Some may argue that the markets are blind to the dangers that still exist in the world. The fundamental landscape is indeed bleak, but that hasn’t stopped European stocks opening higher and GBPUSD rising to its highest level for a week. Interestingly, the euro has disbanded with its inverse correlation to Italian bond yields, so even as Italian bond yields have continued to moderate the euro has also fallen.

This is one of many correlations that have broken down in recent sessions. Interestingly, USDJPY failed to rally as much as the SPX 500’s good performance yesterday would have suggested. USDJPY is still well below its Monday high of 94.70 as investors seem reluctant to sell safe havens including the yen. Gold has had more of a mixed week, after breaking back above $1,600 on Tuesday on the back of Italian election fears and dovish talk by Fed Governor Bernanke; it has drifted lower the last two days. This could be on the back of benign inflation fears. The Fed Governor reiterated that inflation was likely to remain moderate in his testimony to Congress yesterday, while the ECB’s Drgahi said that inflation should fall in the currency bloc in the medium-term. Japan’s latest CPI data is released later tonight, which is expected to show prices decline for another month. A lack of inflation pressure is another reason to sell gold, and that is what investors have done. Right now, we tend to think that the medium-term direction for the yellow metal is lower, in the short term we expect a range to persist between $1,550 on the downside and $1,650 on the upside.

The generosity of the global central banker

While markets are not moving as a block anymore there is an overarching theme that is dominating the price action of late: the generosity of the global central banker. As long as this liquidity keeps coming then it is having an impact on stock and bond markets. However, like any junkie, the markets are a slave to central bankers, which makes this recovery fragile. Hence why we have seen a reluctance to sell safe havens like the yen, the dollar and Treasuries in recent days. This is likely to keep the market fretful as stocks try to push higher, and it is not what we would classify a confident rally…

QE’s impact on different currencies

In contrast, liquidity expectations only have a limited impact on currencies. The Fed is likely to keep going with its QE3 programme for the long-haul, according to Ben Bernanke yesterday yet the dollar index is also climbing. This is because QE infinity is priced into the dollar. Likewise, the pound is also moving higher after a sharp selloff in recent months on the back of news that Mark Carney would be the new BOE Governor and he was expected to boost QE. Thus, in the absence of new news GBPUSD could have made a medium term bottom around 1.5050 and we could be in for a deeper pullback towards the 1.5250 then 1.5400 zone, in the absence of further easing pressures starting to build in the UK.

In contrast to the pound and the dollar, the euro is sensitive to expectations of easing by the ECB. Since the February ECB meeting the euro has been under pressure as the market has started to price in the prospect of future easing by the ECB. Up until recently the focus had been on the ECB’s shrinking balance sheet, now the focus has turned full circle. ECB President Draghi said at a speech yesterday that inflation pressures were weak and prices could fall in future. Today’s inflation data from the currency bloc helped to reinforce his point. Core inflation dropped to 1.3% in January from 1.5% in December, and inflation pressures seem to be weak in Germany, according to the February regional data. This keeps the door open to further policy support, we should get better clarification on this at next week’s ECB meeting. This keeps the prospect of a weaker euro on the table, and EURUSD has declined today. A key support zone to watch is 1.3030. Signs of future ECB loosening could cause EURUSD to break below 1.3030 – a key support zone and base of the daily Ichimoku cloud. Below here is the start of a technical downtrend.

German unemployment fell by 3,000 in February, although the unemployment rate edged up to 6.9%, however this is still very low. Ahead today watch out for a potential upward revision to US Q4 GDP and also initial jobless claims data due at 1330 GMT. There are also a raft of ECB speakers throughout the afternoon.

One to Watch: a key support zone in EURUSD