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Markets

Yesterday, global trade tensions and an inconclusive outcome of the Italian elections caused a good start for core bonds, but the flight to safety bid eased soon as European equities (ex-Italy) returned into positive territory. The EMU PMI was revised to 57.1 (from 58. 8 in January), but had no impact on bonds. The US non-manufacturing ISM printed at a strong 59.5. US equities started an intraday up-leg as several high-ranked Republican politicians tried to convince President Trump no the implement tariffs on steel and aluminum. At the end of the day, US yields rose about 1.5 bp, the 2-year outperforming (-0.4bp). German yields declined less than 1 bp, 30 yr underperforming (+0.7 bp). Italian 10-y yield spreads versus Germany widened 4 bps.

Today, the eco calendar is thin. European investors look forward to Thursday's ECB meeting. Given the ongoing low inflation, the ECB is unlikely to make a U-turn in its communication. In the US, factory orders will be published and Fed's Dudley will speak. Global risk sentiment and the US debate on trade and tariffs will likely set the tone for trading. Markets are growing more confident that Trump's announcement last week won't have a big impact on global trading. Some further losses in core bond might be on the cards. However, bonds probably won't break key support until the tariffs' issue is really out of the way. 119-14 is the cycle low in the 10-y Note future (corresponds with the 2.95 % 10-y yield). The bund might slightly outperform ahead of the ECB meeting.

Yesterday, EUR/USD showed no clear trend. The pair dropped temporary below 1.23 early in Europe as the political uncertainty in Italy weighed. However the setback was short-lived. EUR/USD settled in the lower half of the 1.23 big figure. Later, the USD didn't succeed any meaningful gains against the euro even as US equities rallied and as fear for a trade war eased. USD/JPY (and EUR/JPY) profited from the intra-day rise in core yields and the equity rebound. USD/JPY regained the 106 barrier. This morning, the risk rebound continues in Asia. For now it doesn't help the dollar much. USD/JPY reversed opening gains is again trading in the low 106 area. EUR/USD is gaining marginally further ground. With few eco data on the calendar and the US ‘tariffs' issue still pending, we expect more technical trading in EUR/USD. Expectations for a relatively soft ECB might cap further euro gains. EUR/USD trades in neutral territory (middle of the 1.2155/1.2555 trading range).

Sterling traded with a slight positive bias yesterday. Brexit moved temporary to the background and the UK services PMI rebounded more than expected, keeping the door open for a BoE rate hike in May. EUR/GBP declined from mid 0.89 to the 0.89 area. There are no important UK data today. BoE's Haldane will speak in London this evening. The EUR/GBP 0.8930 intermediate resistance was extensively tested last week, but no sustained break occurred. This suggests that further GBP losses are maybe not that evident as long as the EU and UK are on speaking terms.

News Headlines

U.S. President Trump is facing pressure from political allies and U.S. companies not to implement proposed steel and aluminum tariffs. White House adviser Cohn is preparing a meeting with US companies that depend on steel and aluminum in an attempt to make the President change his mind. The meeting will probably take place on Thursday.

The Reserve Bank of Australia left its policy rate unchanged at 1.5% , as expected. The RBA downgraded its assessment on future growth. The RBA now expects the Australian economy to "grow faster in 2018 than it did in 2017". In its previous assessment it assumed growth to be "above 3 percent" over the next couple of years.

Fed Vice Chairman Randal Quarles said U.S. financial agencies are preparing to make “material changes” to the Volcker Rule. “The regulation implementing the Volcker Rule is an example of a complex regulation that is not working well”, he said at a banking conference.

The 1.1% surge in the S&P 500, the 336 points rally in the Dow Jones Industrial Average and the strong bounce in European markets on Monday are hard to justify, after President Trump announced plans to slap tariffs on steel and aluminum imports last week. He followed this up with a statement saying that trade wars are good and easy to win.

History has taught us that trade wars are not good and in fact, not easy to win. In March 2002, President George W. Bush took a similar approach to Trump, imposing tariffs of 8-30% on steel to revive the domestic industry and exempted Canada, Mexico and a few other countries. These temporary duties were scheduled to remain in effect until 2005. As a result, the EU threatened to impose retaliatory tariffs on U.S. products and a case was filed at the World Trade Organization, which ruled in November 2003, that more than $2 billion in sanctions would be levied if the U.S. did not remove tariffs. Less than a month after the ruling President Bush backed down and withdrew the tariffs.

The S&P 500 dropped more than 30% from March until July 2002, U.S. 10-year treasury yields fell 100 basis points, and the U.S. dollar lost more than 12% in the same period. Of course, many other factors led to these declines, but surely the tariffs did not benefit the economy as Bush thought it would.

Investors seem to believe that President Trump is using his “Art of the Deal” skills to get a better trade deals with the rest of the world or, as Ray Dalio, the Bridgewater Associates founder, wrote on Monday: “what is happening now is more for political show than for real threatening."

Trump tweeted yesterday that “Tariffs on steel and aluminum will only come off if new & fair NAFTA agreement is signed”. This confirms my belief that this mess will likely end up with Mexico, E.U. and China taking a less protectionist stance, rather than the U.S. taking a stronger one.

House Speaker Paul Ryan and other conservatives are not falling in line behind Trump, only time will tell how the situation will evolve, given the unpredictability of Trump. Although I am optimistic that things won't degenerate to a full scale trade war, caution is warranted at this stage.

Futures indicate that equities will continue the rebound when Europeans markets open, but there's little action in currency markets. I think investors are holding off from big bets ahead of the European Central Bank meeting on Thursday and the U.S. jobs report release on Friday. With no tier-one data on the economic calendar today, expect range-bound trading to resume unless we see a surprise on the political front.

The Market has shrugged off any fears of Trade Wars arising from the proposals that were released by the White House last week, with the consensus that they are being used as a threat to force trading partners to accept the demands of the US and strengthen its hand at the negotiating table. However, this could be a dangerous belief if it looks like the tariffs will be implemented and the market panics. President Trump is meeting with Industry representatives today, amid growing opposition from the international community.

The Reserve Bank of Australia has left Interest Rates on hold at 1.5% this morning. The Rate Statement mentioned that inflation was likely to remain low for some time. The risks are that household consumption remains a source of uncertainty and the appreciating exchange rate could slow economic activity and inflation. Markets had a mixed reaction, with AUDUSD first moving higher from 0.77777 to 0.77920 before reversing the move and dropping to 0.77684, suggesting that the outcome of the event was priced-in to a large extent. Retail Sales s.a. (MoM) (Jan) came in at 0.1% v an expected 0.4%, against -0.5% prior. AUDUSD initially moved higher on this data release from 0.77693 to 0.77845 before partially reversing to 0.77667 and settling around 0.77835 ahead of the Rate Decision.

Spanish Markit Services PMI (Feb) was 57.3 v an expected 56.4, from 56.9 previously. This was a welcome increase which beat market expectations.

German Markit Services PMI (Feb) came in as expected, unchanged at 55. Markit PMI Composite (Feb) was 57.6 v an expected 57.4, from 57.4 previously. EURUSD moved lower to find support at 1.27687 following this data release. This data was largely in line with expectations.

Eurozone Markit Services PMI (Feb) was 56.2 v an expected 56.7, from 56.7 previously. Markit PMI Composite (Feb) was 57.1 v an expected 57.5, from 57.5 previously. EURUSD moved high to settle around 1.23225 following this data. The Services PMI number released last month was the highest level reached since September 2007, which indicates the strong performance of the Eurozone economy’s services sector.

US Markit Services PMI (Feb) was 55.9 v an expected 54.6, from 55.9 previously. Markit PMI Composite (Feb) was 55.8 v an expected 55.5, from 55.9 previously. USDJPY moved lower from 105.895 to a low of 105.710 with the release of this data. This release provided a slight downward move as the data beat expectations, and, ultimately, could indicate an increase in inflation, which has prompted dollar weakness and equity market selling recently.

US ISM Non-Manufacturing PMI (Feb) was released at 59.5 v a consensus of 59.0 expected, against a prior reading of 59.9.

UK BRC Like-For-Like Retail Sales (YoY) (Feb) was 0.6% against an expected 0.4%, from 0.6% previously. The release, which was above expectations, saw GBPUSD move higher from 1.38303 to a high of 1.38470. This data point charts the change in the value of same-store sales.

EURUSD is unchanged overnight, trading around 1.23390.

USDJPY is largely unchanged in early session trading at around 106.228.

GBPUSD is down -0.11% this morning, trading around 1.38328.

Gold is up 0.17% in early morning trading at around $1,322.50.

WTI is up 0.06% this morning, trading around $62.58.

Major data releases for today:

At 08:15 GMT, Swiss Consumer Price Index (MoM) (Feb) is expected to be 0.2% from -0.1% previously. Consumer Price Index (YoY) (Feb) is expected to be 0.6% from 0.7% previously. This data could see moves in the CHF currency crosses. CPI data is a breakdown of the effect of inflation on consumer prices, which makes up a substantial portion of inflation overall. Increases in inflation can lead central banks to raise interest rates in an effort to contain the increase and reduce price pressure on consumers.

At 12:30 GMT, US Fed’s Dudley is scheduled to speak about the economic impact of the 2017 hurricanes at the United States Virgin Islands Non-profit Leaders Breakfast Roundtable, in St. Thomas, USVI. His comments, on this occasion, may have a limited effect on the market.

At 15:00 GMT, US Factory Orders (MoM) (Jan) is expected to be -1.3% from 1.7% previously. USD crosses could be moved by this data. If the expected decrease comes to pass, it represents a small drop, as the recent range of this data point over the last three years has been between +3% and -3.5%.

At 15:00 GMT, Canadian Ivey Purchasing Managers Index s.a.(Feb) data will be released, with a consensus of 56.3 expected, against a prior reading of 55.2. Ivey Purchasing Managers Index (Feb) will be released with a prior reading of 51.3. This data may cause the CAD pair to increase in volatility. Seasonally, this data has weakened at the beginning of each year since 2015 but it has remained in expansion above 50 since June of 2016. The softness in the data since reaching the high of 64.0 in November suggests that there is a slowing in demand in the Canadian economy.

At 18:15 GMT, UK MPC Member Haldane is due to speak at the Royal Society for the Encouragement of Arts, Manufactures, and Commerce, in London. Any comments made may affect GBP pairs.

At 21:35 GMT, Australian RBA Governor Phillip Lowe is due to deliver a speech titled “The Changing Nature of Investment” at the Australian Finance Review Business Summit, in Sydney. Audience questions are expected and comments made could affect the AUD.

At 22:30 GMT, US FOMC Member Brainard is due to deliver a speech titled “Economic and Monetary Policy Outlook” at New York University’s Money Marketeers event. Audience questions are expected and USD pairs could be moved by the answers and any comments made.

At 22:30 GMT, Australian AIG Performance of Construction Index (Feb) will be released, with a previous number of 54.3. This data point has remained in expansion above 50 since the March 2017 reading, in what is the longest period of growth over the last decade. The peak was reached in August 2017 at 60.6.

Daily Pivots: (S1) 145.71; (P) 146.41; (R1) 147.75; More...

A temporary low is in place at 144.97 as GBP/JPY recovers. Intraday bias is turned neutral first. But still, outlook remains bearish with 150.92 resistance intact. Deeper decline is expected. Break of 144.97 will extend the fall from 156.69 to 143.51 medium term fibonacci level next. We'll look for bottoming signal there. But firm break will target 139.29 support.

In the bigger picture, the case for medium term reversal continues to build up. There is bearish divergence condition in daily MACD. 146.96 support was taken out. And GBP/JPY was rejected by 55 month EMA. Break of 38.2% retracement of 122.36 to 156.59 at 143.51 will pave the way to 61.8% retracement at 135.43 and below. This will now be the preferred case as long as 150.92 resistance holds.

The euro continues to move higher against the greenback, as a return to risk-on trading sentiment is causing the U.S dollar to weaken on Tuesday. The EURUSD pair has again found strong technical resistance around the 1.2360 region, with price-action currently consolidating around the 1.2350 level ahead of the European session open. Further strong gains remain likely for the euro above the 1.2360 level, which represents the neckline of a bullish inverted head and shoulders pattern.

The EURUSD is strongly bullish above the 1.2364 level, further upside towards the 1.2430 and 1.2550 levels remains possible.

Should the EURUSD pair fail to move above the 1.2364 level, price-action may correct back towards the 1.2305 and 1.2259 support regions.

The British pound continues to recover against the greenback, as bullish comments from UK PM Theresa May and a return to risk-on trading sentiment help to underpin sterling strength. The GBPUSD earlier reached a high of 1.3878, but has now retraced lower, with price-action currently consolidating just below the 1.3850 region. Traders now look towards a key-note speech from Bank of England member Haldane during the European trading session, and the key 90.00 level on the U.S dollar index.

The GBPUSD pair remains bullish above the 1.3807 level, buyers will continue to target the 1.3858 and 1.3914 resistance levels.

Should GBPUSD price-action move below the 1.3807 level, key intraday technical support is then found at the 1.3765 and 1.3711 levels.

Daily Pivots: (S1) 129.89; (P) 130.45; (R1) 131.55; More....

Strong rebound from 129.34, together with bullish convergence condition in 4 hour MACD, suggests short term bottoming there. Intraday bias is mildly on the upside for 38.2% retracement of 137.49 to 129.34 at 132.45. But overall, decline from 137.49 shouldn't be finished yet. We'd still expect another fall to 126.61 medium term fibonacci level at a later stage.

In the bigger picture, current development argues that rise from 109.03 has completed at 137.49, on bearish divergence condition in weekly MACD. Deeper fall should be seen to 38.2% retracement of 109.03 to 137.49 at 126.61 first. On the upside, break of 137.49 is needed to confirm medium term rise resumption. Otherwise, risk will now stay on the downside even in case of strong rebound.

Central banks are headlining a relatively subdued trading session on Tuesday, giving investors the latest clues about the future of monetary policy in regions as diverse as Australia, United Kingdom and United States.

The European data wire begins at 08:15 GMT with a report on Swiss consumer prices. The consumer price index (CPI) is forecast to rise 0.2% in February, which translates into a year-over-year gain of 0.5%.

Shifting gears to North America, the US Commerce Department will report on factory orders at 15:00 GMT. The report is expected to show a 1.3% drop in the headline figure.

Commodity traders will also look to a weekly inventory report from the American Petroleum Institute (API) for clues about the supply/demand balance of US commercial crude. The API report is a precursor to the official data courtesy of the Energy Information Administration (EIA). The EIA report is due Wednesday morning.

On the monetary policy front, speeches from Federal Reserve governors William Dudley and Lael Brainard will make headlines throughout the North American session. Bank of England (BOE) official Andrew Haldane and the Reserve Bank of Australia’s Philip Lowe are also scheduled to speak publicly Tuesday.

Earlier in the day, the RBA voted to keep interest rates at a record low of 1.5% in a decision that was widely forecast by the financial markets. The central bank is expected to remain on the sidelines for the foreseeable future in support of a stronger domestic economy.

Meanwhile, the Australian Bureau of Statistics reported a slower than expected rise in retail sales. Receipts at retail outlets edged up 0.1% in January after falling 0.5% the previous month. Analysts had forecast a 0.4% increase month-on-month.

EUR/USD

Europe’s common currency has returned to form in recent sessions, with the EUR/USD exchange rate approaching multi-week highs. The pair has added roughly 250 pips since the beginning of March and is currently trading in the mid-1.2300 range. Key levels to watch include 1.2206, the low from 9 February, and 1.2401, the short-term resistance level.

AUD/USD

Australia’s dollar picked up steam on Tuesday even as the economic data failed to inspire confidence in the local recovery. AUD/USD advanced 0.3% to 0.7784. The pair continues to trade in a familiar range following a multi-legged breakdown from highs near 0.8000 in mid-February.

GBP/USD

Cable also pointed higher on Monday, as prices continued to claw back toward the mid-1.3800 region. At the time of writing, GBP/USD was trading at 1.3843, where it was little changed compared to the previous close. Sterling has gained traction in the wake of Theresa May’s acknowledgment that a Brexit transition deal was in the works. Brexit talks will continue to influence the British pound in the short term.

Daily Pivots: (S1) 1.5849; (P) 1.5892; (R1) 1.5925; More....

With 1.5786 minor support intact, further rise is expected in EUR/AUD for 61.8% projection of 1.5258 to 1.5816 from 1.5626 at 1.5971. Break there target 100% projection at 1.6184. On the downside, break of 1.5786 will rise the chance of near term reversal and turn bias to the downside for 1.5626 support.

In the bigger picture, medium term rise from 1.3624 is still in progress for 1.6587 key resistance. At this point, we'd be cautious on strong resistance from there to limit upside. But decisive break will confirm resumption of long term rise from 1.1602. On the downside, break of 1.5153 support is needed to indicate completion of the medium term rise. Otherwise, outlook will remain bullish in case of pull back.

Currency pair EUR/USD

The EUR/USD showed strong bullish momentum at the support zone (green). A bullish breakout above resistance (orange/red) could confirm the continuation of the uptrend whereas a bearish break below support makes a wave 4 (pink) less likely and a downtrend more probable.

The EUR/USD could make a bearish pullback via an ABC pattern (blue) within wave 2 (purple).

Currency pair GBP/USD

The GBP/USD is building a bullish channel (green) after bouncing at the 61.8% Fibonacci level.

The GBP/USD is probably not in a bearish wave 4 anymore after breaking above the bottom of wave 1 (dotted red). It could now be in a bullish wave 4 (grey), unless price breaks above the bottom of the wave 1 (red line).

Currency pair USD/JPY

The USD/JPY could have completed a bearish wave 5 (blue) at the most recent lower low around 105.

A bearish extension is still possible as the USD/JPY could be building a bearish wave 4 (green) correction, but a break above the resistance trend line(red) would invalidate this.