Daily Market Outlook, March 10, 2022

Overnight Headlines

Asian equity markets rallied, taking their cues from yesterday’s strong rebound in the US and Europe as investors assess the economic impact of the conflict in Ukraine. Japan’s Nikkei index has risen by nearly 4%. Commodity prices have fallen back, with the decline in Brent crude oil (reaching a low of $105 a barrel yesterday) helped by speculation that major producers could increase output.

The focus today, in addition to developments in the Ukraine war, will be on the ECB’s policy announcement and US CPI inflation figures. Prior to the invasion of the country, it seemed that upside surprises to Eurozone inflation (currently 5.8%) would result in the ECB announcing an end to net asset purchases later this year. However, increased economic uncertainties are expected to lead to greater policy caution. New ECB economic projections accompanying today’s policy update will show significantly higher near-term inflation than previously forecast, but the key question is whether inflation will still be expected to fall back to or below the 2% target in 2023 and 2024. Growth this year (previously seen at 4.2%) is likely to be downgraded and, arguably, weaker economic momentum should dampen medium-term inflation pressures. Given heightened uncertainties about the outlook for both growth and inflation, the most likely outcome is that the ECB dials back on its previous hints of a possible end to net asset purchases this year (and a rise in interest rates shortly after). Instead, we expect it to maintain that net asset purchases will continue through the year with no explicit end date for now. The ECB will be looking to maximise policy flexibility and to buy time until perhaps the June meeting when the economic outlook might be less clouded by the fog of war.

In the US, expect headline annual CPI inflation to increase to 7.9% from 7.5%. It is now set to peak above 8%, a level that was last exceeded in 1982. That maintains the pressure for interest rates to rise, although the impact of the terrible events in Ukraine has instilled a degree of caution. Fed Chair Powell recently signalled a gradual pace of tightening, although reserved the possibility of bigger rate increases should they become necessary.

Early tomorrow sees the release of UK January GDP figures which are obviously backward-looking. The focus instead is on how geopolitical uncertainties will affect inflation and growth as we approach the second quarter. Nevertheless, expect GDP to have increased by 0.4%m/m after falling by 0.2%m/m in December, led by higher services output as Omicron case numbers fell and restrictions were eased back. Look for improvements in supply chains to have supported manufacturing and construction output.

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.0950 (804M), 1.1000 (1.59BLN), 1.1020 (952M) 1.1050 (586M), 1.1075-80 (890M), 1.1100-05 (715M) 1.1150-55 (634M), 1.1200 (455M)
USD/JPY: 114.66-75 (1.17BLN), 115.30 (592M), 115.40 (939M) 115.80 (313M)
GBP/USD: 1.3050 (274M), 1.3280 (238M), 1.3300 (228M)
USD/CHF: 0.9300 (375M). USD/CAD: 1.2750 (265M) 1.2800 (461M), 1.2900 (220M)
AUD/USD: 0.7290-00 (348M), 0.7330 (261M), 0.7400 (312M)

EURUSD Bias: Bearish below 1.15 Bullish above

GBPUSD Bias: Bearish below 1.36 Bullish above.

USDJPY Bias: Bullish above 114.50 Bearish below

AUDUSD Bias: Bullish above .7100 Bearish below

AUD/USD opened +0.67% at 0.7322 after USD fell when oil prices plunged
Risk on mood in US underpinned AUD/USD while weak commodities capped
USD clawed back in early Asia and AUD/USD fell to 0.7287 at one stage
Buyers appeared on the dip after the USD buying flow was completed
AUD/USD is settled around 0.7315/20 heading into the afternoon
AUD/USD support is at 21-day MA at 0.7233 and break would end trend higher
Resistance is at yesterday's 0.7337 high with sellers tipped ahead of 0.7350
AUD/USD gains will likely be limited unless there is a diplomatic breakthrough in Ukraine crisis