Financial market research and analysis

The single currency reversed gains, as the European Central Bank (ECB) President Mario Draghi’s comments revived the ECB doves in Frankfurt. Draghi said that a ‘reassessment of the current monetary policy stance is not warranted at this stage’ and saw ‘no need to deviate from wording of the forward guidance’.

The EURUSD tested the 100-day moving average, 1.0620. The pair is stuck within the 1.0620-1.0700 range. A breakout in either direction could gain momentum. On the upside, we watch 1.0748 and 1.0808 (major 38.2% and minor 23.6% retracement on March rise). On the downside, the move could extend toward 1.0500/1.0495 (March low).

FTSE down, financials, energy stocks lead losses

The FTSE opened downbeat; financials and energy stocks were sold at the London open. Lloyds erased 4% as news that the bank will close 100 branches hit the wires.

BP (-1.44%) and Royal Dutch Shell (-1.00%) traded south as the WTI bounced lower from $52.00 after the EIA reported that the US inventories increased by 1.6 million barrels last week, versus a contraction of 100’000 barrels expected.

Cable remained capped by 1.2500 offers. Trend and momentum indicators remain marginally positive, keeping the possibility of a renewed rise toward the 200-day moving average, 1.2565. The short-term support to the recent positive trend is eyed at 1.2420/1.2506 (major 38.2% retracement on March rise / 100-day moving average).

Will the Fed’s balance sheet shrinkage plans moderate the rate normalization?

The Federal Reserve (Fed) minutes revealed the FOMC members’ will to start shrinking the $4.47 trillion worth of balance sheet ‘later this year’. This has been an important piece of additional information that has been brought on the table for the first time since the Fed stopped tapering its asset purchases.

Fed’s Dudley warned that the balance sheet shrinkage would act as a ‘substitute for short-term rate hikes’, warning that the Fed may need to decide whether ‘to take a little pause in terms of raising short-term rates’.

In the dirt of details regarding the timing and the size of the balance sheet operation, the Fed doves were rapidly pushed out of the market. The probability of a June interest rate hike increased to 63.2%; the 10-year yields held the ground above 2.30%.

The US dollar shortly gained against the G10 currencies, yet the lack of clarity on the Fed’s policy turn prevented the US dollar from taking a fresh bullish direction.

On the data front, the US ADP report beat analyst estimates, as the US economy added 263’000 new private sector jobs in March, versus 185’000 anticipated by analysts.

The consensus for the nonfarm payrolls, due on Friday, is 180’000 versus 235’000 released a month earlier. The 12-month moving average stands at 185’000. Given the weak expectations, there is room for a positive surprise in March payrolls data.

The US stocks are expected to be affected by the bearish mood at the US open.

The Dow is called 55 points lower at $20593.

AUDUSD breaks below 200-dma, attention shifts to 0.7500/0.7490

The Aussie (-0.37%) has been the biggest loser against the greenback, as the Fed minutes failed to revive the carry appetite in the AUDUSD and the slower than expected expansion in China’s services sector weighed on the appetite heading into the meeting between Chinese President Xi and the US President Donald Trump today. Downside risks prevail given that news in China - Australia’s biggest trade partner, have a significant impact on the value of the Australian dollar. The AUDUSD broke below its 200-day moving average (0.7552) and is preparing to test the 100-day moving average at 0.7530. Below this level, the March low of 0.7490 should be a natural downside target for the AUD-bears. Mixed option expiries trail above 0.7550 for today.

Gold tests $1260 resistance

Gold continues seeing a decent resistance at $1260, its 200-day moving average. A further slide in the US yields, due to an eventual pullback in Fed interest rate expectations, could pave the way for a further recovery toward $1280 mark.