Daily Market Outlook, March 3, 2022

Overnight Headlines

The S&P 500 advanced 1.9% on Wednesday, as stocks rallied past another spike in oil prices amid hope surrounding the Russia-Ukraine conflict and a potentially less-hawkish Fed. WTI crude futures topped $110 per barrel ($110.72, +7.31, +7.1%). The Nasdaq Composite (+1.6%) and Dow Jones Industrial Average (+1.8%) both looked up to the benchmark index while the Russell 2000 outperformed with a 2.5% gain. The spike in oil prices was attributed to increased expectations for supply constraints after Russia continued its offensive in Ukraine, but the market might have suspected a near-term peak in prices, depending on the result of cease-fire talks scheduled for tomorrow.

Equally as important to the trading narrative yesterday was what Fed Chair Powell told the House Financial Services Committee in his semiannual report on monetary policy.The Fed chair said the central bank would "proceed carefully" because of the geopolitical uncertainty and that he would support hiking rates by 25 basis points later this month. He went on to say, though, that a 50-bps hike is still possible in the future if inflation is higher as expected. On a related note, the Fed's Beige Book noted that economic activity expanded at a modest to moderate pace between mid-January and February 18. Some Districts reported a temporary weakening in demand in the hospitality sector due to increased COVID-19 cases.

Treasury yields rose double-digit basis points after a two-day plunge, illustrating how negative sentiment had gotten because of the geopolitical tensions. The 2-yr yield jumped 22 basis points to 1.52%, and the 10-yr yield jumped 16 basis points to 1.87%. The U.S. Dollar Index dipped 0.1% to 97.34.

Given fast-moving developments in the Ukraine conflict, today’s economic data releases will perhaps be seen as dated as they predominantly or entirely refer to activity and sentiment predating the Russian invasion. Even the ECB publication of its ‘account’ of its February monetary policy meeting has been superseded by events. Instead, the focus (aside from the war in Ukraine) will likely fall on central bank speakers, including the second day of Fed Chair Powell’s semi-annual testimony to Congress – his last chance to steer the markets before the blackout period ahead of the 15/16 March FOMC meeting. The Fed’s Barkin and Williams will also speak at separate events.

This morning’s UK and Eurozone services PMIs for February are final readings and are expected to confirm preliminary ‘flash’ estimates. Services activity surprised on the upside in both jurisdictions, rising to 55.8 in the Eurozone and 60.8 in the UK, as Omicron restrictions were eased back. Price pressures remained elevated or continued to build.

The US ISM services is expected to post a reading of 56.7, which would be a big jump up from 51.2 in January reflecting the easing of Covid restraints. US factory orders data for January, seen rising by 0.7%, and weekly jobless claims are also due.

The Eurozone unemployment rate has already fallen below pre-pandemic levels and is forecast to have declined to 6.9% in January, the lowest since the inception of the euro. That, together with prospects of even higher energy prices, has made the ECB’s policy trade-off trickier than it was before. Even before the Ukraine crisis, inflation has been surprising on the upside, as the flash CPI rise to 5.8% yesterday attests. Today’s publication of the ‘account’ of the ECB’s last meeting in February will likely reveal a shift towards an earlier end to QE, but heightened geopolitical tensions have since complicated the picture. On balance, it seems likely the increased uncertainty in the economic outlook will now result in more caution in the move towards monetary policy normalisation.

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

EUR/USD: 1.1075 (610M), 1.1100 (760M), 1.1120 (630M), 1.1200 (1.3B) 1.1345-50 (1.3B), 1.1355-60 (640M), 1.1370-75 (1.2B)
USD/JPY: 114.00 (310M), 114.25 (475M), 114.50 (460M), 115.00 (960M)
USD/JPY: 116.00 (445M). EUR/GBP: 0.8250 (430M), 0.8355-60 (300M)
USD/CHF: 0.9200 (360M), 0.9300 (275M)
AUD/USD: 0.7250 (890M), 0.7360 (455M). AUD/JPY: 83.40 (770M)

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: Bearish below 0.7250 Bullish above

AUD/USD opened +0.63% at 0.7298 after risk rally and strong commodities underpinned
USD broadly firmed in Asia and long AUD/USD positions pared back
AUD/USD traded down to 0.7276 before finding fresh buying
Strong rise in iron ore helped to support AUD/USD at the lows
Heading into the afternoon AUD/USD was trading around 0.7290
Resistance is at 2022 high at 0.7314 and 0.7320/25 where 200-day MA and 61.8 fibo converge
Support is @ the 10-day MA @ 0.7232 and break would suggest waning momentum
AUD/USD trending higher with the 5, 10 and 21-day MAs in a bullish alignment