Risk off was the dominant theme throughout trading yesterday. Heavy selling in tech stocks earlier in the week has given way to broader based selling across markets as sentiment broadly soured as the US stepped up its trade wars with China. The stance of the US and Donald Trump is very clear here, and with protectionism a growing trend across global markets we are faced with a sea of red with selling dominating. US stocks are down over 5% on the week thus far while major Asian bourses, the Nikkei and Hang Seng are down 4.9% and 3.8% respectively, while European indices like the DAX and CAC are down over 3% and facing losses of over 1% already this morning. That puts the traditional safe havens back in focus and JPY and EUR have been in demand over the last 24 hours, while gold has also found its supporters.
Elsewhere in currency markets the USD staged a moderate recovery, the USD index closing up over .5% from yesterday’s lows, a mixed message from the Fed on Wednesday saw short end rates decline and with that the USD. One outperformer on the day was GBP, a vote of 7-2 in favour of maintaining rates saw sterling rally, with Mcafferty and Saunders both favouring an immediate rate hike, while general tightening from the BOE is seen as favorable to hit the CPI target.
Yesterday was very interesting for GBP, and while the hawkish sounding BOE was somewhat surprising given the recent pull back in CPI inflation, it was the reaction in sterling that was more notable, especially EURGBP. Our regular readers will know that we’ve been harping on for months that the range in EURGBP has been more or less .8690 to .9000, with some spikes either side for good measure. We’ve almost covered that full range in two weeks, .8970 highs on the 7th March, with a low posted yesterday .8667, the lowest level since June last year. Now, a close at that point would have been very bullish for GBP, with a potential for a larger breakdown towards .8500 region. However, and a big however, this was not the case. EURGBP buyers came out in force and the pair was driven back up to .8740 area where we trade this am. That’s a very big rejection in my opinion, today’s price action will be interesting but as long as we close above .8730 today, rotation back into the mid-range is technically a high probability. GBPUSD was also very interesting, the rally above 1.4200 was also quickly sold into and we find ourselves now looking to hold on to a 1.4100 handle. A close below 1.4075 will likely see additional declines for GBP.
The euro is still struggling for any real direction and the ECB have got themselves into a position where their lifeblood of easing is of vital importance to the ongoing growth and success of the region. In the last ECB meeting they stated as much, and that for now rate hikes are a long way off with easing via bond purchases which are likely to continue past the September deadline of the current program. This leaves the market in limbo however, they want to position themselves for normalisation of ECB policy, this has already happened with the 19% rise vs EURUSD in the last year, but the market also does not want to outright sell the single currency. 1.2210/1.2190 remains a pivotal area for EURUSD, a breakdown below there should see accelerated losses in the Euro but for now it holds firm. Any rally should find itself capped above 1.2400 area.
Durable goods orders headlines the US calendar this evening, these figures have been all over the place this year and rarely hit the mark so to be honest are unlikely to carry too much weight in the market. There is however a large number of Fed speakers due across the wires and this could make things a little more interesting. There’s also the small matter of the international trade wars that seems to be brewing up and the Chinese likely have a lot left in their tank to fire back at the US. And let’s also not forget the escalating geopolitical tensions with Russia. Tin hats on everybody, plenty of risks out there so make sure your risks are managed efficiently.