The Big Picture

1.10 holds again Once again the 1.10 barrier proved too much for EUR/USD. Despite more encouraging European data (better-than-expected Ifo survey) and disappointing US data (worse-than-expected durable goods orders), the pair spent only a few minutes above the 1.10 barrier before coming down. We seem to be getting ready for another challenge of that line again in early trading this morning. Nonetheless, the fundamental background is slightly different as the bond market yesterday ignored the weak US data. Fed funds rate expectations rose by 3 bps yesterday while bond yields were up 4-5 bps across the curve and inflation expectations also rose, perhaps because of the rise in oil prices (see below). Meanwhile the FX market appears to be settling down and reaching more of a consensus as shown by the narrower and narrower trading range for EUR/USD each day: 3.99% last Thursday, 2.53% Friday, 1.74% Monday, 1.27% Tuesday and 1.04% Wednesday. The big question is which direction the market will break out on: 1.1045 or under 1.0885 (see technical comment for details).

Oil surges on Saudi airstrikes Oil prices initially fell Wednesday after the US Energy Information Administration (EIA) confirmed yet another rise in oil inventories, but then the market turned around and prices rose sharply on news that Saudi Arabia started bombing targets in Yemen. The Saudi offensive raises the possibility that Middle East supplies could be disrupted. Yemen is not a big oil producer (it produces only 133,000 b/d) but at one end of the country lies the Bab el-Mandab straits, a 3.2km (2 mile) wide bit of water. An estimated 3.8mn b/d flows through this narrow stretch as oil tankers sail from the Persian Gulf to the Suez Canal. If it were to be closed off, tankers would have to sail around Africa to reach markets in Europe and the Americas, adding many days to the journey and raising the cost of transport considerably.

My view though is that in recent months we have seen numerous threats to Middle East supplies, such as the collapse of Libya and ISIS’s advance in Iraq, and so far supplies have only increased. I’m going to be optimistic and assume that this time too it will be a false alarm. Meanwhile, US inventories just keep climbing and climbing, as the latest data showed. At the current rate, storage at the main US loading port of Cushing, Oklahoma will be full by the end of June. Then what? Nothing to do but to dump the oil on the market at any price. So assuming that the Saudi foray does not result in any disruption to supplies, I expect prices to hit new lows within the next several months. However, it’s impossible to tell when the market will turn from worrying about the fighting to worrying about storage again. It depends on how the fighting goes, which nobody can predict.

Nonetheless, the increased tension in the Middle East is likely to weigh on currency markets. AUD and NZD were the worst performing currencies overnight as risk aversion hit the market, while JPY and the oil-sensitive NOK and CAD gained.

Today’s highlights: During the European day, we get the final GDP figures for Q4 for France. Since the final data is expected to confirm the preliminary growth figure, the market reaction could be limited as usual.

Eurozone’s M3 money supply is forecast to have risen 4.3% yoy in February, a slight acceleration from 4.1% yoy in January. The 3-month moving average is expected to accelerate if the forecast is met. We could also see bank lending turn positive on a yoy basis for the first time since March 2012. Such figures would suggest that the ECB’s preliminary measures to boost money supply growth, such as the targeted long-term refinancing operations (TLTROs), were already taking effect even before the QE program began in March. It would add to the recent data indicating a nascent recovery in the European economy.

In Norway, the AKU unemployment rate for January is forecast to have remained unchanged at 3.7%. The official unemployment rate for the same month had increased, thus the possibility for an increase in the AKU unemployment rate is high, which could prove NOK-negative.

In Sweden, the trade surplus for February is expected to increase a bit. This could strengthen SEK somewhat.

In the UK, retail sales for February are expected to rise, a turnaround from the previous month. This could strengthen GBP, at least temporarily, as rising retail sales in the UK are generally associated with a stronger pound. It’s not clear though whether economics is dominating the pound nowadays or politics. Or maybe it’s being swayed by comments by Gov. Carney and his friends about the likely path of interest rates.

In the US, we get initial jobless claims for the week ended March 21. The preliminary Markit service-sector PMI for March is also coming out.

We have several speakers on Thursday’s agenda: St. Louis Fed President James Bullard, Atlanta Fed President Dennis Lockhart, ECB President Mario Draghi and Bank of Canada Governor Stephen Poloz speak.

The Market

EUR/USD stays below 1.1045

EUR/USD traded somewhat higher on Wednesday, but the up leg was limited once again by the 61.8% retracement level of the 26th of February – 16th of March decline, which stands slightly below the resistance hurdle of 1.1045 (R1) and near the 200-period moving average. Looking at our short-term momentum studies, I am still cautious that a pullback from the recent uptrend may be in the works. The RSI approached its 70 line again and turned sideways, while the MACD stays below its trigger line and points south. On the other hand, the rate is still trading above the prior short-term downtrend line taken from the peak of the 26th of February and above the uptrend line drawn from the low of the 13th of March. Consequently, I would consider the short-term outlook to remain positive. A move above 1.1045 (R1), could see scope for extensions towards the 76.4% retracement of the 26th of February – 16th of March decline, at 1.1160 (R2). As for the broader trend, the price structure still suggests a longer-term downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. Therefore, I would treat the near-term uptrend or any possible extensions of it as corrective move of the larger down path.

Support: 1.0885 (S1), 1.0765 (S2), 1.0700 (S3).
Resistance: 1.1045 (R1), 1.1160 (R2), 1.1260 (R3).

EUR/JPY shows signs of weakness

EUR/JPY traded virtually unchanged yesterday, staying between the support of 130.30 (S1) and the resistance of 131.85 (R1). Although the rate is trading above the uptrend line taken from the low of the 13th of March and this keeps the short-term uptrend intact, our momentum indicators reveal signs of weakness for further upside extensions. The RSI turned down and is now heading towards its 50 line, while the MACD has topped and fallen below its trigger line. Bearing these signs in mind, I would switch my stance to neutral for now. I would like to see a move above 131.85 (R1), before trusting again the short-term upside path. As for the broader trend, I still see a longer-term downtrend. I would treat the recovery from 126.90 as a retracement of that larger down path. Nevertheless, there is positive divergence between our daily oscillators and the price action. This gives me a reason to take the side lines as far as the overall trend is concerned as well. I would like to wait for signs that the downtrend is gaining its momentum back again.

Support: 130.30 (S1), 129.00 (S2), 128.00 (S3).
Resistance: 131.85 (R1), 133.50 (R2), 134.60 (R3).

EUR/GBP continues higher

EUR/GBP continued to race higher yesterday and managed to move above the resistance (now turned into support) of 0.7370 (S1), which also happens to be the 61.8% retracement level of the 3rd of February – 11th of March down wave. I would now expect the bulls to pull the trigger and target the 76.4% retracement line, at 0.7455 (R1). As long as the rate is trading above the uptrend line taken from the low of the 11th of March, and above the downtrend line drawn from the peak of the 3rd of February, the short-term bias stays positive in my view. However, I believe that the broader trend is still negative. After the downside exit of the triangle pattern on the 18th of December, the price structure has been lower peaks and lower troughs below both the 50- and the 200-day moving averages. With no major bullish trend reversal signals on the daily chart, I would see the short-term uptrend as a corrective move of the larger negative path.

Support: 0.7370 (S1), 0.7300 (S2), 0.7230 (S3).
Resistance: 0.7455 (R1), 0.7500 (R2), 0.7590 (R3).

Gold reaches 1200

Gold continued to trade higher on Wednesday. It emerged above the 200-period moving average and eventually reached the psychological round figure of 1200 (R1). Since the yellow metal is still trading above the downtrend line taken from the peak of the 22nd of January, I believe that the short-term outlook remains cautiously positive. A move above the key barrier of 1200 (R1) could aim for the next resistance at 1210 (R2), defined by the peak of the 5th of March. Our daily oscillators support the short-term picture. The 14-day RSI continued to race higher and moved above its 50 line, while the daily MACD, already above its trigger, points up and is getting closer to its zero line. As for the bigger picture, since the peak at 1307, the price structure has been lower highs and lower lows, and even if we see the precious metal trading higher in the near future, the possibility for a lower high still exists. For that reason I would consider the recovery from around 1140 as a corrective move, at least for now.

Support: 1185 (S1), 1175 (S2), 1165 (S3).
Resistance: 1200 (R1), 1210 (R2), 1222 (R3).

WTI rockets higher on Yemen turmoil

WTI surged on Wednesday after Saudi Arabia began a military operation in Yemen, raising concerns over crude supplies from the Middle East. The news overshadowed an earlier report from the US which showed that crude supplies increased for the 11th consecutive week. WTI rallied, hit resistance fractionally below the 52.00 (R1) hurdle, marked by the peak of the 10th of March, and thereafter pulled back to meet the support line of 50.70 (S1). In my opinion, the short-term picture is positive and the momentum is still strong. The 14-hour RSI, already above 30, has turned up, while the hourly MACD, already above its trigger, accelerated higher. I believe that the forthcoming wave is likely to be positive and perhaps challenge again the 52.00 (R1) line. A move above that line could challenge the high of the 9th of March at 52.45 (R2). On the daily chart, WTI is trading well below the 200-day moving average, but tries to emerge above the 50-day one. Moreover, there is still positive divergence between the daily oscillators and the price action. Therefore, I would prefer to stay neutral on the larger trend and wait for clearer directional signals.

Support: 50.75 (S1), 50.00 (S2), 49.45 (S3).
Resistance: 52.00 (R1) 52.45 (R2), 53.40 (R3).