Market Overview. The dollar continues to strengthen, as market sentiment surrounding China has taken a shot in the arm. The reason that the Fed has reduced the speed of its tightening of monetary policy has largely been due to the concerns over the impact of the slowdown in China. However the upside surprise in the China trade data yesterday has boosted support for the dollar bulls and the move has continued today. The strength of the safe haven Japanese yen is unwinding for the time being and we are seeing Treasury yields pulling higher and gold pulling lower. The trades that had been such a concern for risk appetite recently are unwinding. Equities are also stronger. However, how long will this run last? Although little regard was given to a stalling and disappointment of the US Retail Sales yesterday (which does little for Q1 GDP growth prospects) and there is another clutch of key China data out tomorrow which could easily scupper the rally again. Many of these unwinding moves in the key markets still look to be counter trend and there is a lot of work needed to be done yet.
Wall Street closed stronger again last night with the S&P 500 up 1.0%, whilst this also filtered into a broadly positive Asian session, which included the Nikkei up 3.2% on the back of the continued correction on the yen. European markets look to be a touch more cautious today, only showing mild gains around the open. Forex markets show that this dollar rally continues, with the habitually underperforming sterling again the brunt of the pressure. The Aussie dollar is notably sturdy today after the better than expected Australian employment data. Gold is off another $8 whilst it is also interesting that the oil price is over a percent lower, something that could be a curb on equities strength today.
Traders will be looking out for final Eurozone inflation for March at 1000BST which is expected to be confirmed at -0.1%. The Bank of England gives its latest monetary policy statement and minutes at 1200BST and whilst no change is expected on rates there is always the possibility of a change to the voting which currently is unanimous at keeping rates on hold. Ian McCafferty and Martin Weale are always the potential changes but there is no indication of any movement in this meeting, especially not with the EU referendum looming. The big focus though will be on US inflation data with the CPI announced at 1330BST. Whilst the headline year on year CPI is expected to rise slightly to 1.1% (from 1.0%) there is no change expected to the core year on year data at 2.3%. US weekly jobless claims are at 1330BST and are expected to show 270k from 267k last week.
Chart of the Day – EUR/GBP
With the correction of the past few days there are questions beginning to be asked of the continuation of the rally, with Euro/Sterling back towards a medium term crossroads. Following the recent peak at £0.8115 and a return to the support around £0.7930, the first real test of this correction is being seen, a test that is so far holding. The old breakout of £0.7930 is the beginning of a basis of support down to the latest reaction low at £0.7830, a 100 pip support band that needs to be maintained for the medium term bulls to remain in control. The RSI has unwound from 70 and is now back to around 50 where the previous corrections have begun to build support again. Furthermore, the rising 21 day moving average (currently around £0.7935) has often been used as a basis of support since the November rally began. The intraday hourly chart shows a corrective configuration with the hourly RSI finding sellers returning around 50/55. However, the concern is that the hourly chart shows a near term head & shoulders top pattern completed below £0.7955 which implies a correction back to £0.7800 and that today’s early bounce could just be a pullback to the neckline. The bulls will be holding that the supports on the daily chart will overlay this corrective pattern on the hourly chart. Still though this is a crossroads that is still to be negotiated and whilst I see this as a near term correction that gives another chance to buy, the downside pressure is growing. The hourly chart shows that above £0.8020 re-engages the bulls.
