Headlines

* Top Fed officials make case for high rates to cool inflation

* Japan inflation hits 4%, first time in 4 decades as BoJ pivot theme smoulders

* UK consumer confidence suffers fresh drop

* Asian stocks edge higher ahead of Lunar New Year

FX: USD tested 102 to the downside on the DXY. It was a narrow range day. The halfway point of the 2021 rally to last year’s highs is 101.99. The 10-year Treasury yield made new cycle lows at 3.32%. But it bounced off the 200-day SMA at 3.33%.

EUR traded steadily yesterday and is holding onto the gains this morning. There was hawkish pushback from ECB officials. GBP had a narrow range day which was an “inside” day after recent upward momentum. USD/JPY has found a bid this morning after trading above and below 128 yesterday. AUD sunk to 0.6716 before rebounding back above 0.69. USD/CAD found resistance at 1.35 with a Fib level and long-term SMAs.

Stocks: US equities were pressured after more hawkish rhetoric from Fed speakers. The benchmark S&P 500 closed 0.8% lower. The Dow finished 0.76% lower. The tech-heavy Nasdaq lost 1%. Weekly initial jobless claims showed the labour market is still hot. The print was the lowest since September and potentially reduces the chance of a hard landing. Netflix jumped after hours despite a big earnings miss. The market focused on subscriber numbers which blew away expectations. (7.66 million adds compared to 4.57 million forecast).

Asian stocks traded higher, but gains were limited ahead of mass holiday closures. The Nikkei 225 eventually breached the 26,500 level after the latest inflation data printed in line. Core CPI was the fastest since 1981. The Hang Seng posted new cycle highs ahead of NY celebrations. Mainland bourses are closed for the whole of next week.

US equity futures are modestly firmer to finish the week. Futures in Europe are pointing to a higher open (+0.5%). The cash market tanked 1.9% yesterday.

Gold printed a fresh 9-month high at $1935. The dollar is resisting the Fed hawks and Treasury yields are languishing.

Event Takeaway – ECB still has work to do

Minutes from the December ECB meeting once again confirmed the main messages that we have heard during and since. The ECB has more to do as the “monetary policy stance had to be tightened decisively. The current configuration of interest rates and expectations embodied in market pricing was not sufficiently restrictive to bring inflation back to target in a timely manner.” A large number of officials initially preferred a bigger 75bp hike. But the Governing Council eventually compromised on a smaller 50bp increase accompanied by hawkish rate guidance and the start of QT.

This week, President Lagarde has continued this theme stating that the ECB was determined to “stay the course”. She signalled that further significant rate rises lie ahead to get inflation under control. She also highlighted that the economic outlook has improved. Indeed, the impact of warmer weather on activity and the energy crunch has seen upside surprises in the region’s data. It seems that hawkishness is now spread across the ECB with a clear tightening bias.

Chart of the Day – EUR/USD hovers near the highs

Those sequential upside surprises in eurozone data contrast with the disappointments in the US figures since the start of December. As well as the data and ECB hawkishness, outperforming European stocks are also helping the single currency maintain a bid.

But there does seem to be solid resistance in the high 1.08s. This week has seen the world’s most popular currency pair fail to get beyond here. A bullish consolidation, flag pattern appeared to be emerging. But for now prices are hovering around 1.08. The 50% point of the May decline from last year is 1.0901. There looks to be support on minor dips around 1.0766/70.