[B]Inflation data shifts attention back to central banks[/B]
Today’s UK opening call provides an update on:
• UK inflation likely to remain unchanged at 2.8%;
• Another drop in eurozone inflation could prompt ECB rate cut;
• US inflation expected to fall, easing the pressure on the Fed to tighten monetary policy;
• Economic sentiment in the eurozone could fall well below expectations;
• US housing data forecasts point to another strong month in March;
• Surge in volatility expected as a number of big companies report first quarter earnings.
Central banks are going to be back in focus on Tuesday, with the release of inflation data from the UK, eurozone and US likely to spark fresh debate over monetary policy in the coming months.
In the UK, the Bank of England is unlikely to ease monetary policy before Mark Carney’s arrival on 1 July. However, with the voting so close at the last few meetings, this is far from guaranteed. As a result, March’s CPI figure will be watched closely, with a surprise drop prompting talk of increase in the asset purchase facility. With sterling already looking pretty weak again, this could prompt a move back towards 1.50 against the dollar.
The ECB is far more likely to vote in favour of more stimulus in the coming months, with inflation currently at near three year lows of 1.7%, according to the flash estimate earlier this month. If this is confirmed this morning, it could convince the ECB that more stimulus is necessary at the next meeting on 2 May. This would be very welcome in the euro area, which faces at least a few more quarters of recession, with recent data suggesting it’ll probably be longer.
In the US, inflation has remained low despite the very accommodative stance from the Federal Reserve. The CPI figure, released this afternoon, is expected to show inflation fell again in March to 1.7%. This should ease any concerns, for now, that the Fed will begin to tighten monetary policy. Especially when you consider the weakness seen in the other economic data in March, in particular the employment and consumer spending figures.
Also today, we have the release of the ZEW economic sentiment for the eurozone and Germany, both of which are expected to fall sharply back from the figures seen in March. These figures tend to be quite volatile at the best of times, so I would be very surprised if we don’t see figures here well below market expectations. Expectations for the German and eurozone figures are currently 42.0 and 31.5, respectively, which I think is far too conservative.
In the US later, we also have some housing data out for March. Housing starts are expected to be slightly improved at 0.93 million, while building permits are expected to fall back slightly to 0.94 million. Again, I think we’re setting ourselves up for disappointment here, with the poor weather conditions already being blamed for the drop in things like consumer spending. If that is the case then we should also see it reflected in today’s housing data.
Finally today, we have probably the biggest day so far in terms of corporate earnings, with quite a few major companies reporting first quarter profits. Goldman Sachs earnings should be watched very closely, following the strong earnings seen so far from JP Morgan, Wells Fargo and Citigroup. Other major earnings to keep an eye on today include Coca Cola, Johnson & Johnson and Yahoo. With all these major companies reporting earnings today, we could see a surge in volatility in the markets.
[B]EURUSD[/B]
The euro is trading higher again this morning, despite yesterday’s candle looking very bearish. Friday’s and Monday’s candles actually formed a bearish engulfing pattern, which usually marks the end of the uptrend. On top of that, the stochastic has crossed in overbought territory, another bearish indicator. So far this morning, the pair is finding resistance around the 50 day SMA, which suggest that this morning’s move is simply the euro paring some of yesterday’s losses and the pair is in fact back in a downtrend. If that’s the case then we may not see it complete the head and shoulders that was forming on the weekly chart. On the other hand, it could just be a temporary pull back, with the pair continuing it’s move towards 1.3341 later this week.
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[B]GBPUSD[/B]
The pair has had a difficult start to the week, falling around 100 pips to end yesterday back below 1.53. This morning, it is finding resistance around this level, which is quite a bearish signal. The stochastic also crossed in overbought territory over the past couple of days, which again is quite bearish for the pair. If it continues to find resistance around 1.53, we could see further losses, with the pair finding support initially around 1.5260. That being said, on the 4-hour chart, the pair actually looks quite bullish, having bounced off the 38.2 fib level, while the stochastic crosses in oversold territory. If this is the case, we could see the pair move back towards last weeks highs of 1.5410, with it finding resistance along the way around 1.5340, 1.5362 and 1.5380.
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[B]USDJPY[/B]
This pair is looking quite bullish this morning, having found support in the area between the 50 and the 61.8 fib levels. It also failed to close below 96.70, which was previously a major level of resistance. This again, is quite a bullish signal. We should now see the pair target 100.0 once again, with a break above here prompting a move towards 101.50. This will be a major level of resistance for the pair having previously been a big support level. In the shorter term, the pair should find resistance around 97.55, 98.20 and 98.58.
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[B]AUDUSD[/B]
The aussie made huge losses against the greenback yesterday, before finding support around 1.0292, the 61.8 fib level. This morning, the aussie is paring some of those losses, but still appears pretty weak. It’s currently finding resistance around 1.0367, a previous level of support. If it breaks above here, it should prompt a move towards 1.0390, where it should find further resistance from the 200 day SMA. This was also previously a level of support for the pair. However, if the pair fails to break above the current resistance level, we could see a move back towards March lows of 1.0114. The stochastic on the weekly chart supports this bearish outlook, having crossed in overbought territory recently. For this to happen though, it will need to break below to 50 and 100 week SMAs which are currently providing support for the pair.
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Ahead of the open we expect to see…
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