Hopes for diplomacy in Ukraine triggered aggressive short-covering on EUR/USD on Tuesday. Surging German bond yields further underpinned the euro and remained supportive of the move. The risk-on impulse, retreating US bond yields weighed on the USD and fueled the momentum. The EUR/USD pair witnessed an aggressive short-covering move on Tuesday and rallied to a two-week high amid hopes for a breakthrough in the Russia-Ukraine peace negotiations. In the latest development, the Russian Defense Ministry promised to scale down military activity in Kyiv and Chernihiv to create conditions for dialogue. Adding to this, top Russian negotiator Vladimir Medinsky was quoted saying that there have been enough developments to hold a meeting between President Vladimir Putin and his Ukrainian counterpart Volodymyr Zelenskyy. The headlines fueled optimism about a diplomatic solution to end the war and provided a strong boost to the euro, which has been battered in recent weeks amid fears about the economic fallout from the Ukraine crisis. The common currency was further underpinned by surging German government bond yields. The yield on two-year notes briefly moved above zero for the first time since late 2014 and the benchmark 10-year bund yield shot to levels last seen in 2018. The positive news flow surrounding the Russia-Ukrain saga raised expectations that the European Central Bank will scale back its ultra-loose monetary policy as soon as year-end to tame surging inflation. Apart from this, a broad-based US dollar weakness was seen as another factor that contributed to the pair's strong intraday positive move. The risk-on impulse, along with retreating US Treasury bond yields, dented demand for the safe-haven greenback and extended additional support to the major. That said, rising bets for a 50 bps Fed rate hike at the next two meetings helped limit any deeper losses. Investors seem convinced that the Fed would adopt a more aggressive policy stance to combat stubbornly high inflation. This, in turn, acted as a headwind for the major and led to a late pullback of around 50 pips from the daily high. The pair, however, attracted fresh buying during the Asian session on Wednesday amid the prevalent bullish sentiment around the global equity markets. Market participants now look forward to the release of the prelim German consumer inflation figures for March. This, along with ECB President Christine Lagarde's speech should influence the shared currency and provide some impetus to the EUR/USD pair. Later during the early North American session, traders will take cues from the US macro data - the ADP report on private-sector employment and the final Q4 GDP print. Apart from this, the US bond yields and the broader market risk sentiment, will drive demand for the greenback and allow traders to grab some short-term opportunities. Technical outlook From a technical perspective, the overnight strong move-up stalled near the 1.1135-40 region. The mentioned area nears the 50% Fibonacci level of the recent slump from the vicinity of the 1.1500 mark and should act as a pivotal point for trades. Sustained strength beyond will suggest that the pair has bottomed out in the near term and set the stage for a move towards reclaiming the 1.1200 mark. The momentum could further get extended towards testing the 1.1230 region, or the 61.8% Fibo. level. On the flip side, the 38.2% Fibo. level, around the 1.1070 region, now seems to act as immediate strong support. A convincing break below would make the pair vulnerable to slide back towards testing the key 1.1000 psychological mark with some intermediate support near the 1.1025 area. The next relevant support is pegged near the 23.6% Fibo. level, around the 1.0975-1.0970 area, which if broken decisively would shift the bias back in favour of bearish traders. The pair might then accelerate the slide towards the 1.0900 mark before eventually dropping to the 1.0860 support en-route the YTD low, around the 1.0800 mark touched earlier this month.

Outlook: The consumer is two-thirds of the US economy and if we are going to get a recession, first we have to see a change in consumer behavior. So far we are not seeing that. We are not sure that the Conference Board consumer confidence index today will be a good measure—we’d rather see what they do, not what they say. Whatever the Conference Board delivers, it can’t be as bad as the GfK indicator in Germany (see above). And consumers are buying houses like there is a shortage or something, driving up prices dramatically. In the Jolts report, everyone will be looking for evidence of the labor shortage and more information on that quit rate. Every newsletter and newspaper has the 5/30 yield curve inversion. White Rabbits are scurrying hither and yon, muttering "Oh my fur and whiskers! I'm late, I'm late, I'm late!" It’s the Fed considered late, aka “behind the curve. But we say a yield curve inversion is irrelevant to the recession outlook, or relevant to something else, in a world in which the Fed holds $8.96 trillion of the $28.43 trillion debt outstanding (as of 3/15/22). The yield curve debate is not going to fade away. Bloomberg reports that a Citigroup analyst says Powell is looking at the wrong yield curve (like the one we showed yesterday ending at 2 years). “Based in part on the deeply inverted eurodollar futures curve from June 2023 to June 2024, Citigroup calculates the risk of a U.S. recession in the next twelve months has risen to 20%, up from 9% in February. The dislocation between the spread Powell is focused on and the eurodollar curve is the largest since 1994, when a series of aggressive Fed rate hikes was followed by cuts the following year, according to Citigroup.” Recall that in 1994, there was no recession—and inflation was a whole lot lower.  The analyst fails to note that in addition to low then-current inflation, inflation expectations were low. Besides, in 1994, Clinton was president and Gingrich had yet to shut down the US government. Russia was invading Chechnya. OJ Simpson was arrested and put on trial. Chain bookstores were all the rage (try to find one now). The internet was just catching hold. We had Netscape but not Explorer. There were only 45 billion pages and 4 billion users. Today Googles searches for 35 trillion sites. Not least, total US debt outstanding in 1994 was $4.693 trillion. Today the Fed owns almost double that, or 32% of debt at $28.428 trillion. Should we be making comparisons? No. We might say 1994 was an age of innocence, before quantitative easing and totally toxic politics. Don’t forget that Eurodollars were a Thing, whereas today they are on the way out and will be gone by June 2023 in favor or SOFR. Does that affect the chart? We don’t know, but while we can never say “this time it’s different,” we should also consider the overall environment and context. Today is not the same as 1994 in many ways that might be meaningful. Online trading did not exist. We had real-time cable news but actual live data cost an arm and a leg.  (It still costs an arm and a leg at Bloomberg.) We complained about information overload at the time but it got thousands of times worse. Information counts. A lot. In 1929, a major contributor to panic was lack of information. The tape couldn’t keep up and traders were flying blind as often as not. Today we have nearly instant information and traders whose trading time horizon is 60-240 minutes, not days and weeks. We also have AI trading systems that see a seemingly statistically meaningful drop or rise in a price that gets magnified by traders jumping in any big move. And never mind you have no reason to get in—go back and invent one later. Finally, this year we are coming out of a war—a pandemic can be likened to a war, economically—and in the middle of an authentic war. Wars are expensive, drive up budget deficits, screw up consumption/supply lines/savings, and make some market prices irrational. As if QE had not been enough to distort them in the first place. We continue to think QE alone suffices to make current conditions non-comparable to all previous sets of conditions, including curve inversion. Bottom line, the flat yield curve reflect inflation expectations, not current inflation. The Eurodollar bounce can easily be something aberrant that one guy got started and others are, sheep-like, following. And even if it’s meaningful, a 20% chance of recession is pretty low, so what are we talking about, again?  We are not alone in dissing the inverted yield curve talk. Bloomberg writes it could be a false signal, saying the yield curve is getting...

EUR/USD - 1.0984 Although Monday's initial break of last week's low at 1.0961 to 1.0945 in Europe suggests euro's correction from March's 22-month bottom at 1.0807 has ended, subsequent short-covering rebound to 1.0999 would yield choppy swings before prospect of another fall, loss of momentum should keep price above pivotal sup at 1.0902. \Only a daily close above 1.1000 may shift risk to the upside for risk stronger retracement to 1.1035/45. Data to be released today Japan unemployment rate, Australia retail sales. Germany import prices, Gfk consumer sentiment. Canada average weekly earnings, U.S. redbook, monthly home price, JOLTS jobs openings and consumer confidence on Tuesday.

With the unrest in the Black Sea basin, it appears that there are two more cross-trade wars in the world. These are about energy and currency. Crude oil prices, down most of Friday, finally ended the week higher after a huge fire broke out at oil facilities in Jeddah, Saudi Arabia, following attacks by Yemeni rebels. The great winner of the Russian-Ukrainian conflict is undoubtedly the United States, which now seems to be taking advantage of Europe’s moment of weakness. The latter is indeed currently switching its energy supplies from Russian natural gas (pipeline-transported) to the much more polluting and much more expensive US shale gas. The reasons are much higher extraction (fracking) and transportation costs since it requires additional processes such as liquefaction/degasification and the deployment of more port terminals that are able to provide such steps – also much more energy-consuming – linked to Liquefied Natural Gas (LNG) supplies. By doing so, the European Union is going to increase its dependence on the US whilst a new and stronger block (including Asia) emerges on the east side. As a result, we have already started to witness dedollarisation in international trade, with the petroyuan set to dethrone the heavily-printed petrodollar. No wonder that the US dollar supply surge has ended up triggering uncontrollable and probably still underestimated inflation. As a result, this monetary virus is spreading through the global economy at a faster pace than any other variant! WTI Crude Oil (CLK22) Futures (May contract, daily chart) Henry Hub Natural Gas (NGK22) Futures (May contract, daily chart) Want free follow-ups to the above article and details not available to 99%+ investors? Sign up to our free newsletter today!

AUD/USD Current Price: 0.7489 Inflation and the Eastern European crisis undermined the market’s mood. Australian Retail Sales are foreseen up by 1% in February. AUD/USD has begun correcting lower, although the AUD remains resilient. The AUD/USD pair gapped lower at the weekly opening, closing the gap before resuming its slide. The pair ends the day with modest losses trading in the 0.7490 price zone after bottoming for the day at 0.7466. The Australian dollar remains resilient, as it barely gave up, despite the poor performance of equities and a strengthening greenback. Stocks came under selling pressure amid persistent concerns related to the Russian invasion of Ukraine and its effects on the global economy. Markets talks are hinting at an upcoming round of peace talks in Turkey, although there’s no confirmation yet, neither much room for a diplomatic solution. Russian Foreign Minister Lavrov said that a meeting between the Russian and the Ukrainian presidents would be counter-productive at the time being.   Government bond yields, in the meantime, soared across the world after the Japanese Central Bank jumped to intervene in financial markets for a second time this year, a sign that the current monetary policy is falling short of helping the economy. On the data front, Australia did not publish relevant data on Monday, but it will release February Retail Sales on Monday, seen up 1% after advancing 1.8% in the previous month. AUD/USD short-term technical outlook The daily chart for the AUD/USD pair shows that bulls remain in control, although chances of a bearish correction have increased. The pair keeps developing well above all of its moving averages, with the 20 SMA heading firmly higher above the longer ones. Technical indicators, in the meantime, have partially lost their bullish strength but remain near overbought readings. In the near term, and according to the 4-hour chart, the risk skews to the downside, although declines look corrective and could be short-lived. The pair is now below a flat 20 SMA, while technical indicators hover just above their midlines, with the Momentum heading lower and the RSI flat at around 73. A break below the aforementioned daily low should lead to a test of the 0.7390 level, where bulls should come back to maintain the long-term trend in place. Support levels: 0.7465 0.7430 0.7390 Resistance levels:  0.7520 0.7555 0.7590 View Live Chart for the AUD/USD

EUR/USD continued losing ground through the Asian session on Monday amid sustained USD buying. The Russia-Ukraine crisis, rising bets for a 50-bps Fed rate hike move underpinned the safe-haven buck. A sustained break below the 1.0900 round-figure mark will set the stage for a further depreciating move. The EUR/USD pair extended its recent downfall witnessed over the past one week or so and witnessed some follow-through selling during the Asian session on Monday. Investors remain concerned that the European economy would suffer the most from the spillover effects of the Ukraine crisis. This was reinforced by Friday's release of the dismal German Ifo Business Climate Index, which dropped from 98.5 to 90.8 in March and acted as a headwind for the shared currency. On the other hand, a combination of factors benefitted the US dollar, which further exerted downward pressure on the major. Against the backdrop of the lack of progress in the Russia-Ukraine peace negotiations, hawkish Fed expectations continued lending support to the safe-haven greenback. Investors seem convinced that the Fed would adopt a more aggressive policy to combat high inflation. In fact, the markets have been pricing in a 50 bps rate hike in the May meeting amid worries that surging commodity prices would put upward pressure on the already high consumer prices. This, in turn, pushed the yield on the 10-year US government bond beyond the 2.5% threshold, or a fresh two-year and underpinned the buck. There isn't any major market-moving economic data due for release on Monday, either from the Eurozone or the US, leaving the pair at the mercy of the USD price dynamics. Hence, traders will take cues from developments surrounding the Russia-Ukraine saga, which, along with the US bond yields, should influence the USD. The focus, however, will remain on this week's important US macro data, including the closely-watched monthly jobs data (NFP) on Friday. Nevertheless, the pair remains depressed for the fourth successive day - also marking the sixth day of a negative move in the previous seven - and seems vulnerable to slide further. Technical outlook From a technical perspective, sustained weakness below mid-1.0900s could make the pair vulnerable to accelerate the slide back towards the 1.0900 round-figure mark. Some follow-through selling would expose the YTD low, around the 1.0800 mark, with some intermediate support near the 1.0860-1.0850 region. A convincing break below the former should pave the way for a slide towards the 1.0765 area en-route the 1.0730-1.0725 region. This is followed by the 1.0700 round figure, below which the downward trajectory could get extended towards 2020 low, around the 1.0635 area. On the flip side, the key 1.1000 psychological mark now seems to act as immediate strong resistance. The next relevant hurdle is pegged near Friday's swing high, around the 1.1035-1.1040 region, above which a bout of short-covering should allow bulls to aim back to reclaim the 1.1100 round-figure mark. The recovery momentum could then lift spot prices back towards the 1.1135-1.1145 barrier, which if cleared decisively will suggest that the pair has bottomed out in the near term.