Vaccine rollout is linked to faster economic recovery

At the end of the week, we are starting to see a clear divergence in the progress of the main markets.  The strong pace of vaccinations in the US and UK is supporting their economies and currencies putting further pressure on Europe, as we maintain a strong risk backdrop.

The ECB was unchanged. The size of the overall PEPP package has not been increased or extended but they have pledged to increase weekly PEPP purchases to contain rising bond yields.  This met expectations but short positions that sold earlier this week will be disappointed with the price action and market will look to fade any move towards 1.2000 day as the trend feels lower for now.  Lagarde said it’s possible for inflation to reach 2% by year-end but they expect it to be transitory and will look through it.

The US $1.9tn stimulus bill was signed into law which alongside the strong US 30yr Treasury auction further reduced concerns around US yields and allowed the USD to ease off whilst risk sentiment continued to recover.  The Initial Jobless Claims also continued to fall in the US showing the strength of the recovery.  With all the concern around the sharp rise in US yields drifting away.  US yields have stopped their move lower and are expected to settle which will eased the pull back in USD.

Outside or Europe the AUDUSD and NZDUSD have rallied strongly from the 0.7621 and 0.7103 supports they are now approaching resistance at 0.7820 in AUDUSD (head and shoulders forming) and 0.7250 in NZDUSD.  Expecting their rallies to slow here as the pull back in US yields seems to be settling at these levels.

USDCAD also approaching support from 1.2500 to 1.2468 low.  The overall risk backdrop remains strong so it’s difficult to see what can derail the strong trend higher in crossJPY.

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

EURUSD – The euro bulls lost momentum just before reaching the 1.20 psychological resistance, after US bond yields rebounded and lifted the Dollar once again. Meanwhile, the ECB said yesterday that it’s willing to accelerate money printing to keep bond yields under check, which could keep the single currency bulls at bay. Technically, if price breaks below the 50-SMA, we could see price pulling back towards 1.19.

GBPUSD – The pound touched our 1.40 target and reversed sharply amid the broad-based US dollar strength, as the Treasury yields rebound higher. Earlier this morning, mixed UK data added further downside pressure on the cable. If the 50-SMA is broken, price could retest the 200-SMA at 1.39.

USDJPY – The dollar index fell sharply for a third consecutive session yesterday putting pressure on USDJPY that traded lower mirroring Wednesday’s movement but with ¥108.40 acting as strong support so far. This morning however, the US10yr yield is grinding its way back higher to 1.60% after falling to 1.475% overnight prompting the USDJPY to surge back to the critical ¥109 mark. Technically speaking, a sustained move above the ¥109.20 resistance today opens the door for further upside with the psychological ¥110 level as next resistance target.

FTSE 100 – The FTSE100 failed to clear the 6750 resistance with enthusiasm from Wall Street failing to make it through the night. Earlier this morning, UK’s January monthly GDP reading showed a 2.9% contraction versus 4.9% expected, and that arguably is not bad at all considering lockdown measures in the UK at the time. However technically speaking, momentum seems to have faded for now probably due to suspension of the AstraZeneca vaccine by some EU countries over a health issue, despite UK regulator’s reassurance that the jab is safe, with technical indicators favouring a pullback lower to 6700 and 6670 as closest support levels.

DOW JONES – The Dow Index hit our target at 32570 climbing as high as 32660 powered by a rally in technology stocks and by Biden’s USD1.9 trillion stimulus package. Moreover, on the futures market this morning it looks like equity indices are hanging onto gains despite the US10yr yield spiking back above 1.58% after falling to 1.475% overnight. Sentiment is also boosted by the US jobless claims data suggesting a recovering labour market, however from a technical perspective, failure to print higher than the 32610-resistance level may trigger profit-booking pushing the Dow Jones lower to the 50-period moving average around 32296 ahead of US producer prices at 1330 GMT.

DAX 30 – The German DAX hang onto gains yesterday however failed to cross the 14600 resistance despite a dovish ECB that announced additional PEPP purchases over the next quarter prompting a decline in 10y German Bunds and easing global concerns about rising inflation. European shares however look set to retreat this morning after some EU countries suspended AstraZeneca vaccine following reports of blood clots. The DAX index has the 14468 level as next support and target.

GOLD – Gold hit our first long resistance target in yesterday’s session at $1740 only to turn lower on the back of better-than-expected Initial Jobless Claims data coming in at 712K vs. a consensus of 725K and a previous of 745K. The $1.9T relief bill signed with checks expected to reach Americans as soon as next week, along with a strong US30Y Treasury auction, pushed the greenback higher, weighing on the yellow metal safe haven. All focus today on PPI and Michigan Consumer Sentiment data, with an hourly close below $1710 support level to open the door to further downside.

USOIL – WTI Crude oil ended yesterday’s session in the green, supported by economic recovery optimism as equity markets surged to all-time highs (Dax30, Dow Jones) fuelled by big tech with crude prices holding onto gains after the monthly OPEC report showed a weaker demand outlook in the first half of the year due to Europe's restrictive measures to control COVID-19. Baker Hughes US oil rig count data to be released today, Technically, $66.35 resistance level is capping higher prints, favouring a pullback towards $65 support level.