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Dollar Staying Weak, But Awaits Committed Selling

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Markets turned steady in Asian session as risk-on moves take a breather for now. Dollar remains the worst performer but there is no committed follow through selling so far, after breaking near term support against Euro and Swiss Franc. Commodity currencies also lose some momentum and are overtaken by European majors in terms of strength. Euro is having mild upper hand against other European peers.

Technically, EUR/AUD is losing some downside momentum as seen in 4 hour MACD. The corrective fall from 1.5976 might complete ahead of 38.2% retracement of 1.4281 to 1.5976 at 1.5329. Break of 1.5614 resistance will bring stronger rally back to retest 1.5976 high. If happens, given AUD/USD’s firmness, that might be accompanied some upside acceleration in EUR/USD finally. Let’s see.

In Asia, at the time of writing, Nikkei is up 0.72%. Hong Kong HSI is down -0.33%. China Shanghai SSE is up 0.38%. Singapore Strait Times is down -1.00%. Japan 10-year JGB yield is down -0.0024 at 0.503. Overnight, DOW dropped -0.34%. S&P 500 dropped -0.08%. NASDAQ rose 0.63%. 10-year yield dropped -0.052 to 3.517.

BoE Pill: Distinctive context prevails in UK creates the potential for more persistent inflation

BoE Chief Economist Huw Pill said in a speech yesterday that the central bank’s communication “rightly places the persistence of inflation at centre-stage”.

“Given the famous ‘long and variable lags’ in monetary policy transmission, it is the persistent component of inflation – that component of inflation that will still be there once the lags in monetary policy transmission unwind – that is the relevant object for the MPC’s attention,” he said.

He also noted, “the distinctive context that prevails in the UK – of higher natural gas prices with a tight labour market, adverse labour supply developments and goods market bottlenecks – creates the potential for inflation to prove more persistent.”

“It is therefore in this nexus that I focus in coming to my own assessment of the risks surrounding inflation persistence, which – consistent with the MPC’s collective communication – will strongly influence my monetary policy position in the coming months.”

Fed Daly: Case can be made for either 25 or 50 next

San Francisco Fed President Mary Daly said in a WSJ interview that she expects interest rate to rise from the current 4.25-4.50% to 5.00-5.25%. But she added that “doing it in more gradual steps does give you the ability to respond to incoming information.”

Daly said the “case can be made for either” a 25bps or 50bps hike in February. But at the same time, “I want to be data dependent, not wall off a 50 basis point increase.”

She expects unemployment to rise from current 3.5% to 4.5-4.6% as tightening continues. Inflation, now running at 5.5%, will fall to low 3% range by the end of 2023, and closer to 2% in 2024.

Fed Bostic: Rates to stay above 5% a long time

Atlanta Fed President Raphael Bostic said, “if the CPI comes in showing the same kind of trending that we saw in the jobs number, that will make me have to take 25 more seriously,” regarding the rate hike in February.

But he also emphasized that “we are just going to have to hold our resolve,” and expect interest rates to rise to 5.00-5.52% range to bring inflation down. As how long he saw rates above 5%, Bostic said: “Three words: a long time.”

“I am not a pivot guy. I think we should pause and hold there, and let the policy work,” he said. The “base case” for him it no rate cuts in 2024.

On the data front

Japan Tokyo CPI core rose from 3.6% yoy to 4.0% yoy in December, above expectation of 3.8% yoy. Household spending dropped -1.2% yoy in November, versus expectation of 0.6% yoy.

Looking ahead, the economic calendar is light. France industrial output and US NFIB business optimism index are the main features.

Attention will more be on comments from BoC Macklem, BoJ Kuroda and Fed Powell.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.0662; (P) 1.0711; (R1) 1.0785; More

Break of 1.0733 resistance indicates resumption of whole rally from 0.9534. Intraday bias in EUR/USD is turned to the upside. Next target is 61.8% projection of 0.9630 to 1.0733 from 1.0482 at 1.1164. On the downside, below 1.0659 minor support will turn intraday bias neutral again fist. But near term outlook will stay bullish as long as 1.0482 support holds, in case of retreat.

In the bigger picture, focus stays on 38.2% retracement of 1.2348 (2021 high) to 0.9534 at 1.0609. Rejection by 1.0609 will suggest that price actions from 0.9534 medium term bottom are developing into a corrective pattern. Thus, medium bearishness is retained for another fall through 0.9534 at a later stage. However, sustained break of 1.0609 will raise the chance of trend reversal and target 61.8% retracement at 1.1273.

Economic Indicators Update

GMT
Ccy
Events
Actual
Forecast
Previous
Revised
23:30
JPY
Tokyo CPI Core Y/Y Dec
4.00%
3.80%
3.60%
23:30
JPY
Household Spending Y/Y Nov
-1.20%
0.60%
1.20%
00:01
GBP
BRC Like-For-Like Retail Sales Y/Y Dec
6.50%
4.10%
07:45
EUR
France Industrial Output M/M Nov
0.90%
-2.60%
11:00
USD
NFIB Business Optimism Index Dec
91.6
91.9
15:00
USD
Wholesale Inventories Nov F
1.00%
1.00%

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