Overnight Headlines

*Asian stocks mixed, doubts on Russian withdrawal from Ukraine border

*Australia jobs data shows resilience as Omicron hits hours

*Strong US retail sales, Fed minutes show readiness to tighten policy

*Oil falls after France and Iran say closer to a nuclear deal, now retracing

US equities pared earlier losses and closed modestly higher following the minutes of the FOMC January meeting. Energy and industrials led the gains, most likely fuelled by the strong retail sales data. US futures are in the red while yields have come off yesterday’s cycle high at 2.06% in the US 10-year Treasury. Ukrainian tensions remain front and centre.

USD softened in rather directionless trade with overnight reports of a Ukraine border skirmish giving a bid to the dollar before retracing most of the move. EUR pushed up close to 1.14 before selling off to the 50-day SMA at 1.1329 and then bouncing. GBP is trying to get above 1.36 after yesterday’s solid inflation figures while USD/JPY traded in a narrow range, still below 115.52. AUD is clawing back initial losses after the jobs data and is testing 0.72.

Market Thoughts – FOMC minutes less hawkish but stale

The market reacted slightly dovishly to last night’s Fed minutes showing policymakers to be less inclined to raise rates aggressively. Fed Fund futures responded to cutting the odds on a 50bp hike next month to a coin toss from 63% before the release. The committee did not discuss whether 25bps or 50bps is needed at the next meeting, but just that more tightening is required.

It’s important to note that we’ve had a higher-than-expected inflation print since the January meeting and other data showing an economy that appears to be on its way to overheating with all the stimulus still being pumped into the system. Policymakers are likely to be more alarmed by this and will now act on the side of hawkishness. That means the risk is of hiking too much unless the Ukraine crisis kicks off.

Chart of the Day – GBP/USD hoping to breakout of current range

This week’s UK data deluge has reinforced expectations of several more rate hikes in the coming months. Inflation came in a tick stronger than expected at 5.5% and core at 4.4%. Along with the better labour market data, bets on a 50bp hike are currently around 60% with six hikes priced by November taking the rate to 2%. We note that the bank hasn’t raised rates by more than 25bps since becoming fully independent in 1997, though it has been three decades since UK inflation was this high.

Cable appreciated nearly one cent from its lows yesterday and is pushing to the highs of the recent range above 1.36. Strong support lies at 1.35 with the 100-day SMA and the downward trendline from the June highs. Bullish momentum is picking up so watch for resistance around 1.3600/10 and then the 200-day SMA at 1.3687.