Euro Flexes Muscle after ECB, Staging Broad-Based Bullish Reversal?

It was a week a surprises. While BoE delivered that a 25bps hike, four of the nine MPC members have indeed voted for a 50bps raise. However, there was no follow through buying as BoE indicated only “modest” tightening would follow. Also, the event was overshadowed by ECB’s unexpected hawkish turn. Then, after US ADP report set up rather low expectation for non-farm payroll, NFP hit the markets with a bang.

Still, Dollar ended as the worst performing one even though it tried to strike a late come back. Yen was the second worst, followed by Canadian Dollar. Euro was the runaway winner, followed by Australian and then New Zealand Dollar. Sterling just ended mixed with Swiss.

Euro ended as runaway winner after ECB hawkish turn

The biggest surprise last week was ECB’s hawkish turned. In the post meeting press conference, President Christine Lagarde declined to repeat her guidance that rate hike was “very unlikely” this year. Then, Governing Council member Olli Rehn was quoted on Friday that “if there are no setbacks in the pandemic or the geopolitical situation, it would logical for the ECB to hike its key interest rate at latest next year.” Markets are now expecting the deposit rate to be raised from the current -0.50% to 0.00% by year end, even though the opinions on timing differ.

Euro was the runaway leader last week. EUR/USD’s break of of the medium term channel resistance is a bullish sign, together with bullish convergence condition in daily MACD. Immediate focus is on 1.1482 resistance this week. Firm break there will confirm medium term bottoming at 1.1120, and raise the chance of trend reversal. Further rise should then be seen to 38.2% retracement of 1.2348 to 1.1120 at 1.1589 next.

EUR/CAD’s rally argue that a medium term bottom was formed at 1.4098, on bullish convergence condition in daily MACD. Firm break of 1.4644 resistance will confirm this case and target 38.2% retracement of 1.5991 to 1.4098 at 1.4821. Sustained break there will raise the chance of trend reversal, that is, whole down trend from 1.5991 (2020 high) was complete. Further rally would be seen to 61.8% retracement at 1.5268.

EUR/JPY’s break of 131.59 resistance confirmed resumption of the rise from 127.36. More importantly, it revives the case that consolidation from 134.11 has completed with three waves to 127.36. Retest of 133.44/134.11 resistance zone should be seen next. Firm break there will resume larger up trend from 114.42.

EUR/GBP’s strong break of 0.8241 resistance and and 55 day EMA indicates medium term bottoming at 0.8282, on bullish convergence condition in daily MACD, just ahead of 0.8276 key long term support (2019 low). Next focus will be 0.8598 resistance. Sustained break there will argue that whole down trend from 2020 high at 0.9499 is finished too, and turn medium term outlook bullish.

EUR/CHF’s strong break of 1.0510 resistance indicates medium term bottoming at 1.0298, on bullish convergence condition in daily MACD. Immediate focus is now on 38.2% retracement of 1.1149 to 1.0298 at 1.0623 first. Sustained trading above there will raise the chance of trend reversal and target 61.8% retracement at 1.0824 next

Fed hike expectations heightened further after NFP, but stocks resilient

Another big surprise last week was the much stronger than expected non-farm payroll report, which saw large job growth and faster wages growth. There are some speculations that Fed would start the tightening cycle in March with a 50bps hike. Yet, for now, the base case is still for Fed to deliver consecutive 25bps hike at the upcoming meetings. That would give policymakers more flexibility to wait-and-see how inflation develops.

Though, the March 15-16 FOMC meeting is more than a month away and many things could happen in between, starting with January CPI data to be featured this week. If inflation outlook does worsen much further, it would be hard for Fed to not acting quick and heavy.

US stocks remained pretty resilient in spite of heightened expectation on Fed’s stimulus removal. For now, DOW is seen as in a consolidation pattern to the rise from 26143.77 only, not that from 18213.65. Such consolidations should extend for a while with another falling leg before completion. That is, in case of stronger rebound, break of 36952.65 high is not envisaged. In case of another fall, stronger support should be seen at 38.2% retracement of 26143.77 to 36952.65 at 32823.65 to bring rebound.

US 10-year yield surged, so did others

10-year yield broke out from range on Friday to close at 1.930. Near term outlook in TNX will stay bullish as long as 1.743 support holds. Current up trend is expected to continue through 2% handle to 2.159/87 cluster level. This represents 61.8% retracement of 3.248 to 0.398 at 2.159, and 61.8% projection of 0.398 to 1.765 from 1.343 at 2.187. This is where the real test lies, and no break is expected unless there are some dramatic underlying developments.

Meanwhile, it should be noted that US benchmark yields could provide little support to the greenback for now. As other major global yields are also on the way up. Germany 10-year bund yield has finally turned positive with some conviction and closed at 0.210, highest since early 2019.

Japan 10-year JGB yield also jumped to close at 0.210, highest since early 2016.

Dollar index dropped following the rebound in Euro

Dollar index basically followed the move in EUR/USD last week. The steep decline indicates that a short term top is at least formed at 97.44. The biggest question is whether it’s already rejected by key resistance at 61.8% retracement of 102.99 to 89.20 at 97.72.

On the downside, sustained break of trend line support at around 95.00 will argue that it’s at least correcting the whole up trend from 89.20. Deeper decline would be seen through 94.62. Reactions to 55 week EMA (now at 94.02) would reveal whether the medium term trend has reversed.

GBP/JPY Weekly Outlook

GBP/JPY’s rebound from 152.88 extended higher last week, but lost momentum after hitting 156.48. Initial bias is neutral this week first. The consolidation pattern from 158.19 could still extend further. On the downside, below 154.46 minor support will turn bias back to the downside for 152.88 support and below. Nevertheless, above 156.48 will target a test on 157.74/158.19 resistance zone. Decisive break there will resume larger up trend.

In the bigger picture, price actions from 158.19 are seen as developing into a consolidation pattern to up trend from 123.94 (2020 low). Downside should be contained by 123.94 to 158.19 at 145.10 to bring rebound. Firm break of 158.19 will resume the up trend to long term fibonacci level at 167.93. However, sustained break of 145.10 will raise the chance of trend reversal and target 61.8% retracement at 137.02.

In the longer term picture, as long as 55 month EMA (now at 147.30) holds, we’d still favor more rally to 61.8% retracement of 195.86 to 122.75 at 167.93. But sustained trading below 55 month EMA will at least neutralize medium term bullishness and re-open the chance of revisiting 122.75 low (2016 low).