As we have seen on several occasions in recent weeks, the course of the risk recovery never seems able to run smoothly. What was seen as an all out risk rally on Monday has hit the buffers again. The question is how much weight markets now assign to the disappointment over Moderna’s COVID-19 vaccination trial not getting the desired data that initial claims had given. US markets pares some of the gains of the risk rally yesterday but appear to have steadied now. The supportive comments of Fed chair Powell have certainly been a key factor in recent market moves and the old adage of “never fight the Fed” once more springs to mind. US equity futures are finding support today, but given how US Treasury yields are a shade lower today, the traction of the rally has again been lost. The prospect of a trending move for risk and to break the shackles of recent ranges still remains some way off. In data out early this morning, UK inflation came in slightly lower than expected on both headline (+0.8%) and core (+1.4%). This is seeping into mild sterling underperformance this morning.
Wall Street fell into the close last night, with the S&P 500 -1.0% at 2923. However, with US futures ticking slightly higher today (E-mini S&Ps +0.4) there is at least a basis of support forming today. Asian markets have been mixed (Nikkei +0.8% and Shanghai Composite -0.6%) whilst European markets are playing catch up on the US negative close, with FTSE futures -0.7% and DAX futures -0.6%. In forex, there is a mild positive bias forming. GBP is the main underperformer along with JPY. Commodity currencies are broadly supported, whilst EUR continues to run on the legacy of the developments with regards to the EU Recovery Fund. In commodities, there has been renewed support for gold and silver, whilst oil is mixed this morning.
It is fairly Eurozone centric for the economic calendar today. First up at 0900BST there is the Eurozone Current Account for March. Then an hour latest the final Eurozone April inflation is at 1000BST. Final headline HICP is expected to be unrevised at +0.4% (+0.4% flash April, +0.7% final March). Final Core HICP is expected to also remain unrevised at +0.9% (+0.9% flash April, +1.0% final March). Then into the afternoon is Eurozone Consumer Confidence at 1500BST which is expected to slide further in May to -24.0 (from -22.7 in April). In the oil market the Weekly EIA Crude Oil Inventories at 1530BST are expected to show a mild build of +1.0m barrels (after the surprise drawdown of -0.7m barrels last week).
Sterling traders may like to keep an eye out for Bank of England Governor Andrew Bailey who is testifying before the Treasury Select Committee today at 1430BST.
Chart of the Day – AUD/JPY
For weeks we have been fearful of the shallowing of the risk recovery, however during this time the Aussie has still been a standout performer. With a more positive risk appetite taking hold this week, the Aussie has outperformed whilst the safe haven yen has struggled. On the AUD/JPY cross, this has now formed two strong candlesticks and a decisive breakout above key resistance at 70.15. This move has taken AUD/JPY to a ten week high and opens for continued recovery towards the next resistance at 72.40. A slight pullback into the close last night has just taken the edge off some of the buying pressure, but once more the market is moving higher this morning. Momentum indicators have been consolidating recently, and they are lagging the price slightly, which lends a degree of caution. However, if RSI were to move into the mid-60s and MACD lines continue to accelerate to four month highs, it would add conviction to the upside break. The inference of yesterday’s move is an upside break from a range 67.60/70.15 which implies 250 pips of further upside towards 72.60. Initial resistance is 71.50 but a test of the next real overhead supply at 72.40 is well within scope of the move now. The range breakout at 70.15 is initial support for an intraday pullback, whilst the hourly chart shows a near term buy zone between 69.50/70.15. A failure under 68.50 would now abort the breakout potential.
A second positive close in a row, with the market holding above the $1.0890 pivot, this leaves a growing positive bias now. Although the market continues to trade within what is now approaching a seven week trading range between $1.0725/$1.1015, there is developing positive intent. However, reaching the top of the trading band is one thing, but breaking out is entirely different. The bulls need to drive the RSI to closing above 60 to really suggest there is a serious momentum behind the move. Furthermore, MACD lines need to be accelerating above neutral. These would both then be positioning with decisive two month highs and suggest the bulls are really in control. For now, trading above the $1.0890 pivot leaves a positive bias within the range, for pressure towards $1.1000/$1.1015. The market is ticking higher again early today and we are happy to position for a test of $1.1000/$1.1015. The hourly chart shows the market starting to find support at higher levels and pushing on with increasingly positive momentum. There is support now $1.0900/$1.0920 today and expect a retest at least of yesterday’s high of $1.0975. A decisive close above $1.1000/$1.1015 opens $1.1145 as the next key resistance. Failure back under $1.0890 would neutralise again.