ECB’s Forward Guidance Rattles FX and Stock Markets

The ECB surprised markets, unveiling a new round of loans for the Eurozone Banks and pushing back its forward guidance, something that stock markets apparently hated. The US indices recorded a fourth straight session of losses, its longest slump so far in 2019 and Asian stocks took a hit on the chin. In Japan, the Nikkei225 main index lost 2.01 percent to 21,025, and the Hang Seng benchmark in Hong Kong lost 1.91 percent at 28,228. The Shanghai Composite sank 4.40 percent at 2,969, while the Aussie stock market traced the overnight losses on the Wall Street and extended the losses after China’s economic data showed that exports in USD terms plunged 20.7 percent year-on-year in February – the biggest drop in three years – highlighting the worsening global demand conditions. The ASX 200 benchmark finished the session at the day’s lows, down 60 points or 1% to 6,203. Over the week, however, the index rose 0.2% – its third weekly gain.

European stocks started the Friday session in red as expected with DAX losing 0.61 percent to 11,449, CAC40 giving up 0.40 percent to 5,246 while in London, the FTSE100 index is down 0.65 percent to 7,111, after ECB downgraded its economic growth and inflation forecasts, dampening investor sentiment.

In commodities markets, the Crude oil gave up 38 cents to $ $56.05/barrel while Brent oil lost 48 cents higher to $65.75/barrel. US crude oil production remains at a record high 12.1 million barrels per day, while net crude oil imports reached a 4-week high. Amid global markets volatile day, Gold finally finds a bid and currently is trading at $1294 adding 6 dollars, The precious metal price may find support at $1280 ahead of testing 100-day simple moving average down to $1265. The German Yields now fall to 0.54%, the lowest level since October 2016, as it drops by 8 bps from yesterday’s close of 0.62%. German Factory orders in January slumped heavily, and that is prompting a more negative response in the bond market in the near future. It certainly looks like we’re still on course towards hitting 0% yields in due time and this will present yet another unnecessary problem for the euro.

On the Lookout: During the Asian session, China released the latest trade figures. USD denominated exports fell by 20.7 percent, analysts were expecting a decline of 4.8 percent, and that compared with the 9.1 percent rise in January 2019. In today’s calendar, we’ll get interesting data from the U.S., and we’ll be closely watching for Brexit updates from Brussels. The US non-farm payrolls data is due for release along with housing starts. In Central Banks news the FED chairman will also deliver a speech.

Trading Perspective: In forex markets, the risk aversion carries over to opening trades in the European session, and that will continue to help fuel bids in JPY and CHF. US Dollar index is giving up 17 pips and now is trading at 97.45 after recent bid sends the U.S dollar index to fresh 2019 highs against a basket of currencies at 97.65. Traders should be careful at current level as I expect consolidation, amid oversold daily stochastics. AUDUSD trades to worst levels since the early-January flash crash, as China’s trade balance disappointed traders and the Kiwi is gaining some momentum and trades higher at 0.6780 having the low in Asian session at 0.6747. The EURJPY pair is under pressure, having dropped by 1.18 percent yesterday, its biggest single, day drop in over two months.  

USDJPY tumbled to over one-month lows on the last Asian trading day of the week and now is testing the psychological support of 111.00, having breached the 200 and 100-day moving average support. The pair rejected at 112 tough barrier earlier in the week and only a convincing break above can start a new bullish trend. Strong support stands at the 50-day moving average at 109.91 where demand will be strong. The pair has reached oversold levels, so an intraday rebound looks possible.

In JPY futures markets the open interest increased for the third session in a row on Thursday, this time by just 630 contracts from Wednesday’s final 208,395 contracts. In the same line, volume rose once again by around 29K contracts.

USDJPY Daily Chart

GBPUSD: The pair is adding some pips and trading around 1.31 area keeping the long term positive momentum after the correction from yearly high. Long positions can deliver gains and only a break below the 200-day moving average at 1.2996 can scary the bulls away.  

In Pound futures markets traders trimmed their open interest positions by just 483 contracts on Thursday from Wednesday’s final 192,572 contracts, recording the sixth consecutive drop at the same time. Volume, instead, is extending the choppy trade and rose by nearly 29.4K contracts.

EURUSD drop yesterday by 1 percent, the biggest single-day decline since Nov. 12th, 2018, and yesterday’s close at 1.1193 marked a downside break of the 3.5-month trading range of 1.12-1.15. Any strong Euro upside move is likely to come from a weaker US Dollar environment and not from EUR fundamental strength, but this is unlikely to occur in the next months as I expect the Fed to deliver one more hike. EURUSD is likely to test 1.100 by the end of summer and here is why:   

Italy is one factor behind the euro-area slowdown, something that Mario Draghi admitted yesterday and we have mentioned that in our daily reports numerous times. We don’t expect any recovery any time soon for the Italian economy.

An old problem will resurface in Q3, and that is the Greek debt crisis.

Clouds appear above France as the latest economic figures disappointed analysts.   

China and world trade slowdown will have a more negative impact for the euro rather than the US dollar.

Open interest in EUR futures markets rose significantly by nearly 14K contracts on Thursday from Wednesday’s figures, according to preliminary figures from CME Group. In the same line, volume increased by around 275.5K contracts. It was the most significant single day build so far this year in both open interest and volume.

EURUSD Daily Chart