We expect to be "just" risk on today as Mario Draghi helps reduce political uncertainty across Europe and the more Dovish line from the US Fed is expected to restart the USD lower trend, certainly in the medium term.
For the first time in many quarters the markets appeared to be driven by fundamental and company news rather than Covid figures or vaccine roll-outs. Eurozone Services PMI’s were better than expected yesterday, particularly Italy at 44.7 vs 39.5 exp. Eurozone CPI also above expectations with CPI Core YoY at 1.4% vs 0.9% exp.
Super Mario Draghi agreed to try to form a government in Italy. The market has already reacted positively to the familiar and EU friendly face. If successful in forming a coalition government this will significantly reduce EU political risk.
US ISM Services were strong yesterday at 58.7 with the employment sub index particularly strong. ADP also came in strong suggesting NFP tomorrow could be a good number. BoE today. Markets have priced out the chance of negative rates this year so any rhetoric around this will be focused on.
EURUSD hovers just above 1.2004 after the better US data. Seems like a good chance to buy the dip as positioning is a lot cleaner since breaking 1.2050. Super Mario could significantly reduce EU political risk and better Eurozone services PMI’s and CPI yesterday are encouraging. Also, importantly this week FOMC members including Bostic have shifted to Powell’s more dovish line so expect that the USD trend lower can resume now that positioning has been reduced. This particularly goes for growth currencies against USD.
Numbers to Watch
AUD was given good reason to go lower with the extension of QE from the RBA, dovish Lowe and lower Iron Ore but it was unable to close below the 50dayMA at 0.7615, made a low of 0.7564 on Tuesday before bouncing back. Now that position reduction seems to be over feels that the trend higher can resume.
- EURUSD – The US dollar strength sent the Euro to test the 1.20 psychological support this morning as bond yields spiked higher amid the recent strong US economic data. However, USD bulls are not out of the woods yet as long as equities remain resilient. Today’s European Retail Sales data will be critical as the bulls are desperate for a better-than-expected data, to keep the pair above 1.20. Or else, we could see a huge drop towards 1.1925.
- GBPUSD – The pound drops below 1.36 ahead of the BoE Monetary Policy report, pressured by the US dollar’s recent uptick amid the cautious mood. On the positive side, the UK reaches a 10 million milestone for vaccinations, however, fears of the South African variant are keeping the Pound bulls at bay. Today, the focus will be on the Quarterly Inflation Report and the speech from Governor Bailey. A close below 1.36 could take the pair lower towards 1.3530.
- USDJPY –U.S. yields helped the dollar rise against its peers, with the US Dollar index staying near its highest levels in about two months, as the Japanese Yen drops to yearly lows. The USD/JPY doesn’t seem to be losing momentum as it crosses the ¥1065.20 key level earlier this morning with the 200-Day moving average (Daily Chart) around ¥106 as the next target in sight.
- FTSE 100 – London’s FTSE100 is seen opening higher today benefiting from a weaker pound as investors await the Bank of England’s interest rate decision later today. The BoE is expected to keep interest rates and bond purchases steady despite the surge in coronavirus cases since its December meeting. Investors, however, will be waiting for any hints about the potential for negative interest rates which may propel stocks higher with 6550 then 6600 as next resistance targets.
- DOW JONES – On Wall Street, markets have calmed significantly with the Dow Jones index closing up by only +0.12% yesterday despite record earnings from PayPal and Google. We suspect that investors are waiting to see whether Democrats are willing to make a compromise with Republicans who are calling for a smaller stimulus package given that the CBOE Volatility Index VIX slipped to its lowest levels in over a week. From a technical perspective, the Dow is expected to remain supported by the 50-period moving average ahead of US initial jobless claims scheduled to be released at 1330 GMT.
- DAX 30 –German stocks are expected to be steady to slightly weaker today, following a drop in Asian markets this morning as a rise in Chinese short-term interest rates may have spooked investors. The DAX30 index remains supported by near-term moving averages although a slight correction from is likely after European markets failed to capitalize on improved sentiment following former ECB chief Mario Draghi’s acceptance to form a new government in Italy. The key support level remains the 30-period SMA around 13900 on the downside. On the upside, if the German index manages to breach the 14000 level, the move may trigger accelerated buying to test the December 2020 all-time high around 14100.
- GOLD – The yellow metal hit our short support target in yesterday’s session, printing a low at $1815 in early trade today before retracing higher. $1830 remains key resistance level to breach for bullish momentum to pick up. Better than expected ADP employment data along with federal reserve bank of St. Louis President Bullard commenting that stock prices are reflecting optimism about the economic recovery have kept the safe haven under pressure.
- USOIL –WTI Crude oil hit both our long resistance targets at $55.50 and $56, ending yesterday’s session on a 4th consecutive close in the green after OPEC+ continue to be aligned, saying it will keep pushing to quickly clear the oil surplus left behind by the pandemic, while EIA data registered a drawdown of -0.994Mb vs an expected build-up of 0.446Mb. $56.50 and $57.50 as next resistance targets if $56 support level holds.
Rony Nehme - Chief Market Analyst at SquaredFinancial
Rony has over twenty years of experience in financial planning and professional proprietary trading in the equity and currency markets. Prior to joining SquaredFinancial, Rony educated and coached numerous traders helping them find their edge and arming them with proven trading methodologies to successfully battle the markets. Rony obtained a B.S. in Finance from Concordia University in Montreal, and his professional designations include Certified Financial Planner CFP® obtained from the Canadian Securities Institute.