Powell’s comments flatten market

Wild intra-day trading for US equities as the initial tech-led sell-off was pared following Fed Chair Powell’s unsurprisingly dovish comments that the Fed is nowhere close to tapering QE and he added that the Fed will give "advance warning" to any change of course.

There was no explicit pushback by Powell to the recent rise in nominal yields, which is driven by an improved economic outlook and therefore not concerning.  It is notable that despite rising US yields, the catch-up of bond yields in other DM countries such as the UK and Australia prevented material USD appreciation.

GBPUSD hit a high of 1.4245 overnight off the back of the dollar weakening and UK headlines which stated that ‘Boris Johnson's roadmap out of lockdown could be accelerated if real world data on the effect of vaccines is better than expected’.

On the 11th December last year, we predicted Cable would hit 1.42 so we are pleased that this level had been reached.  Even with all the noise we were convinced Brexit was priced in and with the pound holding above the 1.618 Fibo level and its 200-period SMA, the direction had to be up. 

GBP continues to shine relative to other European currencies, notably against the CHF, as stabilising politics in Italy and anticipated improvement in European growth outlook undermine CHF’s safe haven status. Upside pressure on EURCHF will likely remain if the German yield curve continues steepening although we are keeping an eye on ECB’s PEPP purchases following Lagarde’s “monitoring rates” comments.

RBNZ unchanged as expected at 0.25%, bond purchase program NZD100bn

CAD and NOK have benefitted from higher oil prices although the rally in oil prices paused overnight. RUB, by contrast, has been held back by sanction risks although there should be scope to play catch-up to the higher oil prices later once sanction headlines ease

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

EURUSD – Fed Powell gave the dollar bears the green light to resume the down trend in yesterday’s testimony, but the euro bulls remain flat for now as the rising sovereign bond yields, coupled with Germany's slow vaccine delivery could continue to limit the single currency's progress. The buyers need to break above 1.2175 to open doors for further strength towards 1.2215.

GBPUSD – The Cable pierced through our 1.42 target yesterday as the USD lost ground once again after Powell’s testimony. As the UK races for faster vaccinations to regain economic traction as soon as possible, the Pound bulls will remain enthusiastic, and every dip will most likely be bought until at least 1.4350 level is tested.

USDJPY – After hitting a one-week low yesterday the Dollar/Yen mounted a strong reversal to the upside as a recovery in US equities following a very dovish Jerome Powell reduced the Japanese Yen’s appeal as a safe-haven currency. The USDJPY is now back above the 200-period moving average and nearly at the pivotal ¥105.60 resistance level. The main trend is still up according to the daily swing chart, but short-term momentum is weak. A trade above the ¥105.60 to ¥105.85 resistance zone will trigger strong upside momentum and signal a resumption of the uptrend.

FTSE 100 – Confusion around AstraZeneca’s vaccine efficacy along with a surging Pound to almost 3-year highs, is keeping the UK blue chip index under pressure, trading below the 20, 50 and 200-period SMA’s on the hourly chart, with upside momentum facing many headwinds in terms of moving averages and resistance levels. Lloyd's banking group reported pre-tax profit well above estimates early today, and oil giants helped keep the index supported while tech continued to struggle. Failure to hold 6580/6550 support level will have the index print lower, while a breach of 6620 resistance and the 200-period SMA will open the door to further upside.

DOW JONES – US equity markets were saved by a very dovish Jerome Powell yesterday with the Dow Jones index managing to reverse the initial aggressive sell-off and gaining slightly for the day in a very choppy session. Looking ahead, some more volatility is expected today, especially among tech stocks. Speculative assets from Bitcoin to Tesla will also be closely watched as the rise in bond yields tests their stretched valuations with 31300 and 31600 as key near-term support and resistance levels for the Dow, ahead of further testimony from Powell as well as speeches from Fed members Richard Clarida and Lael Brainard.

DAX 30 – US Fed Chair Powell downplayed rising inflation concerns pledging to keep rates low yesterday, and thus his testimony helped stocks recover from their sessions lows yesterday, preventing the German DAX from closing below pivotal 13700. Later today traders will focus on German GDP figures in addition to further testimony from Jerome Powell as well as speeches from Fed members Richard Clarida and Lael Brainard. Technically speaking, the DAX remains in near-term bearish territory, below the 50-period and 200-period moving averages, with 13900 as closest resistance level and target.

GOLD – Gold hit our short/long targets, though continues to trade in a range, failing to breach 1815 resistance level despite Fed Powell’s expected signalling of continued support to the economy and ongoing dollar weakness. Higher US10Y yield is still denting demand on the yellow metal, with a breach of 1800/1815 support/resistance levels needed to boost momentum in either direction, which might be provided by Powell’s testimony today.

USOIL – WTI Crude oil hit our support targets, ending yesterday’s session on a bearish red candle, with technical indicators favouring a pullback below the $60 mark, after API industry report showed stockpiles increased by 1.026 Mb vs. a previous drawdown of -5.8Mb. US production now 80% restored after last week’s deep freeze. Official EIA expected today, with consensus standing at -5.372Mb vs. a previous of -7.258Mb.