After a positive start, the European stocks turned lower but made another bullish attempt ahead of Wall Street open. However, on the whole, investors are still depressed by the tech-led sell-off earlier on the back of further decline in Facebook shares amid a controversy over user data. Another bearish driver for global shares is the widely expected Fed rate hike tomorrow, as well as a potentially more “hawkish” tone from the BoE the following day. Besides, investors continue to digest the threat of a global trade war as Trump prepares import tariffs package on the Chinese goods. Meanwhile, the messages from the Japanese trade minister and the German economy minister on the possible exemption from US tariffs hasn’t brought any significant relief to the markets. Meanwhile, the Britain’s FTSE 100 adds 0.28 per cent to 7,062.98, Germany’s DAX 30 rises 0.34% to 12,258.65 and French CAC 40 gains 0.26% to 5,236.42.
The dollar demand is prevailing following some consolidation earlier. The pound is retreating from Monday’s one-month high of 1.4087 reached after the European Union and Britain agreed on a 21-month transition. The bearish correction followed the UK CPI report that showed consumer prices rose an annual 2.7 percent last month against the expected drop to 2.8 per cent from 3 percent the previous month. The February’s numbers reflected the weakest increase since last July. Nevertheless, the report doesn’t decrease the BoE May hike expectations, and traders are eager to hear this hint during the upcoming central bank meeting on Thursday. But before, the pound will face wage growth numbers and the Fed meeting results tomorrow. The Federal Reserve is widely expected to hike and signal four rate hikes this year instead of three. If so, the widespread dollar rally may sent the pound below the 20-DMA around 1.39.
The EURUSD pair also struggles to regain the bullish momentum and probing fresh daily lows below the 1.23 threshold, around the 1.2270 level. The key reason for the retreat is dollar demand which returned to the market amid positions adjusting ahead of tomorrow’s Fed decision. In February, Powell highlighted the possibility of a more aggressive tightening, and the market participants now expect a fairly aggressive tone from the new central bank governor. In this context, the euro may further lose ground as the recent hawkish rumour about the ECB policy was not confirmed by the officials. The local bearish pressure on the pair has also strengthened after ZEW report which showed the euro area economic expectations plunged from 29.3 to 13.4 in March.
USDJPY is extending its recovery after another brief dip below the 106.00 mark. The price is trading around the daily highs of 106.60 where the 20-DMA also lies. Besides the widespread greenback rebound, the pair’s bullishness is partly due to weaker yen on the back of Japan officials comments on “too volatile yen movement lately” and its strength stemming in part from sharp and repeated drops in US stocks in February. This brought some intervention fears to the market and triggered a mild liquidation of long yen positions. The additional risk event for the Japanese currency is the upcoming Fed meeting which may attract more buyers to the US dollar.
Despite the greenback’s ascent, crude oil prices extend today’s rally and have already reached fresh March highs above $70 after a break of the intermediate resistance at $66.80. There is a number of local bullish drivers for Brent at the moment, including the Middle East tensions, concerns over the Venezuela’s tumbling oil production, and a still high discipline within the OPEC+ group – the compliance rate reached 138 per cent in February. However, the current oil rally is at risk, as the above mentioned catalysts are not sustainable enough to shield the market from the consequences of the persistent US shale boom. Tonight, API will report fresh weekly inventories data which may reflect further increase in stockpiles and dent the recovery in prices.
Spot gold continues to suffer losses, accelerating the bearish move on the resurging dollar buying. The yellow metal failed to regain the important $1.320 level and faced another wave of sell-off, though so far keeps mildly above the yesterday’s three-week lows. The bigger picture highlights the downside risk are getting more significant as prices are gradually moving towards a major $1.300 support, while recovery attempts look shallow and unconvincing. The bearish pressure could intensify, should the Fed trigger a sustainable USD rally tomorrow.
Nathan Lambert, Head of Global FX Analytical Departament