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Core bonds declined marginally on Friday even as uncertainty on global trade persisted after US president Trump indicated he intends to impose import tariffs on steel and aluminum. The rise in US yields was supported by a late session equity rebound. The German 10-yr yield failed to break below 0.62% support, indicating that global sentiment on core bond remains fragile. Today, the eco calendar contains the final EMU services/composite PMI’s. The US non-manufacturing ISM is expected to ease slightly to 59.0, which still points to healthy growth. There will be plenty of headlines on the political stalemate in Italy and on a potential trade war after recent comments on import tariffs from US president Trump. A risk-off context might be a temporary positive for core bonds, but we don’t expect a big leap higher. The US deficit story and rising inflation expectations remain longer term negatives for (core) bonds. The Bund might temporary outperform but the price action end of last week indicated that 0.62% remains a tough support for German 10-y yields. Italian bonds might show some modest underperformance.

President Trump announcing import tariffs abruptly aborted a tentative USD rebound last week. The USD decline slowed on Friday, but the dollar remained in the defensive as Trump indicated that he wouldn’t backtrack on its intentions. EUR/USD jumped back above 1.23. USD/JPY extended its downtrend. This morning, the euro gained temporary as the German SPD approved the new German government coalition. However, the political stalemate after the Italian election soon removed the shine off the euro. EUR/USD is again trading in the 1.23 area. Global uncertain on a potential trade war weighs on the trade-weighted dollar and on USD/JPY. There might be temporary euro caution due to political uncertainty in Italy. However, the global trade frictions (or the easing of this threat) will probably remain the main driver from USD trading in the short-to-medium term. We start the week with a neutral bias on EUR/USD. The EUR/USD 1.2155 area looks not easy to break a long as trade frictions dominate the headlines. USD/JPY remains most vulnerable.

On Friday, UK PM May advocated some kind of tailor-made trade deal between the UK and the EU after Brexit. In this context, she also admitted that neither of both parties can exactly have was they want. There were some cautiously positive reactions from the EU to the speech, but the hard work on the specifics of the deal have still to be done. The sterling decline gradually slowed. EUR/GBP closed the session at 0.8927. Today, the UK services PMI is expected to rise marginally from 53.0 to 53.3. 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

Italy faces a prolonged period of political instability after voters delivered a hung parliament in Sunday's election. Initial results indicated that euro-sceptic Five Star Movement and the anti-migrant League were among the election’s winners. With no one group reaching a majority, weeks of horse-trading will be needed before a new government can be appointed.

China still aims to expand its economy by around 6.5 percent this year, the same as in 2017. However, the economy exceeded the government target printing at 6.9% in 2017. At the same time, China is stepping up its efforts to contain financial risk and secure stability. In this respect it lowered the budget deficit target to 2.6% from 3.0% in the past the years.

Germany's SPD approved another coalition with Chancellor Angela Merkel's conservatives, clearing the way for a new government. Two thirds of the membership voted "yes" to the deal, a wider margin than expected. Angela Merkel could be sworn in for a fourth term as early as the middle of the month

XAUUSD (1326.22): Gold prices posted gains on Friday reversing the Powell testimony led declines. With the risk off sentiment prevailing, we expect to see gold prices supported in the near term. However, price action is likely to be capped near the current resistance level of 1327 - 1325. Unless we see a strong breakout above this level, the bias remains to the downside. Gold prices are expected to fall back to the 1303 level of support to establish a firm retest of this level. However, the risk increases if gold prices post declines below this level. In this case, we could expect the declines to test the lower support at 1282 - 1274 region.

GBPUSD (1.3790): The British pound managed to post some modest gains on Friday following the reversal on Thursday. However, the downside breakout from the triangle pattern on the 4-hour chart indicates that the bias is to the downside. The currency consolidation in price suggests a bearish flag pattern that is emerging. This could indicate GBPUSD targeting the support level near 1.3611 - 1.3589 in the near term if the bearish flag pattern can be validated.

EURUSD (1.2322): The EURUSD edged higher on Friday as the reversal from Thursday's bullish engulfing pattern gave a slight push to the euro. However, with price action back near the familiar resistance level of 1.2363 - 1.2330, we expect to see a near term decline. The fact that EURUSD was back at the resistance level indicates that the bias is to the downside. We expect to see the EURUSD continue to post declines but price action could be limited heading into this Thursday's ECB meeting. The downside target for EURUSD remains at 1.2090 region.

Daily Pivots: (S1) 145.07; (P) 145.75; (R1) 146.53; More...

Intraday bias in GBP/JPY remains on the downside. Current fall from 156.59 is in progress for 143.51 medium term fibonacci level next. We'll look for bottoming signal there. But firm break will target 139.29 support. On the upside, above 147.47 minor resistance will turn intraday bias neutral first. But outlook will remain bearish as long as 150.92 resistance holds, in case of recovery.

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.

Italian elections were held on Sunday with early exit polls indicating a hung parliament as widely expected. Full counting of votes is expected to be completed only by 2pm CET following which the results will be officially announced.

In anticipation of the election outcome, the markets are seen moving to a risk off sentiment. Gold prices which had weakened last week posted a strong reversal toward Friday's close.

Looking ahead, on the economic front, data from the Eurozone will see the release of the services PMI from various regions. The final services PMI data for the Eurozone is expected to show an unchanged print with an estimated reading of 56.7 for February. This was the same reading in the services PMI in January.

Data from the UK will see the release of the services PMI data. Economists forecast that services activity in the region rose slightly to 53.3, up from January's 53.0. Services data continues in the U.S. trading session. Markit's final services PMI is forecast to show an unchanged print at 55.9 while ISM's non-manufacturing PMI is expected to fall to 58.9, down from 59.9 that was registered in January.

Daily Pivots: (S1) 129.70; (P) 130.07; (R1) 130.57; More....

EUR/JPY's decline continues today and reaches as low as 129.34 so far. Intraday bias remains on the downside. Current fall from 137.49 is starting 126.61 medium term fibonacci level next. We'll tentatively look for bottoming signal there. On the upside, above 130.51 minor resistance will indicate temporary bottoming and bring consolidations, before staging another decline.

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.

Daily Pivots: (S1) 1.5792; (P) 1.5856; (R1) 1.5925; More....

At this point, intraday bias in EUR/AUD remains on the upside. Prior break of 1.5816 resistance confirmed medium term rise resumption. Further rally should be seen to 61.8% projection of 1.5258 to 1.5816 from 1.5626 at 1.5971. Break will target 1.6526. On the downside, below 1.5786 minor support will turn intraday bias neutral. But outlook will remain bullish as long as 1.5626 support holds.

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.

Daily Pivots: (S1) 0.8894; (P) 0.8922; (R1) 0.8950; More...

EUR/GBP retreats mildly today but at this point intraday bias stays on the upside for further rally. Prior break of 0.8928 resistance indicates near term trend reversal. Decline from .9305 has completed at 0.8686 after hitting 61.8% retracement of 0.8312 to 0.9305. Further rebounds should be seen back to 61.8% retracement of 0.9305 to 0.8686 at 0.9069. Firm break there will target retest of 0.9305 high. On the downside, below 0.8877 minor support will turn intraday bias neutral again.

In the bigger picture, there are various ways to interpret price actions from 0.9304 high. But after all, firm break of 0.9304/5 is needed to confirm up trend resumption. Otherwise, range trading will continue with risk of deeper fall. And in that case, EUR/GBP could have a retest on 0.8303. But we'd expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside.

EURUSD has completed two consecutive positive trading days following the rebound on the lower Bollinger band, which holds near the 1.2160 support level. However, currently, the pair is moving slightly lower below the 20 and 40 simple moving averages in the daily chart.

Remaining in the short-term chart, technically, the momentum indicators are endorsing the recent downside pressure. The RSI indicator is sloping south near the 50 level, while the MACD oscillator is falling below the trigger line but is still above the zero line. Moreover, the 20-SMA is ready to post a bearish cross with the 40-SMA, suggesting a bearish bias.

If price action remains below the 1.2300 psychological level, there is scope to test the 1.2200 handle and next, the 1.2160 support barrier. Clearing these key levels could see additional losses towards 1.2080, which coincides with the 23.6% Fibonacci retracement level of the upleg from 1.0560 to 1.2540.

On the flip side, if prices successfully surpass the 20-SMA at 1.2320, then the focus could shift to the upside again and the price could challenge the upper Bollinger band near 1.2470. From there, EURUSD could be on the path towards the 1.2540 resistance level.

It is worth mentioning that the world’s most traded currency has been developing with an ascending movement since April 2017 and tested the diagonal line several times in the past.