What are we looking at today:
- USD strengthening ahead of CPI inflation: With longer-dated US bond yields rising strongly again, inflation fears are coming to the fore once more. This will be highlighted again today with the US CPI inflation data. The USD is strengthening ahead of the data.
- Indices increasingly selling off: We have been highlighting the importance of near to medium-term supports in recent sessions. These supports are being broken and this opens further downside.
- Data trading: Focus for EUR traders will be on the German ZEW Economic Sentiment which is expected to continue to deteriorate. For rates and USD traders, the US CPI inflation data will be key. Inflation is expected to jump well above 8% on the headline basis, however, if the core also jumps there could be some significant USD volatility.
There has been another shift in major markets in recent sessions. A decisive move to sell longer-dated bonds has pulled the US 10 year Treasury yield sharply higher. This is coming amidst renewed inflation fears as market measures of inflation expectations climb once more. This is being accompanied by flow back into haven trades. The US dollar (USD) is driving higher once more, but this time also accompanied by the precious metals. Negative risk sentiment and inflation fears are helping gold and silver higher in recent sessions.
On the flip side, we see increasing selling pressure on equity markets again, as major indices break below key support levels. The cryptocurrency space is also following the risk appetite flow, with selling pressure decisively hitting coins such as Bitcoin, Ethereum, and Ripple by over -5% yesterday. Although these coins are relatively stable this morning, there is growing momentum to the downside building.
US CPI inflation dominates the economic calendar today. Major forex pairs will likely see a surge in volatility if inflation rises more than expected again this month. In Europe, the data from the German ZEW Economic Sentiment will be important for the EUR.
Market sentiment turns sour again: Indices and crypto are under downside pressure. Flow into safe-haven assets such as the USD and precious metals are also seen.
Treasury yields climbing again: The US 10 year yield has taken off in the past five sessions, driving from 2.40% to now over 2.80% this morning. Shorter-dated yields are more sedate in their rise, suggesting this move higher is driven by inflation fears.
Russia may be using chemical weapons: In yet another crank up in the atrocities, there are now reports of Russia using chemical weapons in eastern Ukraine. These reports are yet to be verified.
UK labor market data broadly in line with expectations: The headline rate of unemployment fell to 3.8% in February (as expected) with total wage growth increasing to 5.4% (from 4.8%) again as expected.
Fed’s Evans on neutral rates: Evans is not a voter until 2023 but is one of the most dovish voices on the FOMC. He has suggested that he is comfortable with a neutral rate (c. 2.50%) by March 2023, but may even be by the year-end. Keeping in mind almost all of the FOMC is more hawkish than Evans, this makes another 6 to 8 hikes of +25bps (or multiple +50bps hikes) very realistic for the Fed this year.
FOMC’s Brainard speaks today: Lael Brainard speaks at 1710BST today. She is the new vice-chair of the committee and leans slightly dovish. She is also one of the most dovish voters in 2022. Subsequently, her speeches will be seen as a key baseline gauge as for now aggressive the Fed might be in its tightening.
Cryptocurrency stable after yesterday’s sell-off: Sharp sell-offs across the crypto space, with Bitcoin almost -6% lower and under $40,000. The price has found support initially this morning and is back above $40,000 for now.
- German ZEW Economic Sentiment (at 1000BST). Consensus is looking for a deterioration in April to -48 (from -39.3 in March).
- US CPI (at 1330BST). Consensus is looking for headline CPI to increase to 8.5% in March (up from 7.9% in February), with core CPI to increase to 6.6% (from 6.4%)
Major markets outlook
Broad outlook: Market sentiment is turning increasingly negative as equity indices sell off sharply in early moves and US futures are again lower.
Forex: The USD is the main outperformer today, although the commodity currencies have found some support as commodity prices have ticked higher.
- EUR/USD leaked lower throughout much of yesterday’s session and is today eyeing a test of the recent 1.0836 reaction low. This protects what we still favor as a test of 1.0805 and look to use intraday rallies as a chance to sell. Below that key support opens 1.06/1.07. Resistance is mounting at 1.0940.
- GBP/USD continues to trade with a negative bias but for now, also continues to find willing buyers at or just below 1.3000. However, the downside pressure is mounting and a close below 1.3000 would open 1.2850 as the next support. Initial resistance is 1.3040/1.3055 but a move above 1.3110 is needed to suggest a recovery might be building.
- AUD/USD has developed a near-term corrective formation having closed below key near-term support at 0.7455. However, there is a pick-up this morning and a reaction around 0.7455/0.7490 should confirm the mounting corrective momentum for a continued retracement back towards the 10-week uptrend (c. 0.7295). Initial support is now c. 0.7360/70.
Commodities: Precious metals have been moving higher in recent sessions but resistance lies overhead. Oil has ticked higher towards its corrective downtrend.
- Gold has continued to improve in recent sessions and moving above resistance at $1950 the market is now testing the top of a four-week trading band of $1890/$1966. A close above $1966 would open the $2000 area again. Initial support is at $1940.
- Silver has also picked up, with a move above $25.08 to suggest improvement in the outlook again. The market remains some way below the key near to medium term resistance of $25.84 but the outlook is essentially neutral now. Initial support is in place at $24.67/$24.80.
- Brent Crude oil has been struggling to engage a recovery since breaking the support at $105.30. However, another intraday rally is forming today that is rebounding once more towards $105.30/$107.00 resistance but also the near three-week downtrend. Intraday rallies have consistently been used as a chance to sell recently and the initial resistance so is a key test today. Given the downtrend, we still favour a retest of the $100 psychological level and potentially the reaction low at $97.80. It would need a move above $112.50 (the first key lower high) to suggest a sustainable recovery.
Indices: A sharp move lower on Wall Street is being matched this morning on European indices.
- S&P 500 futures sold sharply to break below the support band at 4418/4444 in a move that turns the near to medium-term outlook negative once more. A run of lower highs and lower lows in the past two weeks leaves selling into strength now the strategy. The old support at 4418/4444 is now a basis of resistance, with 4520 a key lower high. The next support is around 4335.
- DAX has now broken the key near to medium term support area 14,030/14,100 area, and this completes a top area which implies a downside target of 13,280. Momentum on the daily and 4-hour chart si corrective and suggests selling into near-term strength. Resistance of a lower high is in place at 14,325 with 14,030/14,090 initial resistance. Initial support is at 13,575.
- FTSE 100 suffered alongside other major indices yesterday but is still seen as an outperformer during the downside moves. The bullish outlook is being questioned now and initial support at 7530 is the first test. A close below 7485 would be a corrective signal. Initial resistance is at 7580/7610 now.
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