GBP/JPY REMAINS ON THE DEFENSIVE NEAR 157.00 MARK, DOWNSIDE SEEMS CUSHIONED

11 February 2022, 10:23

• GBP/JPY witnessed some selling on Friday and extended the overnight modest pullback.
• The risk-off impulse benefitted the JPY’s relative safe-haven status and exerted pressure.
• The BoE-BoJ policy divergence should help limit any meaningful downfall for the cross.

The GBP/JPY cross remained depressed through the early European session and was last seen trading just a few pips above the daily low, around the 157.00 mark.

The cross extended the overnight modest pullback from the 158.00 round figure, or the highest level since October 2021 and witnessed some selling during the first half of the trading on Friday. The risk-off impulse in the markets underpinned the Japanese yen's relative safe-haven status and exerted some pressure on the GBP/JPY cross.

Growing market acceptance that the Fed will adopt a more aggressive policy response to combat high inflation triggered a fresh bout of the global risk aversion trade. This was evident from a sea of red across the equity markets, which, in turn, forced investors to take refuge in traditional safe-haven assets and benefitted the JPY.

On the other hand, the British pound was weighed down by a broad-based US dollar strength and failed to gain any respite from mixed UK macro releases. The UK Office of National Statistics reported that the economy contracted less than anticipated, by 0.2% in December, and expanded by 1% during Q4 2021 as against expectations for the 1.1% increase.

Separately, the UK Industrial/Manufacturing Production figures and a larger than estimated traded deficit did little to impress traders or provide any impetus to the GBP/JPY cross. The downside, however, remains cushioned, at least for now, amid the divergence between the Bank of England and the Bank of Japan monetary policy outlooks.

It is worth recalling that the BoE raised its benchmark interest rate by 25 bps last week – marking the first back-to-back hike since 2004. Adding to this, four out of nine MPC members voted for a more aggressive 50 bps hike in borrowing costs. Conversely, the BoJ has repeatedly said that it would retain its ultra-loose monetary policy.

The fundamental backdrop still seems tilted in favour of bullish traders. This, in turn, warrants some caution before confirming that the recent strong move up from the 200-day SMA has run out of steam. That said, tensions over the Northern Ireland protocol of the Brexit agreement might hold back traders from placing fresh bullish bets around the GBP/JPY cross.

USD/CAD REFRESHES THREE-DAY HIGHS BUT RETREATS UNDER 1.2700 POST-US INFLATION REPORT

10 February 2022, 16:50

• The USD/CAD appears to fade the US inflation report, which came higher than estimated.
• US Treasury yields rise, led by the 10-year benchmark note at 2%.
• USD/CAD Technical Outlook: Neutral biased, confined to the 1.2650-1.2790 range.

The USD/CAD pares Wednesday’s losses as the US inflation in January grinds higher, reaching a 40-year high, while the US central bank prepares to begin its tightening cycle. At the time of writing, the USD/CAD is trading at 1.2693.

On Thursday, the Department of Labor reported that January’s inflation rose by 7.5%, higher than the 7.3% estimated annually based. Excluding volatile items like energy and food, also called Core Consume Price Index (CPI), broke the 6% threshold, higher than the 5.9% expected, the most witnessed since 1982.

Market’s reaction

The USD/CAD initial reaction was upwards, from 1.2670s region to 1.2714, though stalled around February0s 9 daily high. Meanwhile, the US 10-year Treasury yield reached the 2% mark in the bond market, rallying more than five basis points after the US inflation report.

An absent Canadian economic docket left USD/CAD traders adrift to US macroeconomic data. On the US front, alongside the inflation figures, Initial Jobless Claims for the week ending on February 5, increased 223K, lower than the 230K estimated by economists, while Continuing Jobless Claims stayed unchanged at 1621K compared to the revision of the previous week.

USD/CAD Price Forecast: Technical outlook

The USD/CAD is confined to the 1.2650-1.2790 area. The 50-day moving average (DMA) at 1.2703 above the spot price is resistance, capping moves since Monday, while the 100 and the 200-DMA at 1,2616 and 1.2519 are almost “horizontal” well below the exchange rate.

That said, the USD/cad first resistance would be the aforementioned 50-DMA. Breach of the latter would expose the January 28 cycle high at 1.2796. Once that is broken, the USD/CAD will have a clear path towards December’s 2021 swing high at 1.2963.

S&P 500 OPENS SHARPLY LOWER AFTER HOT US INFLATION DATA

10 February 2022, 16:39

Wall Street's main indexes came under strong bearish pressure on Thursday after the data from the US showed that inflation continued to rise at the beginning of the year.

The S&P 500 Index was last seen losing 1.15% at 4,535, the Dow Jones Industrial Average was losing 0.75% at 35,500 and the Nasdaq Composite was falling 1.4% at 14,285.

The US Bureau of Labor Statistics reported that inflation, as measured by the Consumer Price Index (CPI), jumped to 7.5% on a yearly basis in January from 7% in December. This reading surpassed the market expectation of 7.3%. Additionally, the Core CPI, which strips food and energy prices, climbed to 6% from 5.5%, compared to analysts' estimate of 5.9%.

Meanwhile, the benchmark 10-year US Treasury bond yield is up nearly 3% on the day at 2% and the CME Group FedWatch Tool shows that markets are pricing a 50.2% probability of a 50 basis points Fed rate hike in March.

GBP/USD REFRESHES DAILY LOW, AROUND 1.3525 AREA ON STRONGER US CPI

10 February 2022, 15:41

• GBP/USD dived over 50 pips in the last hour amid a strong pickup in the USD demand.
• Hotter-than-expected US CPI print boosted Fed rate hike bets and lifted the greenback.
• Bears might wait for sustained break below the 1.3500 mark before placing fresh bets.

the GBP/USD pair witnessed a dramatic turnaround in reaction to stronger US CPI prints and dived to a fresh daily low, around the 1.3525 region in the last hour.

Following a brief consolidation, the US dollar caught fresh bids during the early North American session following the release of the latest US consumer inflation figures. This, in turn, was seen as a key factor that attracted some selling around the GBP/USD pair and led to a sharp pullback of over 50 pips from the daily high, near the 1.3580 region.

According to the data released this Thursday, the headline US CPI edged higher to 0.6% in January as against expectations for a reading of 0.5%. Moreover, the yearly rate reached a fresh multi-decade high and accelerate to 7.5% during the reported month, up from 7% recorded at the end of 2021, against surpassing consensus estimates.

Adding to this, the core CPI, which excludes food and energy prices, rose 6.0% from a year ago as against 5.5% in December and 5.9% anticipated. The data boosted bets for a 50 bps Fed rate hike in March, which was evident from an uptick in the US Treasury bond yields. This, in turn, benefitted the USD and exerted pressure around the GBP/USD pair.

It will now be interesting to find if the pair is able to find some buying at lower levels or weakens further below the key 1.3500 mark, confirming a near-term bearish breakdown. Hence, it will be prudent to wait for a strong follow-through selling before traders start positioning for any further near-term depreciating move for the GBP/USD pair.

Technical levels to watch

USD/INR TO ADVANCE NICELY TOWARDS 77.50 BY YEAR-END AMID MORE DOVISH RBI – STANDARD CHARTERED

10 February 2022, 15:49

India’s Monetary Policy Committee (MPC) kept both the repo and the reverse repo rate unchanged and maintained its accommodative policy stance. In the view of analysts at Standard Chartered, RBI’s dovish rhetoric poses yet another headwind – they remain bearish on the INR.

Dovish RBI supports bearish INR view

“MPC maintains status quo on repo and reverse repo rates. We continue to expect the repo rate to be hiked from August; corridor normalisation likely by June vs our previous expectation of April.”

“We think the RBI’s dovish rhetoric relative to market expectations will act as another headwind for the INR, particularly at a time when major central banks are adopting a much more hawkish stance.”

“We maintain our targets for USD/INR at 75.50 by end-March and 77.50 by year-end.”