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• Bank of Canada meets; markets seem to be expecting a major dovish pivot, which may not materialize
• US dollar rally revitalized by robust ISM index
• Aussie drops to two-month lows as RBA rate-cut expectations grow

BoC decides as rate-hike bets evaporate

The main event on Wednesday will be the Bank of Canada (BoC) rate decision. No action is expected, and since there is no press conference by Governor Poloz either, investors will scrutinize the accompanying statement for any policy hints. It’s striking that a significant repricing of BoC rate hike expectations has taken place lately, with markets now seeing practically no chance for a hike this year, as opposed to roughly a 50% probability for one just a few weeks ago.

This shift occurred after Q4 GDP data disappointed, igniting speculation that the BoC will follow in the Fed’s footsteps and adopt a ‘patient’ approach, signaling it will pause rate hikes until – and if – the data pulse recovers. While such a shift may indeed take place further down the road, it may be too early for the BoC to signal as much today. It seems a little exaggerated for the Bank to completely change course on a single disappointing data set, especially from a quarter where growth was weak globally, and considering that 2019 data have been solid so far. Hence, if the BoC retains an iota of optimism today and keeps a future hike on the table, that may come as a hawkish surprise, and perhaps help the loonie to rebound.

Robust ISM non-manufacturing index refuels dollar rally

The US dollar index – which measures the greenback’s performance against a basket of six major currencies – rose for a fifth consecutive session on Tuesday, propelled higher by encouraging US data. The ISM non-manufacturing PMI for February clocked in at a remarkable 59.7, far exceeding the forecast for a more modest increase to 57.3, and likely calming some fears around the US economy. Although still largely non-existent, market implied odds around Fed policy entered the green once again, indicating a faint probability for a hike this year, as the robust print amplified the narrative for a rebound in growth.

Alas, US stock markets were not impressed, closing marginally lower as even the slight revival of rate-hike expectations was enough to curb the appeal of riskier assets. Today, traders will keep their eyes on the ADP employment report for February, which is considered a tracker of the nonfarm payrolls print, as well as on a speech by New York Fed President Williams (FOMC voter) at 17:00 GMT.

Aussie gets hammered as GDP disappoints, rate-cut bets soar

The Australian dollar is the worst performer among the majors on Wednesday, after the nation’s GDP for Q4 fell short of expectations. Real growth came in at 2.3% on a yearly basis, missing the forecast of 2.5%. Aussie/dollar fell to a two-month low as the probability for rate cuts by the RBA this year soared. Specifically, a quarter-point rate cut by year-end is now more than fully priced in, with investors even assigning a ~12% chance for a second one, according to Australia’s overnight index swaps.

While understandable given that incoming data have been on the weak side lately, this pricing still seems overdone in the sense that it appears to be far too dovish far too early. A potential US-China trade deal would eliminate a major downside risk facing the Australian economy, and while the RBA may still cut rates if the domestic outlook softens, doing so twice this year may be a bit of a stretch. Against this pessimistic backdrop, Australia’s retail sales for January that are due early on Thursday (00:30 GMT) may be crucial.

AUDUSD stretched sharply on the downside on Wednesday to unlock a two-month low of 0.7027 after sliding sideways the past three days. The technical picture has also turned more bearish as the MACD deepened further in negative territory and below its red signal line, while the RSI has increased its speed southwards. The latter however is not far from its 30 oversold level, a sign that losses may not last for long.

Should bearish action continue below the 0.70 mark, support could be found between the psychological levels of 0.69 and 0.68. A successful break lower, could then bring the almost 10-year low of 0.6745 back into view.

In case of a recovery, the 23.6% Fibonacci of 0.7074 of the upleg from 0.8135 to 0.6745 could provide nearby resistance ahead of the 0.7200 round level. Slightly higher at 0.7244, the 200-day moving average could challenge the bulls as it did at the end of January. If it fails to stop upside pressure, the next target could be the January peak of 0.7294.

In the medium-term, AUDUSD is stable in a neutral mode within the 0.70-0.7392 area. The flattening 50-day MA suggests that the sideways run may not change any time soon.

EUR/USD

Current level - 1.1299

The bias remains bearish, for a slide towards 1.1214. Crucial on the upside is 1.1350.

USD/JPY

Current level - 111.76

The intraday outlook is bearish, for a break through 111.60, towards 111.20.

GBP/USD

Current level - 1.3135

Intraday allow a rebound to 1.3200 area, before another drowning, towards 1.2960.

The Aussie dollar fell to new two-month low at 0.7028 on Wednesday, pressured by disappointing economic growth figures of Q4 2018.

Annual Australian GDP rose 2.3% in Q4 (at the slowest pace since mid-2017) falling below expectation for 2.5% rise and 2.8% in the previous quarter.

Further slowdown of the economy raises expectations for RBA to start cutting interest rates and stimulate the economy, after the central bank held optimistic tone following rate decision meeting on Tuesday.

Fresh bearish acceleration of AUDUSD pair eventually broke strong supports at 0.7070/54 (Fibo 38.2% of 0.6706/0.7295 / 12 Feb trough) and generated strong bearish signal that requires confirmation on daily close below these points.

Completion of Head & Shoulders pattern on daily chart (bears pressure the neckline at 0.7022) adds to negative outlook, along with growing bearish momentum and other daily indicators in negative setup, however, oversold stochastic warns that bears may enter consolidation before attempts through psychological 0.70 support (also 50% retracement of 0.6706/0.7295).

Broken previous key supports at 0.7054/70 are now acting as solid barriers which should ideally limit upticks and guard pivotal resistance at 0.7110 (converged 10/20SMA's).

Res: 0.7054, 0.7070, 0.7092, 0.7110
Sup: 0.7022, 0.7000, 0.6931, 0.6900

Markets

Yesterday, global bonds showed no clear directional trend. German bunds and US Treasuries initially traded with a tentative negative bias supported by good EMU services PMI's. However the rise in yields was modest. Later in the session, (US) yields tried another upside attempt on a strong US non-manufacturing ISM (59.7). However, bonds soon found their composure. US yields ended the session little changed, bonds with longer maturities outperforming. The 10-y bund yield also showed no clear directional move. This morning, Asian, equities are trading mixed with China still outperforming. Markets are awaiting more concrete news from the US-China trade talks. In line with yesterday's price action, core (US and European) bonds remain well bid with the Bund jumping higher at the start of European dealings. Bond trading will probably be driven by global risk sentiment and event risk (headlines on trade) today. The US eco data (ADP and trade balance) probably will have to yield a big surprise to give clear a directional bias global bond trading. European bond investors are looking forward to tomorrow's ECB policy decision.

Last week, the euro gained modest ground as investors embraced the idea that EMU data might bottom and that better eco data might keep the door open for ECB policy normalisation later this year. Yesterday, the EMU services PMI's indeed surprised on the upside of expectations. This positive development was visible in several countries, including Italy and France. However, it didn't help the euro. EUR/USD remained paralysed in a tight sideways range in the 1.1340/1.1315 area. Later in the session, the dollar proved more sensitive to positive news. The US currency profited from a strong US non-manufacturing ISM. EUR/USD dropped to the 1.13 area and closed the session at 1.1308. USD/JPY spiked temporary above the 112 level, but couldn't sustain the gain. The pair finished the day at 111.89. Today, the eco calendar is only moderately interesting with few eco data in Europe to guide euro trading. In the US, the ADP labour market report and the December trade balance are probably only of second tier significance for global FX trading. The Fed Beige book and speeches of Fed members are a wildcard for USD trading. The dollar, rather than the euro currently looks to have the benefit of the doubt. EUR/USD is currently drifting back lower in the 1.12/1.15 ST consolidation pattern. Investors are apparently cautious to engage in euro long positions ahead of tomorrow's ECB policy decision. We don't expect the ECB to be outright soft. We expect Draghi en Co to stay in waitand- see modus and maintain their guidance on interest rates.

Yesterday, sterling showed some intraday volatility, but at the end of the day changes were modest. The UK services PMI unexpectedly rebounded and stayed well above the 50 level. However, it didn't help sterling much. EUR/GBP jumped temporary higher on headlines that a break-through in the EU-UK Brexit talks wasn't to be expected anytime soon. However, at the end of the day, sterling closed little changed against the dollar and even gained slightly ground against a broadly weaker euro. Today, there are no important eco data in the UK. So sterling trading will proably be driven by the headlines on the negotiatons between the UK and the EU.

News Headlines

Australia Q4 GDP rose a lower than expected 0.2% Q/Q and 2.3% Y/Y in the fourth quarter of last year. The report raised market speculation on an RBA rate cut later this year. The Aussie dollar drifted lower in the 0.70 big figure.

Greece received strong demand in its first 10-y bond sale since the financial crisis. The country sold €2.5 bln bonds. Demand reached €11.8 bln. The bond was priced to yield 3.90%

Today, the calendar in Europe is thin. The OECD will publish its interim outlook. The US eco releases are including the ADP private sector labour market report and the US trade balance for the month of December. The Fed will release its Beige Book preparing the policy meeting at the March 20. Fed's Williams and Fed's Mester will speak.

Asian stocks traded mixed this morning as investors adopted a ‘wait and see’ approach due to alack of fresh catalysts.

With much of the hope of a US-China trade deal priced in and the risks of a no-deal Brexit by March 29 heavily priced out, a new theme needs to be brought to the table. Although geopolitical risks continue to linger in the background, they appear contained for now while ongoing concerns over global growth areslowly becoming old news.

The movements across global equity markets are likely to be limited until investors are offered some real clarity on the progress of US-China trade talks. With a high degree of optimism over trade talks already baked into the markets, many will be left empty-handed if the final deal fails to mirror the heightened expectations. Such a development would impact appetite for riskier assets, consequently punishing equities across the globe.

While US equities have erased the losses seen since December, this year-to-date rally appears to be running on fumes. Are equity bulls running out of steam? Time will tell.

Currency spotlight – GBPUSD

It is shaping up to be another rough trading week for the British Pound thanks to growing concerns over Prime Minister Theresa May’s ability to pass her Brexit deal through Parliament by March 12.

Reports of the talks between European Union and British negotiators ending in an impasse worsened matters for the British Pound, with the GBPUSD trading around 1.3134 as of writing. While a lack of progress or clarity on Brexit talks will most likely punish the Pound this week, the downside will be limited by speculation over the government extending Article 50 to prevent a no-deal outcome. With uncertainty still a major theme when dealing with Brexit, the Pound’s medium to longer term outlook remains open to question.

In regards to the technical picture, the GBPUSD is under pressure on the daily charts. The breakdown below 1.3200 at the start of the week has provided bears with enough ammunition to attack 1.3080. A breach below 1.3080 will open a path back towards the psychological 1.3000 level.

Commodity spotlight – Gold

Gold prices edged higher this morning after rebounding from a more than five-weeklow yesterday thanks to a pause in the stock market rally.

The absence of a fresh market catalyst has the potential to send investors back towards Gold which tends to perform well in times of uncertainty. While the near-term outlook for the precious metal points to further downside amid Dollar strength and US-China trade optimism, the medium to longer term outlook remains in favour of bulls. With geopolitical risks, concerns over global growth, and expectations over the Fed taking a break on monetary tightening this year being dominant market themes, Gold still has upside potential. Focusing on the technical perspective, the yellow metal is seen depreciating towards $1278 as long as the psychological $1300 level proves to be a reliable resistance. A breakout back above this psychological level will bring bulls back into the game.

Pivot (invalidation): 56.75

Our preference Short positions below 56.75 with targets at 55.55 & 55.25 in extension.

Alternative scenario Above 56.75 look for further upside with 57.20 & 57.55 as targets.

Comment The RSI is bearish and calls for further decline. Crude Oil broke below a rising trend line drawn from March 3.

Pivot (invalidation): 15.1600

Our preference Short positions below 15.1600 with targets at 14.9800 & 14.9000 in extension.

Alternative scenario Above 15.1600 look for further upside with 15.2700 & 15.3900 as targets.

Comment As Long as 15.1600 is resistance, likely decline to 14.9800.

Pivot (invalidation): 1290.00

Our preference Short positions below 1290.00 with targets at 1282.50 & 1280.00 in extension.

Alternative scenario Above 1290.00 look for further upside with 1294.50 & 1297.00 as targets.

Comment The RSI is above its neutrality area at 50% but reversing down.

Pivot (invalidation): 2778.00

Our preference Long positions above 2778.00 with targets at 2803.00 & 2816.50 in extension.

Alternative scenario Below 2778.00 look for further downside with 2764.00 & 2750.00 as targets.

Comment The RSI is bullish and calls for further upside.