By Areena FxYields volatility seems to be staying relatively low, which is not disrupting a positive market sentiment. Last week’s economic calendar was light apart from the strong US services ISM data on Monday. Even the US CPI revision on Friday didn’t change much. US auctions for various bonds saw solid demand, but yields in the US and Europe are testing significant technical resistance levels, nearing new year-to-date peak levels. Despite a weaker economic outlook in Europe, European bond yields are also testing similar upside levels. Central bankers are cautious about starting the easing cycle too aggressively but haven’t provided specific timing for rate cuts, leaving room for interpretation by the market. Market focus is now on upcoming data to determine the direction of interest rates. US yields saw a slight increase across the curve on Friday, while German yields further inverted. However, this hasn’t deterred a positive risk sentiment, with the S&P and Nasdaq reaching record highs. The EUR/USD pair edged higher towards the 1.08 level, while USD/JPY stalled around 149.29.
This morning, many Asian markets are closed for the Lunar New Year holiday. ECB governing Council member de Cos mentioned that the ECB’s March projections will be crucial for assessing whether the ECB can be confident in achieving the 2.0% target and the path to reaching it. However, this doesn’t offer concrete guidance on the timing of a rate cut. Today, attention will be on the NY Fed 1-year inflation expectations. Several central bank speakers are scheduled, but they’re unlikely to bring significant market-moving stories. From tomorrow onwards, data releases will resume, including the US January CPI, US Empire manufacturing, Philly Fed business outlook, and retail sales later in the week. Additionally, updates on labor data, inflation, production/GDP, and retail sales in the US will provide more insights. Any signs of resilience in the UK economy could impact EUR/GBP, potentially testing the key support level at 0.8493.
In other news, EU officials reached an agreement on a new fiscal framework, replacing the strict rules that were suspended due to the pandemic. The reformed pact allows for debt reduction over four to seven years, with some exemptions for public investments in green sectors, defense, and technology. Germany’s ruling coalition faced losses in a partial repeat of the 2021 federal election in Berlin, indicating potential challenges for the government in upcoming elections.