Espresso Morning Call: Oil declining as USD builds support

What are we looking at today

• US dollar may be starting to regain strength: This has come with oil falling back again, which is weighing on Treasury yields. However, if oil and yields continue to fall, USD may struggle near term.
• Oil jags back lower: Selling pressure has mounted again with the US mulling a “massive” release of oil reserves. 
• Russia/Ukraine peace talks to continue tomorrow: The two sides continue to talk. Although both seem to be slightly contradictory still over the fate of eastern Ukraine, continued talks are at least encouraging.
• Data trading: Jobs and inflation today. Eurozone unemployment tends to do little to move the EUR. US jobless claims have been a positive signal for USD for a while. The Fed’s preferred inflation indicator, the core PCE could cause a stir on any higher than expected reading. 

Overview

With signs of progress in the peace talks, the oil price and Treasury yields have fallen in recent days. This has weighed on the US dollar which has unwound significantly this week. This USD correction has come especially against the currencies which have been underperforming in recent weeks, with the Japanese yen (due to rate differentials narrowing) and the Euro (proximity to the war) finding a new lease of life. However, the decline in oil has taken hold once more this morning. There are suggestions that the US could be about to use some of its oil reserves to add perhaps 1m barrels of oil per day into the global supply. This is further weighing on oil and Treasury yields (lower oil is less inflationary). Despite this, we are still seeing the USD starting to reclaim some recent losses.

Lower oil, lower yields are factors that have been helping to underpin equity markets this morning too. Yesterday’s weakness seems to be finding willing buyers to help sustain the recent recovery momentum.

The economic calendar is focused on jobs and inflation today. Eurozone unemployment is expected to fall slightly to 6.7%, whilst US weekly jobless claims are expected to increase slightly to 197,000 having fallen to the lowest since December last week. Attention will also be on the Fed’s preferred inflation gauge, the core PCE today, which is expected to increase to 5.5%.

Today's news

Sentiment is looking more positive: European indices are rallying, with DAX outperforming especially versus the FTSE 100. NASDAQ futures are outperforming amongst US markets. There is also a tick lower on precious metals. USD is starting to build support.    

Treasury yields continue to fall: yields are lower again this morning, for the fourth consecutive day. The 10-year yield is c. -4 basis points, with the 2-year yield c. -3 basis points lower. Yield spreads remain incredibly tight with 2s/10s at just 3 basis points apart. 

Russia/Ukraine peace talks to continue: Talks will resume on 1st April. Russia seems to be stalling on a meeting between Putin/Zelenskyy. 

China's official PMIs move into contraction: Both the manufacturing and non-manufacturing (services) PMI data show that the sectors are shrinking. It is happening as several cities impose restrictions in response to COVID outbreaks. This is the first time this has happened since February 2020. 

UK final Q4 GDP revised higher: Consensus was looking for 1.0% but the revision to 1.3% is encouraging. The Current Account deficit for Q4 was also lower than expected at -£7.3bn (-17.6bn exp)

US President Biden is considering a “massive” release of oil from reserves: It could be at a rate of .c 1m barrels per day for as long as six months. 

Cryptocurrency continues to consolidate: Bitcoin has been quiet for the past couple of days and is still hovering around $47,000. 

One Fed speaker scheduled today: John Williams (permanent voter, shades dovish) is speaking at 1400GMT

Economic Data:

• Eurozone Unemployment (at 100GMT) – Consensus is looking for a reduction to 6.7% in February (from 6.8% in January) 
• US core Personal Consumption Expenditure (at 1330GMT) – Consensus is expecting a +0.4% increase in February with the year on year inflation at 5.5% (5.2% in January)
• US Weekly Jobless Claims (at 1330GMT) – Claims are expected to increase slightly to 197,000 (from 187,000 last week)

Major market outlook

Broad outlook: is looking slightly more positive today.

Forex: USD is starting to build support following the recent sharp decline, however falling commodity prices are weighing on commodity currencies of AUD, NZD and CAD.

• EUR/USD has rallied decisively through key resistance at 1.1120 in a move that looks to be an outlook changer. There are a few signs on intraday charts (1 hour and 4 hours) that this move may be beginning to run out of steam this morning, so the reaction to a pullback will be key. There is now support between 1.1070/1.1120 which will be a gauge of how strong the bulls are. Hold this breakout and a test of 1.1185/1.1230 will be seen. 
• GBP/USD failed to decisively clear the near term resistance at 1.3120/1.3160 yesterday and the outlook remains uncertain. With daily and 4-hour RSI indicators struggling under 50 there is still a mild negative bias. Another failure under 1.3185 could be a chance to sell for 1.3050 and maybe 1.3000 again. 
• AUD/USD has been more choppy in consolidation in recent sessions. A range between 0.7455/0.7540 has formed. However, faltering momentum is a warning signal for potential correction now. Key resistance remains at 0.7555 and a pullback into 0.7360/0.7425 could be seen.

Commodities: Precious metals are fluctuating with a slight near term corrective bias, with oil also selling into strength.

• Gold has fluctuated in the past 48 hours but essentially it is still in a near term range between $1890/$1966. The move underscores the importance of support now in the band between $1878/$1895 as a close below would complete a big top pattern. The mild tick higher today is more of a consolidation move now. Initial resistance at $1938.
• Silver has slightly more of a negative bias than gold does, but essentially it is also ranging. If the market starts to close in the $24.45/$24.67 band it would suggest a growing downside pressure. For now, though, this area is attracting buyers. Initial resistance is at $25.06 today. 
• Brent Crude oil remains highly volatile with significant intraday swings (the Average True Range is $7.60 today). Another sharp move lower overnight has picked up $108.15 and is looking to build support again. The importance of resistance between $113.40/$115.75 is growing. The negative configuration on RSI momentum suggests still selling into strength. 

Indices: Indices are consolidating yesterday’s declines.

• S&P 500 futures have pulled back from 4630 but remain above the key 4585 resistance. This retains a positive outlook for potential moves towards 4671 and 4739 next resistance levels. The move is confirmed on momentum with the daily RSI in the mid-60s and at levels not seen since November. Reaction to a pullback will now be key. There is support between 4550/4585.
• DAX shied away from the 14,800/15,000 resistance band yesterday, but an unwinding move has started to build support around the previous breakout support band 14,400/14,585. The recovery momentum remains positive and weakness is still being bought into. Resistance of Tuesday’s high is at 14,932.
• FTSE 100 continues its slow grind higher. Moving through 7559 previous resistance with persistent strong positive configuration on daily and 4-hour RSI momentum remains encouraging. With a run of higher daily lows into its 12th day, initial support is at 7522. The next resistance is at 7635.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.