Forex news and forecasts from 23-02-2021

• We expect inflation to temporarily move up on base effects
• Over time growth of balance sheet will slow but asset purchases will continue until substantial further prioress is seen
• If we get unwanted inflation, we have the tools to deal with it
• Doesn't see how a burst in fiscal support or spending would lead to high inflation
• Inflation dynamics do not change on a dime
• Does not seem likely that increase in spending would lead to large or persistent inflation
• Won't take a position in minimum wage debate

FXStreet notes that copper (LME) is accelerating in an exponential manner towards the February and August 2011 highs at 9905.00/10190.00 but this ascent isn’t sustainable, according to Axel Rudolph, Senior FICC Technical Analyst at Commerzbank, who expects the metal to see a retracement lower soon.

“Copper has shot up to levels last seen in August 2011 but it is short-term overextended with the daily RSI trading at extreme levels not seen since 2006. Just like back then we expect to see some kind of retracement lower, probably this or next week, for the contract to give back some of its recent sharp gains.” 

“While the contract remains above the January trough at 7705.00, we will retain our medium and longer-term bullish view with the February and August 2011 highs at 9905.00/10190.00 being targeted.” 

• We are strongly committed to achieving monetary policy goals that Congress has given us: maximum employment and price stability
  
• Economic recovery remains uneven and far from complete, and path ahead is highly uncertain
  
• Economic momentum has slowed substantially after summer rebound
• Fed will not tighten monetary policy solely in response to a strong labor market
• Fed will clearly communicate "well in advance" of any change to bond buying pace
• It will likely take some time for substantial further progress to be achieved
• Economy is a long way from employment and inflation goals
• We are committed to using our full range of tools to support economy and to help ensure that recovery from this difficult period will be as robust as possible
  

The Conference Board announced on Tuesday its U.S. consumer confidence rose 2.4 points to 91.3 in February from 88.9 in January.

Economists had expected consumer confidence to come in at 90.0.

January’s consumer confidence reading was revised down from the originally estimated 89.3.

The survey showed that the present situation index increased from 85.5 in January to 92.0 this month. Meanwhile, the expectations index dropped from 91.2 last month to 90.8 in February.

“After three months of consecutive declines in the Present Situation Index, consumers’ assessment of current conditions improved in February,” noted Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “This course reversal suggests economic growth has not slowed further. While the Expectations Index fell marginally in February, consumers remain cautiously optimistic, on the whole, about the outlook for the coming months. Notably, vacation intentions - particularly, plans to travel outside the U.S. and via air - saw an uptick this month, and are poised to improve further as vaccination efforts expand.”

S&P reported on Tuesday its Case-Shiller Home Price Index, which tracks home prices in 20 U.S. metropolitan areas, jumped 10.1 percent y-o-y in December, following a revised 9.2 percent y-o-y surge in November (originally a 9.1 percent y-o-y climb). This was the biggest annual gain in house prices since April 2014.

Economists had expected a climb of 9.9 percent y-o-y.

Phoenix (+14.4 percent y-o-y), Seattle (+13.6 percent y-o-y) and San Diego (+13.0 percent y-o-y) recorded the highest y-o-y advances among the 19 cities (excluding Detroit) in December. Eighteen of the 19 cities reported greater price gains in the year ending December versus the year ending November.

Meanwhile, the S&P/Case-Shiller U.S. National Home Price Index, which measures all nine U.S. census divisions, surged 10.4 percent y-o-y in December, following a 9.5 percent y-o-y jump in the previous month.

“The trend of accelerating prices that began in June 2020 has now reached its seventh month,” noted Craig J. Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P Dow Jones Indices. “As COVID-related restrictions began to grip the economy in early 2020, their effect on housing prices was unclear. Price growth decelerated in May and June, and then began a steady climb upward, and December’s report continues that acceleration in an emphatic manner. 2020’s 10.4% gain marks the best performance of housing prices in a calendar year since 2013. From the perspective of more than 30 years of S&P CoreLogic Case-Shiller data, December’s year-over-year change ranks within the top decile of all reports.”

U.S. stock-index futures fell on Tuesday, as the heavily-weighted technology stocks remained under pressure on valuation concerns ahead of Federal Reserve Chair Jerome Powell’s testimony in Congress.

Global Stocks:

(company / ticker / price / change ($/%) / volume)

Exxon Mobil (XOM) initiated with an In-line at Evercore ISI; target $48

Starbucks (SBUX) upgraded to Outperform from Market Perform at BMO Capital Markets; target raised to $120

FXStreet reports that S&P 500 has confirmed a small “head & shoulders” top below 3885 following the move to 3900 and the Credit Suisse analyst team continues to look for a correction lower to 3819/17 and potentially to 3792/74.

“We maintain our view of looking for a correction lower with support seen at 3852 initially, the 38.2% retracement of the rally from late January. Whilst we would look for this to hold at first, below in due course can see support next at 3830 and then the ‘measured top objective’ at 3819/17.” 

“We see scope for an overshoot into the 3792/74 early February price gap but with the rising 63-day average not far below here at 3761, we look for a floor here for a resumption of the core uptrend.” 

FXStreet notes that the ECB is interested in possibly issuing a central bank digital currency (CBDC), and its decision will be announced in April. If the ECB were to go ahead, economists at HSBC believe there should not be any impact on the euro.

“The ECB is interested in possibly issuing a CBDC after it ended a public consultation on 12 January 2021 and a decision whether to proceed will be announced in April. The initial aim would be to compliment cash within the eurozone for domestic residents – households and firms. So, this should not have any impact on the EUR.”

“The ECB said in a report about the digital euro that ‘it should potentially be accessible outside of the euro area in a way that is consistent with the objectives of the Eurosystem and convenient to non-euro area residents.’ Otherwise, the ECB said the international role of the EUR could weaken at the expense of other CBDCs.”

“The ECB believes the international role of the EUR is stable but its composite measure also shows that this has been weakening for more than the past decade."

FXStreet notes that the U.S. equities markets have continued to perform well, fueled by upbeat earnings and vaccination news. However, that’s often when surprises arise. A correction would be welcome at this point, as sentiment and positioning have reached extreme levels, as Mike Wilson, Chief Investment Officer and Chief US Equity Strategist for Morgan Stanley suggests.

“Fourth-quarter earnings proved to be terrific for most companies. With 419 companies in the S&P 500 reporting so far, earnings per share have come in 18% higher than the consensus estimate. Sales have been just 3% higher on average, suggesting our operating leverage theme is really playing out. Fourth-quarter sales actually grew 1% year over year.”

“After a slow start, the vaccination process has picked up nicely. In addition, there is some evidence that the first shot of the vaccine could provide 75% effectiveness against symptoms of any kind. Meanwhile, new cases are falling more rapidly than expected, and several leading health experts are even saying we may achieve herd immunity as early as April.”

“At this point, it seems like nothing can slow this bull market. However, that's exactly when surprises usually arise. We see two potential risks to be thinking about as we exit February. First, is the risk associated with interest rates rising sharply as bond markets simply catch up to what other asset prices are already reflecting. Second is the risk that some of the positive operating leverage that we've been witnessing in company earnings reports starts to go in reverse.”

“With this macro backdrop, we continue to favor areas in the market that are reasonably priced or can benefit from rising rates and inflation. Areas like banks, materials and energy. We also favor reopening beneficiaries in the consumer and business services sectors, as markets begin to digest a faster return to normal activities.”

USD traded mixed against its major rivals in the European session on Tuesday as market participants prepared for the Fed chair Powell's appearance in front of the U.S. Senate Banking Committee later today with his semi-annual testimony on the economy. 

The U..S. currency rose against CHF, JPY and AUD, changed little against EUR and CAD, and fell against GBP and NZD. The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, increased 0.12% to 90.12.

In Powell's testimony, close attention will be paid to his comments on the inflation prospects and growing Treasury bond yields. It is possible that the Fed's chairman may play down the risk of inflation despite President Joe Biden’s massive $1.9 trillion COVID-19 relief package. In the past, Powell had cautioned that inflation could rise, but only temporarily, as the economy recovers.

USD/CNH stick to the positive outlook - UOB

FXStreet reports that FX Strategists at UOB Group suggest that the outlook for USD/CNH remains tilted to the constructive side for the time being.

24-hour view: “We expected USD to ‘trade sideways between 6.4400 and 6.4700’ yesterday. USD subsequently traded between 6.4496 and 6.4760. The underlying tone has softened and USD could drift lower but is unlikely to threaten the support at 6.4400 (6.4500 is already quite a strong level). Resistance is at 6.4680 followed by 6.4760.”

Next 1-3 weeks: “As USD advances, we noted in our latest narrative from last Friday (19 Feb, spot at 6.4580) that ‘outlook for USD is still positive’ and ‘the next resistance level of note is at 6.4920’. USD rose to 6.4760 yesterday before easing off. Shorter-term momentum has waned somewhat but there is no change in our view for now. Only a break of 6.4200 (no change in ‘strong support’ level) would indicate that 6.4920 is out of reach this time round.”

FXStreet notes that the AUD/JPY pair has reached highs since December 2018 this week. Economists at Westpac expect the pair to trade at 84.50 in the next weeks while forecasting it to end the year trading at around the 87.00-neighborhood.

“The AUD/JPY recovery from pandemic lows is not yet a year old and should extend into 2022, backed by a coordinated global upswing supporting commodity demand. This should reinforce the rebound in Australia’s domestic economy from a comparatively contained covid situation.” 

“The surge in global bond yields should support AUD/JPY, given the BoJ’s commitment to ‘around’ 0% yield for the 10-year JGB. While the RBA’s dedication to loose policy is very clear, steepening yield curves globally should help A$ on crosses.”

“Multi-day/week risks look to be tilted towards 84.50, with our year-end forecast 87.”

Home Depot (HD) reported Q4 FY 2020 earnings of $2.65 per share (versus $2.28 per share in Q4 FY 2019), beating analysts’ consensus estimate of $2.37 per share.

The company’s quarterly revenues amounted to $32.261 bln (+25.1% y/y), beating analysts’ consensus estimate of $27.096 bln.

The company also announced that its board of directors approved an increase in its quarterly dividend by 10% to $1.65/share, which equates to an annual dividend of $6.60/share.

HD fell to $266.98 (-3.22%) in pre-market trading.

• We can really look at that June 21 date with some optimism
• But "nothing can be guaranteed" in the current climate and it depends on people following rules in each stage
• "Immense possibilities" of vaccine rollout would lead to "shield around our population"

The Confederation of British Industry (CBI) reported on Tuesday its latest survey of retailers showed retail sales volume balance stood at -45 in the year to February, up from -50 in January. 

Economist had forecast the reading to improve to -38.

In addition, retail sales volumes are expected to drop at a steeper pace in the year to March (-62).

The report also revealed that the retail orders balance also decreased (balance of -36, from -45 in January) with an even sharper decline seen next month (-44). Meanwhile, internet sales increased at a record pace (balance of +75, from 43 in January), providing relief for some retailers; another historically strong performance expected in the year to March (+78).

In other survey results, employment in the retail sector dropped for the 17th consecutive quarter and at a faster pace than in the year to November (balance of -44, from -32 in November), and similar fall is anticipated in the year to March (-44). Investment intentions for the quarter ahead stabilized compared to November (balance of -2, from -19 in November).

“With lockdown measures still in place, trading conditions remain extremely difficult for retailers,” noted Ben Jones, CBI Principal Economist. “Record growth in internet shopping suggests that retailers’ investments in on-line platforms and click-and-collect services maybe paying off, but the re-opening of the sector can’t come soon enough to protect jobs and breathe life back into the sector.”

FXStreet reports that economists at DBS Bank discuss GBP/USD prospects. 

“At this level, GBP appears overbought. Apart from a Relative Strength Index reading around 74, GBP is around the top of an ascending price channel established after the November US elections.” 

“While UK research showed that the vaccines sharply reduced hospitalisation and transmissions, Prime Minister Boris Johnson has decided to go slow on easing lockdowns which will be carried out in four stages between 8 March and 21 June.” 

“With the UK economy slow to emerge from the pandemic in 1H21, GBP could return below 1.40 again if the bulls decide to book some profits.”

According to the report from Eurostat, the euro area annual inflation rate was 0.9% in January 2021, up from -0.3% in December. A year earlier, the rate was 1.4%. European Union annual inflation was 1.2% in January 2021, up from 0.3% in December. A year earlier, the rate was 1.7%.

The lowest annual rates were registered in Greece (-2.4%), Slovenia (-0.9%) and Cyprus (-0.8%). The highest annual rates were recorded in Poland (3.6%), Hungary (2.9%) and Czechia (2.2%). Compared with December, annual inflation fell in three Member States, remained stable in six and rose in eighteen.

In January, the highest contribution to the annual euro area inflation rate came from services (+0.65 percentage points, pp), followed by non-energy industrial goods (+0.37 pp), food, alcohol & tobacco (+0.30 pp) and energy (-0.41 pp).

FXStreet reports that analysts at Standard Chartered see strong support for the yellow metal at $1765.

“Bond yields are unlikely to drive further gains in gold. The Fed will likely welcome the rise in inflation expectations under its Average Inflation Targeting framework. This means a further rise in real yields could be harder to come by.”

“While USD has been resilient in recent weeks, a resolutely accommodative Fed in the face of rising growth and inflation expectations is likely to be negative for the USD over the next 6-12 months. This can be a positive driver for gold, helping it still deliver absolute gains.”

According to the report from the Istat, in December 2020 the seasonally adjusted turnover index increased by 1.0% compared to the previous month (+2.0% in the domestic market and -1.0% in non-domestic market); the fourth quarter reported a growth of 0.8% compared to the third quarter (+0.6% in domestic market and +1.2% in non-domestic market).

The seasonally adjusted industrial new orders index increased by 1.7% in December compared to November (+6.5% in domestic market and -4.9% in non-domestic market) and by 2.6% in the fourth quarter compared to the third quarter (+3.1% in domestic market and +2.0% in non-domestic market).

With respect to the same month of the previous year the calendar-adjusted industrial turnover index decreased by 0.5% (+1.7% in domestic market and -4.6% in non-domestic market). Calendar working days in December 2020 were 21, one more than December 2019.

The unadjusted industrial new orders index increased by 7.0% with respect to the same month of the previous year (+7.8% in domestic market and +5.8% in non-domestic market).

FXStreet reports that FX Strategists at UOB Group noted that USD/JPY could slip back to the 104.40 region in the next week.

Next 1-3 weeks: “We have held a positive view in USD since early last week. After USD retreated after touching 106.21, we cautioned yesterday that ‘upward momentum has waned quickly’ and ‘prospect for further USD strength has diminished considerably’. The positive phase came to an end as USD took out our ‘strong support’ level at 105.00 yesterday (low of 104.97) The current movement is viewed as a pullback that has scope to test month-to-date low at 104.40. At this stage, the prospect for a sustained decline below this level is not high. On the upside, a break of the ‘strong resistance’ at 105.65 would indicate the current downward pressure has eased.”

eFXdata reports that MUFG Research discuss EUR prospects.

"The EUR has been one of the worst performing G10 currencies so far this year alongside the other low/negative yielding currencies of the CHF and JPY...The EUR’s recent failure to continue to strengthen on the back of the ongoing improvement in global investor risk sentiment could suggest/encourage more use of the EUR as a funding currency, and/or reflect more concern amongst market participants that the euro area will not benefit as much from global recovery optimism. The developments suggest that the EUR could continue to underperform in the nearterm, but there is upside potential for the EUR if relative pessimism over the euro area growth outlook proves overdone," MUFG adds.

FXStreet reports that strategists at Capital Economics discuss GBP/USD prospects.

“With the government now aiming to give all adults their first vaccine dose by the end of July, we think the lockdown easing roadmap will allow the economy to climb back to its February 2020 level late this year and to the same level as in Q4 2019 in Q1 2022.”

“The Chancellor and the BoE are unlikely to knock the recovery off course by tightening policy. Fiscal policy in 2021/22 is more likely to be looser than currently planned, not tighter. The BoE has been stressing since August that it won’t raise interest rates at the first signs of a sustained rise in economic activity or inflation. Our forecast that it won’t be raised until 2026 implies that, after having risen from 0.30% in late January to 0.68%, there is not that much more upside for 10-year gilt yields. A fast economic recovery and loose policy underpins our forecasts that the pound and FTSE 100 will rise from $1.40 and 6,600 now to $1.45 and 7,500 this year.”

During today's Asian trading, the US dollar consolidated near a six-week low and commodity-linked currencies traded near multi-year highs as investors ' attention shifted to how US Fed Chairman Jerome Powell might respond to resurgent inflation expectations.

Rising prices for materials - from oil and copper to lumber and milk powder-have lifted currencies such as the Canadian, Australian and New Zealand dollars to their highest levels in about three years.

Traders expect Powell, who is testifying before Congress at 15: 00 GMT, to provide some reassurance that the Fed will allow higher inflation without rushing to raise rates. According to them, it can calm the bond markets and, ultimately, to put pressure on the dollar.

Asia trade was dampened by a public holiday in Tokyo, but new confidence that low US interest rates won't rise any time soon could clear the way for further gains in trade-affected currencies at the expense of the dollar.

The ICE Dollar index, which shows the value of the dollar against six major world currencies, fell 0.03%.

According to the report from the Federal Statistical Office (FSO), the Producer and Import Price Index rose in January 2021 by 0.3% compared with the previous month, reaching 100.3 points (December 2020 = 100). The rise is due in particular to higher prices for scrap, petroleum products, as well as for basic metals and semi-finished metal products. Compared with January 2020, the price level of the whole range of domestic and imported products fell by 2.1%.

In particular, higher prices for scrap were responsible for the increase in the producer price index compared with the previous month. Petroleum products also became more expensive. In contrast, lower prices were seen for orthopaedic and prosthetic devices.

The import price index registered higher prices compared with December 2020, particularly for petroleum products, petroleum and natural gas, basic iron and steel. The same applied for processed steel, copper and products made therefrom. In contrast, price decreases were seen for communication equipment.

According to the report from Office for National Statistics, data from Labour Force Survey (LFS) shows the unemployment rate continued to increase, while the employment rate continued to fall. Although total hours worked continued to increase from the low levels in the previous quarter, this increase slowed in the latest quarter. The number of people temporarily away from work has fallen since its peak in April and May 2020, although it has increased slightly in November and December. The number of people away from work because of the pandemic and receiving no pay has also fallen since the start of the pandemic but risen slightly over the last two months.

In January 2021, 83,000 more people were in payrolled employment when compared with December 2020; this is the second consecutive monthly increase. In January 2021, 726,000 fewer people were in payrolled employment when compared with February 2020.

The UK employment rate, in the three months to December 2020, was estimated at 75.0%, 1.5 percentage points lower than a year earlier and 0.3 percentage points lower than the previous quarter.

The UK unemployment rate, in the three months to December 2020, was estimated at 5.1%, 1.3 percentage points higher than a year earlier and 0.4 percentage points higher than the previous quarter.

There were an estimated 599,000 vacancies in the UK in November 2020 to January 2021; this is 211,000 fewer than a year ago and 64,000 more than the previous quarter.

Growth in average total pay (including bonuses) among employees for the three months October to December 2020 increased to 4.7%, and growth in regular pay (excluding bonuses) also increased to 4.1%.

EUR/USD

Resistance levels (open interest**, contracts)

$1.2261 (3650)

$1.2221 (3015)

$1.2188 (2522)

Price at time of writing this review: $1.2166

Support levels (open interest**, contracts):

$1.2084 (1742)

$1.2059 (2311)

$1.2026 (2985)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date March, 5 is 94494 contracts (according to data from February, 22) with the maximum number of contracts with strike price $1,1950 (5754);

GBP/USD

Resistance levels (open interest**, contracts)

$1.4180 (318)

$1.4144 (420)

$1.4112 (1933)

Price at time of writing this review: $1.4060

Support levels (open interest**, contracts):

$1.3825 (258)

$1.3783 (410)

$1.3738 (201)

Comments:

- Overall open interest on the CALL options with the expiration date March, 5 is 15604 contracts, with the maximum number of contracts with strike price $1,4250 (2008);

- Overall open interest on the PUT options with the expiration date March, 5 is 15161 contracts, with the maximum number of contracts with strike price $1,3100 (1225);

- The ratio of PUT/CALL was 0.97 versus 0.97 from the previous trading day according to data from February, 22

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.