Central banks move in to calm ‘yield’ nerves

Market nerves around runaway yields have eased after strong verbal intervention from G10 Central Banks, which has led to most markets opening in the green.

We are expecting G10 Central Banks to try their best to engineer a slow and controlled return to growth and inflation and to step in when we see sharp moves, like we did last week.  This makes position reduction moves like last week good opportunities to buy growth currencies on dips and sell funders on rallies.

Markets are still waiting to see what Powell has to say on Thursday, with FOMC member Daly making it clear overnight that they do not want to pre-emptively tighten policy.  Brainard said it will take “some time” to meet the conditions laid out by the US Central Bank for reducing the pace of its massive asset purchases, while noting recent bond market volatility.

German Retails Sales were weak yesterday at -4.5% MoM vs 0.3% exp.  Unemployment was also weak with an increase of 9k vs the expected fall of 10k. Eurozone CPI came in line with CPI Core YoY at 1.1%.  It feels like the same story of EU underperforming, therefore EUR can continue to be used as a funder to buy the reflation stories of US, UK, Australia, and New Zealand.  CHF and JPY still the funders of choice.

Australian GDP coming in stronger than expected overnight at -1.1% YoY vs -1.9% exp.  And we have the OPEC+ meet on Thursday.  They are expected to agree on a production increase of around 1.5m bpd. This has been weighing on oil.

The roll-out of the vaccines has taken Covid out of the headlines but yesterday there was news that the Brazilian P1 variant is 1.4 to 2.2 times more contagious than versions of the virus previously found in Brazil, and 25% to 61% more capable of reinfecting people who had been infected by an earlier strain. This comes as the death rate in Brazil has reached a new record of 1,641 deaths in 24hrs.

UK Budget will be announced today around 12:30pm GMT.  Chancellor Sunak is expected to say: "First, we will continue doing whatever it takes to support the British people and businesses through this moment of crisis,". "Second, once we are on the way to recovery, we will need to begin fixing the public finances - and I want to be honest today about our plans to do that. And, third, in today's budget we begin the work of building our future economy." The furlough scheme is expected to be extended until September.

Our overview and outlook of the key trading pairs and indices is as follows

EURUSD – The US Dollar reversed lower yesterday after the risk sentiment recovered on retreating Treasury yields. The mixed Eurozone CPI data failed to cap the bullish momentum as the dynamics around the yields and dollar remain the main market drivers. Today, the bulls will attempt to break above the 1.21 resistance level and the moving averages for a possible move towards 1.2180.

GBPUSD – The Cable recovered from two-week low amid retreating US bond yields, however the bulls will be waiting for UK Chancellor Rishi Sunak’s key budget statement, for a possible move above 1.40. Additionally, investors remain optimistic about a relatively strong US economic recovery from the pandemic amid the progress in COVID-19 vaccinations and a massive US fiscal stimulus plan. If the bulls can take out the 1.40 resistance level, then 1.4050 will be on the cards today.

USDJPY – The US Dollar continues to shine against the Japanese Yen as it gets closer and closer to the pivotal ¥107 level which if breached will change the overall trend for long-term traders. USD/JPY has so far been well supported by the 50-period moving average on the hourly chart. Moreover, the ¥106.70 level has shifted from resistance to support triggering buy-the-dips moves with a breach of the ¥107 level to trigger accelerated buying to ¥107.90.

FTSE 100 – The FTSE100 finished strong yesterday on vaccine optimism with the UK blue-chip index setting up for a strong start in today’s session ahead of UK’s Annual Budget release around noon, followed by Rishi Sunak’s budget statement which is expected to address the impact of the pandemic and give guidance for future rate hikes as well as extend the furlough scheme until the end of September 2021. However, we expect Sunak will hold off on raising corporate taxes for now until some sort of normality has resumed, and this will help keep London equities strong today, with 6700 as next resistance level for the Footsie.

DOW JONES – The stock market rally retreated yesterday after earlier gains in growth stocks reversed as the Dow Jones index hit a resistance area around 31600. But the index also found support at natural levels around 31400/31225 with Dow futures rising modestly this morning ahead of U.S. ADP employment numbers due later today which will set us up for Friday's NFP. Technically speaking, the RSI is pointing sideways to up, signalling consolidation ahead and favouring slight upside action with 31600 and 31720 as next resistance levels and targets.

DAX 30 – The DAX hit our resistance target at 14100 yesterday despite disappointing retail sales data with more upside action expected today ahead of Germany’s reopening plans. Angela Merkel will layout a much-anticipated lockdown easing strategy accompanied by widespread Covid-19 testing amid political pressure to open up Europe’s largest economy. Germany’s services PMI at 0855 GMT and eurozone PMIs at 0900 GMT are also in focus today, with better-than-expected data to trigger more upside action to the next resistance level at 14173.

GOLD – The yellow metal hit our long resistance target at $1730 and $1740 in yesterday’s session as treasury yields and the greenback slid on the back of Fed Brainard expressing concerns around the speed of bond yield moves. Investors focus on PMI data out of the Eurozone and the United States, along with US ADP employment change data. Technically, $1730 support level should hold to give a clear indication of further upside momentum.

USOIL – WTI Crude oil hit our long resistance targets, topping at $61 resistance level to erase gains as we print around $60pbl in early session today. US API inventories registered the biggest build-up since December (Actual: 7.356Mb, Previous:1.026Mb) weighing down on the black gold. All eye’s today on EIA inventory data, as investors look for build-up confirmation. $60 resistance should be confirmed as support to favour further upside.