Daily Market Outlook, January 27, 2022

Overnight Headlines

  • Fed Fund Futures Extend Slide, As Market Prices In Five Hikes This Year
  • New Zealand’s Red-Hot Inflation Cements Rate-Hike Expectations
  • China's Dec Industrial Profits Grow At Slowest Pace Since April 2020
  • China Encourages Bad Loan Companies To Aid Struggling Developers
  • China Is Said To Weigh Breaking Up Evergrande To Contain Crisis
  • North Korea Fires Two Missiles As U.S. Condemns Flurry Of Tests
  • EU Set To Launch WTO Case Against China Over Lithuania Blockade
  • Britain's 2021 Car Production Falls To Lowest Since 1956 - SMMT
  • Dollar Nears 2022 High As Powell Says Fed Set For March Liftoff
  • Bitcoin Drops As Fed Signal Of March Liftoff Dents Risk Appetite
  • Fed Fallout Sends Sovereign Yields Soaring To Highs Across Asia
  • Commodities Index Hits Fresh Record As Inflation Concerns Spread
  • Asian Shares Retreat After Powell Says Rate Rise Expected Soon
  • Samsung Profit Misses After Increased Spending On Workers, Tech
  • Tesla Beats Rev Estimates On Record Deliveries, Despite Challenges
  • Intel Posts Record Quarterly Revenue, Sees Supply Strains Through Year

The Day Ahead

  • Risk-off sentiment dominated the Asian trading session following last night’s US Federal Reserve monetary policy update. Japan’s Nikkei index is down over 3% and China’s CSI 300 is nearly 2% lower. The Fed decision was much as expected as the rate-setting Committee continued to move policy in a more hawkish direction. No policy changes were made on this occasion, but a signal was sent that interest rates will very probably be raised at the next meeting in March with more hikes probably set to follow later in the year. It was also indicated that the Fed may start to reduce its asset holdings later in 2022.
  • Today’s US Q4 GDP report is likely to show economic growth stronger than in Q3, but the pace of acceleration may be less than that currently expected by the consensus. Look for a 4.5% quarterly annualised rise, up from 2.3% in Q3 but well below growth rates seen in the first half of last year. Moreover, some of the improvement is likely to be from higher inventories rather than a rise in final demand. A big fall in December retail sales suggests that consumer spending growth will prove to have been disappointing and some consumer services data that are not included in the retail sales report may have been hit even harder by Omicron. However, capital goods orders and shipments may show activity holding up rather better in areas that are probably less directly impacted by Omicron.
  • Other US releases today include weekly initial unemployment claims data, pending home sales and a regional manufacturing survey from the Kansas City Fed. Initial claims have risen recently, reflecting a slowdown in hiring following the sharp rise in Covid cases. The latest data showed a rise to 286k, the highest for three months. For the week ending 22 January, we forecast initial claims to fall to 240k, which would indicate a potential waning Omicron impact. Last night, the Fed seemed prepared to attribute recent signs of slower activity to a short-run impact from the surge in Covid cases around the turn of the year.

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: 1.1100 (554M), 1.1150 (700M) 1.1200-05 (700M), 1.1245-50 (993M), 1.1325 (267M)

1.1350 (351M), 1.1500 (284M)

USD/JPY: 112.50 (1.1BLN), 113.00-05 (860M) 113.50-60 (1.0BLN), 113.90-00 (745M), 114.15 (310M) 114.75-80 (1.16BLN), 115.50 (775M)

GBP/USD: 1.3545-50 (615M), 1.3570 (250M)

EUR/GBP: 0.8300 (241M)

USD/CAD: 1.2500-10 (500M), 1.2560-65 (1.1BLN) 1.2650 (203M), 1.2700 (257M)

AUD/USD: 0.7140-50 (560M), 0.7220 (676M)

NZD/USD: 0.6670 (624M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.15 Bullish above

  • Edges lower as test of support levels looms
  • EUR/USD opened -0.53% at 1.1242 after sliding late on hawkish Powell comments
  • USD remained bid through Asia morning and EUR/USD slipped to 1.1225
  • Heading into the afternoon it is trading at the session low
  • Diverging central bank expectations weighing heavily on EUR/USD outlook
  • Support is at the Dec 15 low at 1.2121 and break targets trend low at 1.1186
  • Resistance is at 10-day MA at 1.1324 and break would ease downward pressure

GBPUSD Bias: Bearish below 1.36 Bullish above.

  • Heavy, as the dollar strengthens and signals crest
  • -0.15% on the firmer USD, as commodities and stocks slump post hawkish FOMC
  • Trades towards the base of a 1.3441-1.3469 range with solid interest
  • London is top global finance center but lags in key areas
  • UK landlords raise rents for new tenants by record 9.9%
  • Rising house prices and rents fuelling inflation in many countries
  • Charts; 5, 10 & 21 day moving averages crest-fall, 21 day Bolli's expand
  • Momentum studies slip, negative setup - 1.3568 21 DMA major resistance
  • 1.3385 61.8% Dec-Jan rise resilient support, unless the U.S. dollar surges

USDJPY Bias: Bullish above 114.50 Bearish below

  • Asia risk mood very sour following hawkish FOMC, Powell, stocks off large
  • USD/JPY up early to 114.78 EBS before falling back, low 114.48
  • Japanese importers on bid, Tokyo fix demand, some investors too on dips
  • Japanese exporters in wait from ahead of 115.00, spec longs too
  • Higher US yields supportive, Treasury 10s @1.856%, early high 1.880%
  • Option expiries in area today - 114.00 $639 mln, 114.80 $911 mln
  • Large both side tom too - 114.00 $748 mln, 114.50 $596 mln, 115.00 $1.1 bln

AUDUSD Bias: Bearish below 0.7250 Bullish above

  • Post Fed slump accelerates in Asia
  • AUD/USD opened -0.52% at 0.7115 after completing a bearish outside day
  • It fell late in US session after Powell was more hawkish than expected
  • AUD/USD selling continued in Asia with pair falling to 0.7073 at one stage
  • Late in the morning session it is settling around 0.7080
  • Break below 0.7082 support targets Dec 3 trend low at 0.6994
  • Resistance is at 10-day MA at 0.7171 and beak would ease pressure
  • Likely hawkish pivot from RBA next week may cushion downside for now