21 Mar 2017
By Ipek Ozkardeskaya
GBP gains on CPI, EUR on Macron
The headline inflation in the UK accelerated by 2.3% year-on-year in February, faster than 2.1% as analysts expected. The core inflation advanced to 2.0%y/y versus 1.7% expected and 1.6% printed a month earlier.For the first time in three years, the UK’s inflation breached the Bank of England’s 2% inflation target, confirming the MPC’s worries regarding the rising inflationary pressures at last week’s monetary policy meeting.
As a kneejerk reaction, the GBPUSD traded at a fresh three-week high of 1.2462. The 100-day moving average (1.2408) is now expected to give support to the rising positive momentum for a likely test of the 1.25 level for the first time since February 23rd.
The FTSE sold off to 7409p on stronger pound. Further appreciation in the pound, combined to the global risk aversion and softer commodity prices, could keep the pressure on the UK stocks and encourage a negative retracement toward the 200, 100-day moving average range (7375/7280p).
Mining stocks (-0.33%) open under selling pressure, as copper cheapened 1.50% and nickel lost 0.88%.
Macron revives hope, as Le Pen risks big on Trump-like rhetoric
The election worries in France eased after the pro-European candidate Emmanuel Macron convincingly fought back the far-right candidate Marine Le Pen in the presidential debate. Le Pen brought up a Trump-like, 35% tax suggestion on some imported products.
The first televised presidential debate may have been an eye-opener for many French voters. It is possible that the similitude to broadly criticized Trump policies penalize Le Pen in her race to the presidential seat. The latter scenario would be euro supportive. The EURUSD tests the 1.0800 level. The key mid-term resistance is eyed at 1.0820/1.0830 (Fibonacci 50% level on post-Trump rally / 2017 resistance).
Moving into the first round of the French election due on April 23rd, the evolution of the French political platform will certainly remain the major driver of the euro markets.
The polls following the debate will be closely monitored and could cause significant price action in the euro; the volatility is expected to be two-sided. Any disappointment on the Macron camp could pull the euro lower.
The European stocks opened marginally positive on hopes that Macron could make his way to the Elysée Palace. CAC 40 gained 0.28% in Paris, while the DAX 30 quickly reversed gains on stronger euro.
US stocks to open higher on European optimism
The G10 currencies consolidated gains against the greenback at the beginning of the trading week, as the US 10-year yields remained below the 2.50% level.
The risk-off due to the G20 conclusions need to be further digested by global investors, especially given that the US political pictures becomes somewhat muddy.
According to the latest news, FBI Director Comey confirmed that the agency has been probing Russia on its possible intrusion in the 2016 election campaign and on probable ties with President Donald Trump.
The US stocks traded on the back foot on Monday. The S&P500 retreated by 0.20%, as the Dow Jones closed the day 0.04% softer. Financials (-0.76%) led losses in New York on the back of softer US yields.
The US futures were marginally better bid in Asia and in Europe; the appetite was mostly due to the French enchantment.
The Dow Jones is called 40 points higher at $20945 at the US open.
RBA says trading volumes with the US decline significantly
The slightly hawkish comments in the Reserve Bank of Australia’s (RBA) meeting minutes did little to sustain the AUD-bulls in Sydney. The RBA warned about the heating in the housing market, perhaps caused by the reflation trend. Property prices in Sydney and Melbourne more than doubled since 2009, as low rates encouraged households and investors to rush to the housing market; a situation which would require a tightening in the monetary conditions sooner rather than later.
Nevertheless, the structural shift from the mining to the construction sector has been less efficient than desired over the past years. Lately, the unemployment rate unexpectedly jumped to 5.9% from 5.7%, keeping the RBA in a quite difficult position regarding its monetary policy.
In one hand, the Australia’s economy still needs a hand to support the economic recovery although the growth in the US, China, Japan and Europe has picked up recently and the reflation rally was reflected in improved commodity prices. The trading volumes with the US have declined significantly as a share of total global trade since the late 1990s’ cited the bank. In the light of the latest G20 communiqué, the declining trend may have only begun and as most of us fear, the protectionist measures would be damaging in the medium to long-term. Hence, the central bank needs to stay vigilant and supportive of the economy.
On the other hand, the overheating in the housing market requires a more orthodox stance. In worst case scenario, the RBA could opt for the settlement of macro-prudential measures as it has been the case in some of the G10 economies, including the UK and Switzerland.
All in all, the RBA adopted a wait-and-see mode, kept the cash rate unchanged and reiterated that the actual accommodative policy is convenient for ‘sustainable growth […] and achieving the inflation target over time’.
The AUDUSD has gathered enough momentum to test the mid-term resistance of 0.7785/0.7800. Above this level, the pair would need the carry traders to come back to the market. Hence, the US yield levels would be decisive whether the Aussie’s rise could extend beyond the 0.78 against the US dollar or traders would reverse their position to bet on a mean-reversion trading.
Japan lacks appetite, yen starts the week on positive note in Japan
Japanese stocks started the week on a negative note. The G20 communiqué weighed on Japanese stocks at the beginning of the short trading week; Nikkei (-0.34%) and Topix (-0.16%) eased as the yen strengthened at the early trading hours.
The USDJPY extended losses to 112.27. The solid negative momentum suggests a deeper move toward the 111.60 (February low), before eventually meeting the mid-term critical support of 110.55 (Fibonacci 50% level on post-Trump rally). Offers are touted at 113.00/113.50 (50-day moving average).