Will EU vaccine scepticism lead to new lockdowns?

We are looking at a positive opening to European markets, which are following the US higher, but this could change as the slow vaccination programme across the EU could be further delayed as Covid cases start to spike again.

More countries including Germany, Italy, Spain, Portugal and France are suspending the use of the AstraZeneca vaccine.  Given the number of shots that have been given and the small number of incidents it seems like an overreaction but will impact the global vaccine roll out. This incident is likely to increase vaccine scepticism, especially in Europe, which is already seeing the third wave of Covid and new lockdowns imposed.

This may add to the prevailing view of the US outperforming the EU over the coming months and should add pressure on EURUSD, being short below 1.2010 makes sense, with 1.1836 low this month as support.

A lot of focus on the Fed this week.  We expect Powell to tread the same careful line of promising to continue monetary policy support and look through temporary inflation spikes whilst also being comfortable with the move higher in US yields on the back of better growth expectations.  There are plenty of different outcomes around dot plot projections, SLR exemptions and IOER changes but expect the overall message of being willing to look through any temporary inflation spikes will hold and with inflation still below target this shouldn’t be changing anytime soon.

The move in crossJPY has been a powerful one over this year and has been the best expression of the reflation/ recovery trade as yields march higher in much of G10 whilst Japan’s yields remain capped by the BoJ.

We are not expecting this to change at this Friday’s BoJ.  Even if they stop buying ETF’s so aggressively the market does not expect the 0% target for 10-yr yields to change.  Although the crossJPY move has been large and sharp it is not yet overly owned.  Japan fiscal year end at the end of the month could lead to some JPY demand but for now feels like dips in crossJPY should be bought for the reflation trade.

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

EURUSD – The euro remains stuck in a tight range as the US10-year yield keep hovering around 1.60%. Meanwhile, countries such as Germany, France and many others continue to suspend the rollout of AstraZeneca's COVID-19 vaccines which is weighing on the single currency. However, this week's focus remains tomorrow's FOMC press conference. If the Fed hints of raising rates earlier than expected, tit would likely drive the EUR/USD much lower towards key important support level around 1.1840.

GBPUSD – The cable drops towards 1.38 after BoE’s Bailey said that the BoE will continue bond purchases this year putting additional pressure on the British currency. Moreover, Europe’s Covid vaccine concerns are adding further uncertainty on the risk sentiment with failure to rebound above the 1.3860 resistance to trigger further declines with key important support at 1.3780 as possible level to test.

USDJPY – The USD/JPY is still hovering around the ¥109.20 resistance level with no significant change in price action ahead of the FOMC 2-day policy meeting due to begin today. And although a sudden selloff in this currency pair is highly unlikely at this point, a move lower to the ¥108.50/35 support zone coinciding with the 200-period moving average should attract “buy-the-dip” buyers wanting to take advantage of a pullback. On the upside, a clear breakout above the ¥109.20 resistance will trigger accelerated buying with the June 2020 high around ¥109.80 as target.

FTSE 100 – FTSE100 closed slightly in the red yesterday, despite a 6.8% rise in gambling firm Flutter following reports of a potential IPO of its US business. As we look ahead to today's open, it seems likely that last night's US market rally will lead into a positive start, however a clear breakout above the 6800 resistance is needed for the uptrend to resume. Otherwise, we expect a sluggish trading session in London today with the 200-period moving average around 6700 to act a key important support level.

DOW JONES – The market of stocks continues to grind higher. The Dow rallied for the 7th straight day closing at fresh record near 33000 with Nike, Walgreens, and McDonald’s leading the surge higher. Today, the two-day FOMC meeting begins, and although no policy shift is expected, Fed Chair Jerome Powell’s comments about inflation will most likely direct sentiment. US retail sales at 1230 GMT will also be closely watched. Technically, the momentum indicators seem to be shifting slightly into sell mode and the RSI is pointing lower suggesting profit-booking is likely with 32610 as support level and target.

DAX 30 – The DAX 30 in Frankfurt struggled throughout the day yesterday, tumbling down to our support target at 14415, then rallying back up, then down again, as investors continue to be nervous over rising US treasury yields, and over AstraZeneca’s safety woes, ahead of the German ZEW economic sentiment survey due later today at 1000 GMT. From a technical perspective, the DAX is trading below its near-term moving average on the hourly chart, suggesting more selling ahead, with the 200-period SMA around 14300 as possible target.

GOLD – Higher prints on the yellow metal remain capped as ETFs continued to cut holdings for the 21st straight day according to data compiled by Bloomberg. All eyes on the Fed two-day policy meeting, as investors expect Fed Powell to retain dovish stance. A breach of the $1718 - $1740 trading range is needed to provide a clearer direction on the bullion’s next move, while stronger than expected Retail Sales data today to further strengthen the greenback and weigh on Gold.

USOIL – Second consecutive close in the red for WTI Crude oil, confirming $66.35 as resistance level and printing below the 20,50 and 200 period SMA on the hourly chart in early trade today as bullish momentum continues to build on the greenback. API weekly inventories to be released later today, with previous week standing at 12.792Mb. Technically, upside momentum facing $65 mark, 20 and 50 period SMA as resistance, with a breach of $64.40 needed to open the door to lower prints.