Market Brief
There are a few key moments to look out for today on the economic calendar. The first of the Tier 1 data releases come from the European Central Bank and then before the US open, we have US Retail Sales and the US Industrial Production data reports.
Central banks have been slow to adjust their monetary policies and in general, they are favouring looser monetary policies to support their economies, which are being dragged out of the economic slump caused by the COVID-10 pandemic. The ECB is likely to keep everything unchanged, but traders will be looking to see if they follow the Bank of England and slow their purchases of bonds. Any variation in policy will see a reaction in the single currency, as traders will take that shift in policy or forward guidance as a change in sentiment.
The EURUSD has traded above yesterday’s high at the start of the London session, and I expect that we will test higher today, with an acceleration to the upside if the ECB turns more Hawkish in their views.
A higher Euro would also add to the downside pressure on the US dollar index which is looking like the resistance found yesterday will hold.
For anyone listening in on the ECB press conference or reading the minutes, there will be a lot of focus on the PEPP monetary policy. PEPP is an acronym for Pandemic Emergency Purchase Programme, so if this emergency asset purchase were to be tapered that would signal a bullish environment was developing as COVID-19 restrictions etc. would be lifted sooner. The DAX dropped yesterday but found support around the daily 50 exponential moving average. The momentum is still to the upside so a significant-close higher today and preferably above the May 10th highs would be a great signal for further buying next week.
There is a mantra that you “don’t fight the Fed”, but market analysts can get whipped up with headline data and start calling for the Fed to change course. There is precedent for Fed Chair Powell to reverse course after the Taper Tantrum around 2018. The market-led the Fed to reverse their rate hike cycle and to eventually start buying assets again. The last FOMC press conference was focused on when the Fed would start talking about tapering and Fed Chair Powell was determined to make it very clear that there would be no such tapering or rate hikes in the near future. Yesterday’s bounce in equities following the large drop in risk assets after the CPI report, should have been expected, as ‘Buy the Dip’ is the best trend following strategy in these market conditions. But the fall in the commodity markets was more likely the catalyst for risk-on, rather than traders simply holding their noses and buying the bids. The S&P500, Nasdaq and Dow Jones all traded off their lows and closed higher than the previous day. Once again, the 50 period EMA’s are showing where dynamic support is to be found, and where the trade location for Buy The Dip buyers can be expected.
Oil had dropped in yesterday’s session adding to the -3% during Wednesday’s session. The biggest concerns are still around coronavirus situations in India. Indian officials are recommending a lockdown of 2 months to try and flatten the curve and OPEC+ revised down its estimates for global oil demand for Q2 by 300,000 BPD. On the supply side, the US fuel supplies are expected to return to normal as the Colonial Pipeline reopens following on from the cyber-attack. A reduced amount of demand and sufficient supply will bring the price of energy down, which will have a deflationary effect.