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EUR/USD

Current level - 1.2341

EUR/USD Current level - 1.2341

Yesterday's slide failed to break through 1.2300 support, but even a dip below the mentioned area will not rule out a rise towards 1.2460.

USD/JPY

Current level - 104.85

The slide through 105.20 low signals a completion of the consolidation phase and the outlook is bearish, for a continuation towards 103.40 and 102.50. Initial intraday resistance  lies at 105.20 and crucial on the upside is 106.60.

GBP/USD

Current level - 1.4110

The short-lived spike to 1.4220 could be the finale of the whole rise since 1.3710 low and my outlook is bearish, for a break through 1.4075 support, towards 1.3910.

We'd like to emphasize again that China's tariff on USD 3b of US goods, including pork, is a response to the steel and aluminum tariff. The statement of the Ministry of Commerce is here (in Simplified Chinese).

There is another response to the section 301 related tariffs, announced yesterday, on USD 50-60b of China import to US, in here (in Simplified Chinese too).

In short, regarding the section 301 tariffs, China said it "doesn't hope to be in a trade war, but is not afraid of engaging in one." And, "China hopes the United States will pull back from the brink, make prudent decisions, and avoid dragging bilateral trade relations to a dangerous place."

An MOFCOM spokesperson also said "we firmly oppose" to the section 301 tariffs. He added that "it is a typical unilateral and protectionist practice." And China is "fully prepared to firmly defend our interests." And have "have confidence and capability in dealing with any challenges."

USDCAD plummeted aggressively on Wednesday after the pullback to the 61.8% Fibonacci retracement level near 1.3130 of the downleg from 1.3800 to 1.2060. The price came under heavy selling pressure after hitting a 9-month high. However, during yesterday’s trading session it pared some losses and posted a green day.

Currently, the price is developing slightly below the 50.0% Fibonacci level of 1.2930, while holding below the 20-day simple moving average (SMA).

Short-term technical indicators are pointing to a continuation of the bearish bias. The MACD oscillator dropped below the trigger line and is retreating while remaining in the positive zone. Also, the Relative Strength Index (RSI) slipped from the overbought area and is heading south towards the threshold of 50.

Further losses should see the 38.2% Fibonacci mark of 1.2720 come into view, which is standing near the 40-day SMA. A drop below this level would reinforce the bearish structure in the short-term and open the way towards the next key support level of 1.2460, which is near the 23.6% Fibonacci.

An alternative scenario is the event of an upside reversal. A bullish run above the 1.2930 resistance level (50.0% Fibonacci) could move the price until the 1.3130 – 1.3160 zone which is acting as a strong obstacle. Further gains would lead the way towards the 1.3350 resistance barrier

At 10:30 GMT, Russian Interest Rate Decision is expected to be cut to 7.25% against the current 7.50%. RUB traders will be closely following this data release.

At 12:10 GMT, FOMC Member Bostic is due to speak about the economic outlook at the Knoxville Economics Forum. Audience questions are expected and comments may cause moves in USD crosses.

At 12:30 GMT, US Durable Goods Orders Ex-Transportation (Feb) is expected to come in at 0.5% from -0.3% previously. Durable Goods Orders (Feb) is expected at 1.5%% v -3.7% previously. This data series missed to the downside last time out but it is expected to show recovery today. USD crosses may be heavily traded as a result of this data.

At 12:30 GMT, Canadian Consumer Price Index (MoM) (Feb) is expected to be 0.5% against 0.7% previously. BOC Consumer Price Index Core (YoY) (Feb) is expected to be 1.4% against 1.2% previously. BOC Consumer Price Index Core (MoM) (Feb) is expected to be unchanged at 0.5%. Consumer Price Index (YoY) (Feb) is expected to be 2.0% against 1.7% previously. Consumer Price Index – Core (MoM) (Feb) is expected to be 0.5% against 0.2% previously. Canadian Retail Sales Ex-Autos (MoM) (Jan) is expected to be 0.9% against -1.8% previously. Retail Sales (MoM) (Jan) is expected to be 1.1% against -0.8% previously. Inflation is expected to strengthen after a beat last month. Retail sales are also expected to have a strong showing after missing expectations last month. This comes on the back of tariff exemptions for Canada, which sent USDCAD lower to trade just above 1.29000. CAD crosses could be affected by this release, especially if the data deviates from expectations.

At 12:30 GMT, UK MPC Member Vlieghe is due to speak at the Birmingham Chamber of Commerce. Comments may cause moves in GBP pairs.

At 14:00 GMT, US New Home Sales (MoM) (Feb) is expected to come in at 0.623M from 0.593M previously. New Home Sales Change (MoM) (Feb) is expected at 4.4% v -7.8% previously. On the back of strong HPI data yesterday, Sales are expected to improve after falling for three months. USD crosses may be heavily traded as a result of this data.

At 17:00 GMT, Baker Hughes US Rig Count numbers will be released. The prior number last Friday showed that there were 800 Oil rigs in operation. WTI traders will be paying close attention to this number as they look to the week ahead.

The pair hit fresh 16-month low at 104.63 in Asian trading on Friday after eventual break below psychological 105 support. Risk aversion on fears of global trade war boosted demand for safe-haven yen after US President Trump announced tariffs on Chinese goods and China responded, saying that will fight until the end. However, there will be a 30-day consultation period before the measures will be implemented., which may lower tensions until final decision is made. Break through important 105 support is strong bearish signal for extension of larger downtrend from Dec 2016 high at 118.66, which eyes next target at 104.04 (Fibo 76.4% of 99.53/118.66 rally) and could travel much lower on stronger bearish acceleration. Weekly close below 105 is needed to confirm bearish signal as the pair is also on track for the second straight weekly close in red. Daily techs are firmly bearish (MA's in strong bearish setup and 14-d momentum heading south, deeply in negative territory) which supports scenario. However, the price may hold in extended consolidation and even bounce higher, as strong bids under 105 keep bears limited for now, but firm bearish structure should not be affected. Former low at 105.24 now marks solid resistance, with extended upticks expected to be capped under strong barriers at 106 zone, provided by falling daily Tenkan-sen and 10SMA.

Res: 105.24,105.45,105.60,105.96
Sup: 104.63,104.04,103.68,103.20

XAUUSD (1338.36): Gold prices were seen breaking out to the upside after price action was seen briefly retesting the breached resistance level at 1328 to establish support. The minor bullish flag pattern that was formed is expected to see gold prices extend the gains toward 1346 level in the near term. In the event that gold prices retreat, we expect the support level at 1328 to hold but a close below this level could see gold prices pushing back toward the 1318 level of support.

GBPUSD (1.4140): The British pound jumped to intraday highs of 1.4215 before closing on a bearish note. The hawkish Bank of England which signaled the next rate hike in May was already discounted by the markets. Ahead of the BoE's meeting, retail sales in the UK rebounded sharply, rising 0.8% on the month which beat estimates and accelerated from a revised 0.2% declines from the previous month. The British pound is expected to continue maintaining the upside bias with the new support level at 1.4060 likely to support any declines. To the upside, price action will need to clear the previous highs in order to post further gains.

EURUSD (1.2333): The EURUSD was seen closing on a bearish note yesterday after posting an intraday high of 1.2388. The gains were rejected with price testing the short term trend line. Support is seen around 1.2239 level which is expected to hold in the near term. With the horizontal resistance level at 1.2363, the EURUSD is expected to remain muted below this level for the near term while maintaining the sideways range within 1.2363 and 1.2180 level of support.

Following the Fed meeting, it was the turn of the Bank of England. As widely expected, the central bank held interest rates steady at 0.5%, albeit with two dissenting votes in favor of a rate hike.

The central bank stuck to the base scenario of cementing expectations for a next rate hike in May 2018. The recent slowdown in inflation and pickup in wages alongside the Brexit transitory deal helped policy makers to push the case for a "gradual" rate hike. Still, in the longer term, the Bank of England is expected to stay cautious until the UK formally exits the Eurozone.

The British pound jumped on the news but soon gave up gains.

Monetary policy and economic data were once again overshadowed by U.S. politics. The U.S. President Trump announced that his administration would levy over $50 billion in tariffs on China for intellectual property theft. The markets were jittery on the news as this could potentially breakout into a full-fledged trade war. At the center of the discussion is whether China will respond with similar policies.

U.S. equity markets were weak with a mix of U.S. trade policies and the Facebook investigation into alleged data theft.

Looking ahead, the markets will be looking to a quiet Friday with only retail sales and inflation report from Canada coming up. Headline inflation is forecast to rise 0.4%, slower than 0.7% increase registered previously. Core retail sales are expected to rise 0.9%, reversing some of the declines from the month before.

Data from the U.S. will cover the durable goods orders report which is forecast to rise 0.5% which would reverse the 0.3% decline registered in the previous period. The day concludes with new home sales report that is expected to show a headline print of 621k.

Rates: US 10-yr yield tests important support
An intensification of the equity sell-off could generate more safe haven flows into core bonds. The nature of the stock market root suggests though that this link might break at one stage (eg if China reduces US Treasury purchases). The US 10-yr yield tests 2.8% support. We don’t expect a break, but wait until after the weekend to enter short bond positions.

Currencies: Trade war a tentative USD negative?
The dollar didn’t suffer much from yesterday’s risk-off correction. However, further USD/JPY losses might also affect other USD cross rates. Still we expect EUR/USD to hold the established consolidation pattern. EUR/GBP is rebounding back higher in the 0.87 big figure after a downside test following the BoE’s policy decision was rejected.

The Sunrise Headlines

• US stock markets lost huge ground (-2.5% to -3%) after US president Trump came through with his pledged trade offensive against China. Main Asian equity indices lose even more ground overnight (-3% to -5%).
• China fired a retaliatory shot against the US, announcing planned tariffs against American goods and saying it is readying more actions against the Trump administration’s proposed penalties on Chinese exports.
• US President Trump has replaced his national security adviser HR McMaster with foreign policy hawk John Bolton, an explosive appointment that signals a further lurch to the right and points to a White House in turmoil. (FT)
• The US Senate passed a $1.3 tn spending bill, acting to avert a government shutdown with less than 24 hours to spare and bringing to a close a messy negotiating process over the sprawling measure.
• The BoJ’s preferred inflation measure, the national CPI excluding fresh food, accelerated in February in line with forecasts from 0.9% Y/Y to 1% Y/Y. Headline inflation rose to 1.5% Y/Y.
• OPEC members will need to continue coordinating with Russia and other non-OPEC oil-producing countries on supply curbs in 2019 to reduce global oil inventories to desired levels, Saudi Arabian Energy Minister al-Falih said.
• Today’s eco calendar contains US durable goods orders. Fed governors Bostic, Kashkari, Kaplan and Rosengren are scheduled to speak. The EU Summit continues with discussion on global trade developments

Currencies: Trade War A Tentative USD Negative?

Trade war escalation: a tentative USD negative?

USD bulls were a bit disappointed after the FOMC meeting, but dollar selling eased soon as markets realized that policy normalization remains firmly in place. EMU PMI’s again missed the consensus by a big margin, capping potential euro gains. After an initial spike, EUR/USD drifted lower in the 1.23 big figure. Later, risky assets sold off as US president Trump ordered to impose tariffs on Chinese imports. This was quite neutral for EUR/USD. The pair closed the day at 1.2302. The yen jumped sharply higher with USD/JPY closing at 105.28 and EUR/JPY at 129.52

The equity sell-off accelerated overnight with major regional indices losing up to 5% even as the first reaction of China (considering tariffs on imports worth $3 bn) can be seen as rather moderate. USD/JPY declined further (currently 114.80). Japanese inflation was in line with consensus (1.5%Y/Y headline, 1.0% core) ,but that wasn’t the focus of markets. The dollar declines slightly against the euro (EUR/USD 1.2335).

US new home sales and durables are expected to rebound after a poor January reading. Several Fed governors speak. They might bring some insight on the internal dynamics during the FOMC meeting. However, the focus will be on the next steps in the China-US trade war. Trade tension had no big impact on the USD’s performance yesterday (excl. USD/JPY). The dollar slightly underperforms this morning. We keep a cautious approach on the dollar as long as the trade war dominates market highlights. Even a widening of the USD-EUR interest rate differential maybe won’t help the dollar. Underperformance of US Treasuries might be due to the wrong reasons (US risk premium, less buying of China). USD/JPY remains most vulnerable. At the same time, any further EUR/USD gains might be slowed by selling from EUR/JPY. The trade war is a growing source of uncertainty, but for now we assume that the 1.2155-1.2555 trading range remains in place.

EUR/GBP tested the 0.8688 downside barrier yesterday as two BoE members already voted for a rate hike. However, a sustained break didn’t occur. EU leaders will approve the guidelines for further Brexit talks today. We don’t expect big news for sterling. The risk-off context might also be slightly sterling negative (EUR/GBP supportive). A modest technical rebound after yesterday’s EUR/GBP rejected downside test might be in the cards.

USD (Trade-weighted): no clear USD reaction to trade war escalation