.

  • GBP/USD holds below 1.36 after big UK retail sales miss
  • Cable holds sub-1.36 after much worse than expected UK Dec retail sales data
  • Down 3.6% MM vs -0.6% f/c, down 0.9% YY vs +3.4% f/c
  • 1.3579 was three-day low for GBP/USD in Asia, courtesy of risk aversion
  • U.S. equities fell into Thursday's close, with Nasdaq closing down 1.3%
  • GBP is risk-sensitive; USD is a safer-haven
  • 1.3661 was Thursday's high (when U.S. equities were in positive territory)

USDJPY Bias: Bullish above 114.50 Bearish below

  • USD/JPY, JPY cross wilt with US and other offshore yields off, soft
  • USD/JPY 114.15 to 113.64 EBS, towards base of 113.37-87 Ichi cloud
  • Buyers holding back ahead of weekend, weak longs in exit mode
  • Also ascending 100-DMA below at 113.24 below base of daily cloud
  • $1.3 bln in option expiries at 113.80-90 today by-passed, 113.50-55 $1 bln
  • Yield on US Treasury 10s 1.792% to 1.765% in Tokyo, high Wednesday 1.902%
  • Nikkei -1.4% @27,377, lowest since August '21, E-Minis -0.9% @4433

AUDUSD Bias: Bearish below 0.7250 Bullish above

  • AUD/USD swept lower by fresh wave of cross – assets risk – off
  • AUD/USD swept lower to 0.7190, veering into bearish path
  • Fri close below 0.7187 engages Bollinger downtrend channel
  • If 0.7157 breached, more bearish still
  • That would open the way to Fibo support at 0.7126
  • Risk aversion hits stocks, bonds, oil, cryptocurrencies
  • US Treasury yields slide as havens sought; 10y down to 1.765%