With market fear still at elevated levels, traders and investors around the world are looking out for a coordinated response from the authorities. Central banks assisting with looser monetary policy and perhaps action from governments through fiscal support. There has been an enormous re-pricing of Federal Reserve monetary policy over the past couple of weeks. The CME Group Fed funds futures are now pricing a full -50bps cut from the Fed in its April meeting. A “bull steepener” on the yield curve has resulted as shorter-dated yields price for a dramatic rate cut. At its low yesterday, the US 2 year yield had fallen -70 basis points in seven sessions, whilst the US 10 year yield is around -50bps lower over the same time. The Reserve Bank of Australia has been the first major central bank to make its move with a cut of -25bps overnight (down to +0.50% which was expected, +0.75% last). Other central banks with room to cut (such as the Bank of England) as also being priced in. With Fed chair Powell saying they would “act as appropriate”. Those banks with less room for manoeuvre, such as the ECB or BoJ, are translating to outperformance of their respective currencies. However, the hints of policy co-ordination are helping to stabilise markets, at least in the near term. A huge rally on Wall Street last night (volatility remains massive) is translating to decent gains this morning in Asia and Europe. A rebound on oil has also kicked in.
Wall Street engaged a mammoth rally yesterday, with the S&P 500 +4.6% higher at 3090, whilst US futures are a little more circumspect, around flat this morning. In Asia there has been a little more of a mixed session, with the Nikkei still lower by -1.2% but other markets higher, with the Shanghai Composite +0.7%. In Europe, the outlook is mildly positive initially, with FTSE futures +0.9% and DAX futures +0.8%. In forex markets, there is a mixed look across the major pairs, with EUR giving back some recent gains, but USD is not really that strong, as GBP and JPY are performing better, whilst AUD is also higher. In commodities, there are tentative gains for gold and silver, whilst oil is over 1% higher.
On the economic calendar the big focus will be on Eurozone inflation. However, first up, the UK Construction PMI is at 0930GMT and is expected to improve to 48.8 in February (from 48.4 in January). Flash Eurozone HICP for February is at 1000GMT and is expected to show headline HICP slipping to +1.2% (from +1.4% in January) whilst core HICP is expected to tick higher to +1.2% (from +1.1% in January). Eurozone Unemployment is expected to remain at 7.4% in January (from 7.4% in December).
There one Fed speaker on the agenda today, with Loretta Mester (voter, leans hawk) who is speaking at 1950GMT. Mester will be a good gauge of how dovish the committee could be beginning to become.
Chart of the Day – USD/CAD
As the oil price has (finally) been able to muster support for a technical rebound, we see the Canadian dollar also bouncing. Yesterday’s strong negative candle on USD/CAD reflects a big turnaround on the trend higher, but as yet has achieved relatively little. With a mild tick higher again today, the market is back into a key pivot band between 1.3330/1.3350 once more. The question is whether this will be a sustainable turnaround. The two month uptrend comes in at 1.3250 today, so there is further room in a correction. Furthermore, momentum indicators are topping out, with the sensitive Stochastics crossing lower and RSI ticking back from 70. Again there is room for downside potential in these near term negative momentum signals. With the move back into 1.3330/1.3350 which has been an old key resistance, this is a key moment for the correction. The hourly chart has taken on more of a corrective configuration now on momentum, whilst a move back below support at 1.3305/1.3310 would increase the corrective momentum. There is a lower high that has formed at 1.3395 which the bulls need to overcome to re-engage a positive outlook.
The enormous rally on EUR/USD has now smashed through the key resistance of the pivot band $1.1065/$1.1100. The market continues to price for a drastically more dovish Federal Reserve than current rates suggest. Even this morning, EUR/USD continues to rise. Having breached $1.1100 this has been a key move which now, incredibly, re-opens the January highs again. An intraday breach of $1.1170 means that $1.1200/$1.1240 is now a realistic test. Momentum indicators are decisive in their improvement, with Stochastics into strong bullish configuration now, and MACD lines accelerating in their improvement. The intriguing indicator is the RSI, which is now at 70 today. This has been a limiting point on recent bull runs (in October and early January). Historically also, the RSI has not been above 70 since January 2018. It is very rare for the RSI on EUR/USD to go outside its 30/70 points, but the February sell-off went decisively below, and now the rally is above 70. These are not normal times. The pivot at $1.1065/$1.1100 is now supportive and given the momentum of the move higher, a retest of $1.1200/$1.1240 is likely.
Cable remains under pressure as, even in the face of further negative dollar momentum across the major pairs, sterling has remained corrective. The run of selling into intraday rallies continues, as resistance built yesterday at $1.2850. Give that this lower high came around the resistance of the old lows from February between $1.2845/$1.2860, along with the basis of resistance generated from the 50% Fibonacci retracement (of the $1.2193/$1.3515 rally) at $1.2855. Yesterday’s latest intraday bull failure means that the market has also now closed below $1.2765. This confirms a broad corrective medium term configuration. It means that despite the mini early rebound today, another failed near term rally towards $1.2850 would be a chance to sell. The lower high at $1.3015 is key resistance, with Friday’s high of $1.2920 resistance above $1.2850. Initial support is at $1.2725 from last Friday’s low, but the next real support is the 61.8% Fibonacci retracement is at $1.2700, whilst price support is at $1.2580.