While market positioning and flow are always major determinants of price action, especially with month-end in play, it seems premature to call a turnaround in risk this week.
Looking at the known event risks, we head through a week with some data points to be concerned with, but this builds into what will be a far heavier landmine-fest in the following week, where we get the RBA meeting, Powell’s testimony to Congress and US payrolls.
The Eurozone in focus this week
Rates and bond markets continue to get the lion’s share of attention. The US is always in the markets headlights, but this week we focus more intently on Europe, where we get flash CPI prints in France, Spain and Germany before the Eurozone brings it home on Thursday. Market pricing has the European Central Bank (ECB) hiking by 50bp in both March and May (there is no April meeting), before a step down in June to 25bp. We reach a peak of 3.75% later this year.
Notably, we’ve seen upside breakouts in German, French and Italian 2-year govt bonds, and 5-yr debt is on a bearish trend. We’d need some punchy upside surprises in EU inflation to see terminal ECB pricing closer to 4% and the market is quietly confident on its peak pricing after the recent shift in expectations. For those prepared to listen, the raft of ECB speakers could influence, where speeches from ECB members Lane (28 February) and Schnabel (2 March) get the attention.
EURUSD has its eyes on the 6 January swing of 1.0481, where the trend looks decisively weak. I am neutral or selling bouts of strength, but the risks are still for a modestly stronger USD.
I want price to close above the 5-day EMA to offer higher conviction on EURUSD longs.
EURAUD and EURJPY have been the better way to express EUR longs, and with Tokyo CPI due this week and likely to fall, could this be the leading indicator for national CPI that validates both Kuroda and incoming governor Ueda’s dovish stance?
Has headline inflation indeed peaked in Japan?
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Watch JPY exposures, but EURJPY is eyeing a bullish break.
In the US, growth is a more dominant theme in the data flow this week, with the ISM manufacturing and services data getting some focus.
After the core PCE shock on Friday (+4.7%) we’ve seen peak pricing for US rate expectations move to 5.4% by September, and new cycle highs in US 2yr yields (at 4.81%), with a breakout in the trend in 5yr Treasuries too.
US real rates (TIPS) are at the backbone of this and the move into 1.71% has largely been the factor supporting the USD, where the DXY has gained for 5 straight days (+1.3% WoW), while making it 4 weeks of gains in a row.
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