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Market Comment 10th April 2017

GBP fragile pre-CPI, USD firm before Yellen's speech

GBP fragile pre-CPI, USD firm before Yellen's speech

The pound (+0.16%) started the week flat-to-positive, in an effort to consolidate Friday’s losses after the unexpected contraction in UK’s manufacturing and industrial data sent the GBPUSD below its 100-day moving average (1.2398).

The 1.2360-support (Fibonacci 50% retracement on March recovery) has been tested for the third consecutive session. Breaking below this level should pave the way toward 1.2301 (major 61.8% retracement). The key resistance stands at 1.2422 (major 38.2% retracement & down-trending triangle top).

UK inflation & labour data in focus The UK’s inflation (Tue) and labour data (Wed) are the key events of the week.

The rising inflation has become a major concern in the UK, since the Bank of England (BoE) eased the monetary conditions to support the British economy through the Brexit. The headline inflation surpassed the BoE’s 2.0% target in February. 

Good news is that analysts expect a cool down in consumer prices in March. According to estimates, the headline inflation may have softened to 2.2% year-on-year from 2.3%, the core inflation could have eased to 1.8%y/y from 2%. If this is the case, the pound could resume its descent throughout this week. 

On the other hand, an upside surprise in CPI (consumer price index) could revive the BoE hawks despite last week’s weak economic data and trigger a fresh, hawkish rally in the pound given that an increasing number of BoE members would consider an interest rate hike sooner rather than later.

Pound recovery weighs on FTSE 

The appetite in the FTSE reversed soon after the weekly opening bell, as the pound extended recovery to 1.24 mark.

Energy stocks (-0.55%) opened under pressure, despite a third positive session in the oil markets. 

Miners remained ahead of the game, as BHP Billiton rallied past 5.00% after Elliott Advisors, an activist fund, said its three-step operation restructure plans could give a boost up to 50% to the company’s share value. Elliott said that ‘most of BHP’s underperformance [related to comparable companies] in terms of total shareholder returns has been driven by the incomplete status of management’s streamlining and value-optimisation of BHP’s group structure and asset portfolio’. 

EURUSD hits 1.0570

Across the Channel, the EURUSD extended losses to 1.0570. We remind that the European Central Bank (ECB) President Mario Draghi said ‘reassessment of the current monetary policy stance is not warranted at this stage’ and saw ‘no need to deviate from wording of the forward guidance’. Hence, the divergence between the Fed and the ECB policy outlook hint at the possibility of a further dive toward 1.0500/1.0490.

USD-bulls in charge of the market after Friday’s NFP shocker, Yellen in focus 

Released on Friday, the US nonfarm payrolls has been a big miss. The US economy added 98’000 nonfarm jobs in March, versus 174’000 expected by analysts. Last month’s read has been revised down to 219’000 from 235’000. The average earnings grew at the steady pace of 0.2% on the same month. 

Although the US labour data remained well behind the expectations, it didn’t discourage the USD-bulls. In the aftermath of Friday’s trading mood, it is obvious that the markets are focused on the Federal Reserve’s (Fed) tightening policy and much less on how fast the rate normalization would happen. There is a tacit consensus that two or more rate hikes are sufficiently suitable. Clearly, the Fed’s balance sheet reduction plans also added a hawkish bias, although the issue remains unclear in terms of market pricing at this early stage. 

Fed’s Dudley reassured that the Fed’s major focus is the interest rate tightening, in contradiction with his earlier suggestion that the balance sheet shrinkage could interfere with, or potentially delay the rate tightening plans. 

The Fed hawks remain in charge of the market before FOMC Chair Janet Yellen’s speech later in the session. Yellen will speak for the first time since the Fed revealed its plans regarding the balance sheet. We expect Yellen to prioritize the actual rate tightening policy, yet to remain discreet regarding the balance sheet reduction plans. 

AUDUSD slides to lowest in almost two months

The AUDUSD slid below its 100-day moving average (0.7525) for the first time since mid-January. The pair stepped in the bearish consolidation zone, below 38.2% retracement on December- March recovery.

The bearish reversal could dent the carry appetite and underpin the sell-off in the Aussie. 

The MACD (Moving Average Convergence Divergence) gains momentum on the downside, suggesting that the current negative trend could extend to 0.7454 (Fibonacci 50% retracement on December – March rally), before 0.7385 (major 61.8% retracement).

USDJPY sailing away from 110.00

It appears that the USDJPY is sailing away from the 110.00 level, as the USD-bulls gain more field on hawkish Fed expectations.

From a technical point of view, the upside correction pushed the USDJPY to the first milestone, 111.40 (minor 23.6% retracement on March-April decline). The pair should take over the 112.20 resistance (major 38.2% retracement on March-April decline) to grant a mid-term bullish reversal.


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