FTSE +6 points at 7355
DAX +17 points at 12242
CAC -2 points at 5133
Euro Stoxx flat at 3495
Asian markets opened the week on a positive note. Nikkei (+0.71%) and Topix (+0.62%) gained on weaker yen (-0.31%) against the US dollar; Chinese stocks traded mixed after Xi-Trump meeting has resulted in a good friendship, yet nothing concrete in terms of trade partnership or else.
European and UK stocks are expected to benefit from a light, risk-on mood at the open, helped by the softer euro and pound after the US jobs data failed to bring the USD-bears back to the market.
Released on Friday, the US nonfarm payrolls data has been a big miss. The US economy added 98’000 new nonfarm jobs in March, versus 174’000 expected by analysts. Last month’s read has been revised down to 219’000 from 235’000. The average earnings grew at the steady pace of 0.2% on the same month.
Although the US labour data remained well behind the expectations, it didn’t discourage the USD-bulls from gaining more field against the majority of its counterparts. The EUR/USD hit a month-low, the AUD/USD traded at the lowest levels since mid-January and the USD/JPY advanced to a week-high.
In the aftermath of the Friday’s trading mood, it is obvious that the markets are focused on the Federal Reserve’s (Fed) tightening policy and much less on how fast the rate normalization would happen. There is a tacit consensus that two or more rate hikes are sufficiently suitable. Clearly, the Fed’s balance sheet reduction plans added an extra hawkish flavour into the mix, although the issue remains unclear in terms of market pricing at this early stage.
Fed’s Dudley reassured that the Fed’s major focus is the interest rate tightening, in contradiction with his earlier suggestion that the balance sheet shrinkage could interfere with, or potentially delay the rate tightening plans.
All in all, the Fed hawks remain in charge of the market before FOMC Chair Janet Yellen’s speech later in the session. Yellen will speak for the first time since the Fed revealed its plans regarding the balance sheet. We expect Yellen to prioritize the actual rate tightening policy, yet to remain discreet regarding the balance sheet reduction plans.
The US dollar extended gains against the G10 currencies, except the pound.
The pound (+0.10%) started the week flat-to-positive, in an effort to consolidate Friday’s losses after the unexpected contraction in UK’s manufacturing and industrial data sent the GBP/USD below its 100-day moving average (1.2398). The nearest support is eyed at 1.2360 (Fibonacci 50% retracement on March recovery), if broken, could encourage a further slide to 1.2301 (major 61.8% retracement).
The UK’s inflation (Tue) and labour data (Wed) could affect this week’s price action. The rising inflation has become a major concern in the UK, since the Bank of England (BoE) eased the monetary conditions to support the British economy through the Brexit. The headline inflation surpassed the BoE’s 2% target in February. Good news is that analysts expect a cool down in March figures. The headline inflation may have softened to 2.2% year-on-year from 2.3%, the core inflation could have eased to 1.8%y/y from 2.0%. If this is the case, the pound could resume its descent this week. On the other hand, an upside surprise could revive the BoE hawks despite last week’s weak economic data and trigger a fresh, hawkish rally in the pound given that an increasing number of BoE members would consider an interest rate hike sooner rather than later.
Demand in FTSE futures (+0.13%) is boosted by the weaker pound. The FTSE rolling index traded above the 200-day moving average (7335p) in Asia. Cheaper pound and firmer oil prices hint at a positive open in London.
Across the Channel, the EUR/USD extended losses to 1.0570. We remind that the European Central Bank (ECB) President Mario Draghi said ‘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’. Hence, the divergence between the Fed and the ECB policy outlook hint at the possibility of a further dive toward 1.0500/1.0490.
Quick glance at technicals on LCG Trader:
GBP/USD: under pressure. Short positions below 1.2410 with targets 1.2335 & 1.2305 in extension. Above 1.2410, further upside to 1.2450 & 1.2475.
Gold spot intraday: under pressure. Short positions below 1261 with targets at 1251 & 1245.80 in extension. Above 1261, further upside to 1264 & 1269.50.
EUR/GBP: mixed sentiment. Long positions above 0.8450 with targets at 0.8570 & 0 8590 in extension. Below 0.8540, further downside to 0.8520 & 0.8500.