Equities weaker, US yields lower, USD softer

The US Federal Reserve’s rejection of capital raising plans by several banks taken together with further confrontation between the US and Russia and a disappointing US durable goods orders report were sufficient to result in a sell off in equity markets, lower US yields and a weaker USD.

Gold failed to benefit in yet a further sign that its bull run has ended, with the metal honing in on its 200 day moving average at 1296.71. On the US data front headline February US durable goods orders beat expectations (2.2%) but core orders (-1.3%) were weaker than expected.

Although the lead for Asia is a weak one markets may still find some resilience due to expectations of policy stimulus from China. Similarly dovish talk from the European Central Bank will offer further support to market sentiment while undermining the EUR somewhat. On the data front today the main releases are US Q4 GDP revision (upward revision likely), and UK retail sales (rebound likely).

Eurozone data releases this week

There are several first tier Eurozone data releases on tap this week including March flash purchasing managers indices (PMIs), preliminary HICP inflation and the March IFO business confidence survey.

We look for a slight increase in the “flash” composite PMI, with the data restrained by concerns about China and the Ukraine. Inflation in March could move lower, while the German IFO survey is expected to flat. The data will not be particularly spectacular but ought not to detract from the fact that growth momentum in the Eurozone is picking up.

Lower inflation may provide more support to lower policy rates from the European Central Bank but some of the pressure on the ECB to ease policy rates may have eased given the decline in the EUR last week.

After last week’s sharp drop EUR/USD is likely to consolidate around 1.3800 over coming days.

Talking the Euro down

It looks like the European Central Bank is finally waking up to the fact that belligerence over further monetary policy easing is resulting in a firming in the currency.

The fact that EUR/USD came dangerously close to breaching the psychologically important level of 1.40 must have triggered some panic within the governing council. To counter this ECB President Draghi noted that the currency’s level is becoming “increasingly relevant in our assessment of price stability”.

The problem is that words alone will not do the trick. Draghi believes that enhanced forward guidance will help to loosen monetary conditions by lowering real interest rates and this will weaken the EUR as real rates fall relative to other countries.

The market will expect action and not only words. If the Draghi really wants to weaken the EUR some form of monetary measures will need to be announced otherwise there may be little to stop EUR/USD testing 1.40 and beyond.

In the near term Draghi may have helped cap EUR/USD although technical support around 1.3825 (28 Feb previous high) will limit any downside.

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EUR and GBP losing ground

Safe haven currencies including JPY and CHF will be the main FX beneficiaries of the current bout of risk aversion although the USD has also edged higher in part due to some slippage in the EUR and GBP. I had noted at the beggining of this week that EUR/USD will remain a buy on dips on any decline to 1.3775. However, after hitting a high around EUR/USD 1.3916 following the European Central Bank’s inaction at its policy meeting last week the currency pair distinctly looks like it has topped out this week. Technical and positioning indicators are also looking less positive for the currency, with the RSI (Relative Strength Index) at a stretched level and speculative positioning above its three month average.

Comments by ECB Vice President Constancio that the markets had not fully taken on the message from the ECB last week that policy will remain accommodative also helped to dampen sentiment for the EUR. Further slippage to technical support around 1.3778 looks likely in the near term.

GBP has lost ground overnight too. Softer data including yesterday’s January industrial production data as well as comments from the Bank of England have weighed on the currency. As noted last week GBP/USD was looking vulnerable above 1.6700 and will face some further short term pressure, with a test of support around 1.6538 looming.

Euro / dollar eyeing 1.40

EURIMM

EUR has continued to push higher over recent weeks and looks well supported as inflows into European assets continues unabated. Although speculative EUR positioning continues to move higher above its 3-month average, suggesting that positioning is becoming a little more stretched, sentiment for the EUR remains firm. The ECB’s decision last week to refrain from any policy easing while not hinting at any easing in the pipeline, suggests that EUR/USD will remain a buy on dips on any decline to support around 1.3775. A test of strong psychological resistance around 1.4000 cannot be ruled out over coming sessions.

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