MNI US MARKETS ANALYSIS - USD Fade Helps EUR/USD Off ECB Lows

US TSYS: Twist Flatter With PCE Report Firmly In Focus

• Cash Tsys have twist flattened, with the front end (2bp cheaper) seemingly spurred on by the ECB hawks’ turn after yesterday’s late dovish musings, whilst the long end firms (up to 1bp richer).
• TYH4 at 111-12+ (+ 02+) sits at the low end of the day’s range but consolidates yesterday’s push higher, with volumes a little lower than recent averages at 270k. The overnight high of 111-18 came close to resistance at 111-20 (20-day EMA) whilst the bear cycle is seen still in play with support at 110-26 (Jan 19 low).
• Data is firmly in focus today, in particular core PCE inflation with potential for the six-month run rate to have slipped a little further below 2% annualized in December. The FOMC firmly in media blackout and a Friday limiting Tsy issuance should further add to the focus on the report.
• Data: PCE and income Dec (0830ET), Pending home sales Dec (1000ET), Kansas City Fed services Jan (1100ET)

Fed Rate Path Holds Bulk Of Post GDP/PCE Decline

• Fed Funds implied rates have lifted up to 1.5bps overnight, aided at the margin by pushback from ECB hawks. It still holds the bulk of yesterday’s decline on nuanced data which although expected included confirmation of a second quarter for core PCE at 2.0% annualized.
• Cumulative cuts: 12.5bp for March, 33bp for May, 59bp for June and 140bp for Dec – table below.
• Yesterday’s 2.0% increase for Q4 implies core PCE inflation of ~0.16% M/M in today’s December release, on the heavy assumption of no revisions to Oct/Nov.

OI Points To Mix Of Long Setting & Short Covering

The combination of Thursday's rally and preliminary OI data point to the following positioning swings:

• Net long setting: TU & TY futures.
• Not short cover: FV, UXY, US & WN futures.
• The apparent net long setting seen in TY futures generated the largest DV01 equivalent OI swing on the day, which managed to tilt the net curve OI swing towards long setting, just.
• Much of the rally in futures was triggered by the mix of the ECB's post-meeting communique, the totality of yesterday's U.S. data and solid demand metrics at the latest 7-Year Tsy auction.

OI Points To Long Setting Dominating Across SOFR Strip On Thursday

The mix of yesterday's rally in SOFR futures and preliminary OI data points to net long setting across all packs through the blues, with nothing more than pockets of (modest) short cover detected in some of the contracts across that area of the strip.

• A reminder that much of the rally was triggered by the mix of the feedthrough from the ECB's post-meeting communique and the totality of yesterday's U.S. data.
• Still, SOFR futures operate comfortably shy of recent bests.

FOREX: Returning ECB Speak Sticks to Script, EUR/GBP Holds Inside Downtrend

• ECB speakers have returned after Thursday's rate decision, with Simkus, Panetta, Vujcic and others voicing their view on policy going forward. ECB members stuck to the messaging laid down by Lagarde yesterday, stressing that the rate cut path ahead is data dependent, and not date dependent - leaving market pricing with few fresh clues.
• Markets moves have left EUR/GBP inside the downtrend channel drawn off the late December high. 0.8521 marks the next downside level ahead of stronger support into 0.8493. EUR/USD now closely pinned to one of the most sizeable option expiries rolling off at today's cut, with E1.1bln rolling off at 1.0850 today.
• An early uptick in the US yield curve has faltered, helping cement a recovery off lows for both EUR/USD and GBP/USD. Moves similarly mirror the ~10 point creep higher for the e-mini S&P, steadying prices and sentiment into the NY crossover.
• CHF is among the session's strongest performers on the day, however markets are largely reversing the weakness noted in the currency Thursday. USD/CHF remains either side of the 50-dma, which has proved a strong magnet for prices across the past fortnight. 0.8607 remains the first support, weakness through which opens 0.8577 and below.
• Focus for the remainder of the week rests on the personal income/spending data for December, as well as the last PCE deflator stats before next week's Fed decision. FOMC members remain inside their pre-decision media blackout period.

EGBS: Core/Semi-Core Stronger on Dovish ECB Sources; Peripheries Tighten

Core/semi-core EGBs remain firmer on the day, after an initial pullback from best levels lost momentum. Bunds are +14 ticks at 134.67, having been unable to breach the first resistance at 134.97 (20-day EMA) earlier.

• The morning's firmness came following a dovish ECB sources piece from RTRS, alongside follow-through from a soft Tokyo CPI in Japan and solid demand metrics at last night's 7Y auction in the US.
• Today's ECB-speakers have mostly derived from the hawkish camp of the Governing Council, though they have generally re-iterated the stance of data- (not date-) dependency, introduced in yesterday's press conference, as well as echoing Lagarde's lines on the labour market and wage data.
• A weaker-than-expected GfK consumer confidence print from Germany alongside moderating inflation expectations in the ECB's latest Survey of Professional Forecasters will have also marginally helped today's bid.
• The German and French cash curves have bull-steepened, with 5-year tenors outperforming. Meanwhile, periphery spreads have tightened owing to this morning's strength in European equities alongside the wider core FI bid. The 10-year BTP/Bund spread has compressed 2.5bps to 151.2 - close to the tightest levels in almost 2-years.
• The remainder of today's regional calendar is light, with markets looking to the US PCE deflator release at 1330GMT.

EQUITIES: Eurostoxx 50 Futures Extend Recovery Toward Resistance at Mid-December High

• Eurostoxx 50 futures have recovered this week from 4402.00, the Jan 17 low. 4402.00 represents a key short-term support. A break of this level would resume recent bearish pressure and open 4370.00, the Nov 28 low. On the upside, key resistance is at 4634.00, the Dec 14 high. Clearance of this level would confirm a resumption of the medium-term uptrend and open 4662.90, a Fibonacci projection. Initial support lies at 4508.80, the 20-day EMA.
• The uptrend in S&P E-Minis remains intact and this week’s move higher has reinforced current conditions. Resistance at 4841.50, the Dec 28 high has recently been cleared, confirming an extension of the price sequence of higher highs and higher lows. Moving average studies remain in a bull-mode condition, highlighting positive market sentiment. Sights are on 4952.45 next, a Fibonacci projection. Key support lies at 4729.00, the 50-day EMA.

COMMODITIES: WTI Futures Breach Resistance at Late December High

• WTI futures traded higher yesterday. The contract has breached resistance at $76.31, the Dec 26 high. A clear break of this hurdle undermines the recent bearish theme and highlights a stronger short-term bullish condition. A continuation higher would signal scope for a climb towards $79.56, the Nov 30 high. On the downside, a reversal lower would refocus attention on $69.56, the Jan 3 low.
• Gold is unchanged and remains above the Jan 17 low of $2001.9 - for now. The recent print below the 50-day EMA and the break of support at $2013.4, the Jan 11 low, has strengthened a bearish threat and a resumption of weakness would open a key level at $1973.2, the Dec 13 low. For bulls, clearance of 2062.3, the Jan 12 high, is required to signal a reversal. This would expose $2088.5, the Dec 28 high.