Espresso Morning Call: Sentiment recovers as USD slips

What are we looking at

• USD could be set for a near term correction: With moves across major forex pairs, there are hints that there could be a pullback against the USD strength. 
• Indices rebounding: The selling pressure of the past couple of weeks has just eased and been replaced with a more positive mood in the past 24 hours. Reaction to key resistance of lower highs will now be key
• Data trading: The Eurozone industrial production data is unlikely to do too much to the EUR. CAD traders will be watching the Canadian inflation for any positive surprises. The Existing Home Sales may impact risk appetite if there is any negative surprise. 

Overview

There has been a slight shift in mood across major financial markets in the past 24 hours. With a more positive sentiment across Wall Street with indices rallying into the close, there are hints of a pullback on the recent US dollar (USD) strength. Every major currency is outperforming the USD this morning and major pairs are approaching key levels, the reaction to which will suggest whether these moves can continue. 

However, traders will also be keeping a nervous eye on Treasury yields which have once more hit multi-year highs earlier today. Although yields have since pulled back slightly, for a USD unwinding move to continue and a rally on indices to build momentum, likely, a stalling or perhaps unwind in the big run higher on Treasury yields will be required. 

The economic calendar starts with Eurozone industrial production, where analysts are looking for an improvement in March. As with elsewhere around the world, Canadian inflation is expected to continue to increase in March. The US data is limited to Existing Home Sales which could begin to reflect a housing market impacted by higher mortgage rates, higher inflation and house prices which have increased by over +30% nationally in the two years since the start of the pandemic.

Today's news

Market sentiment has improved: Indices have rebounded and the USD pulled lower initially this morning.

Treasury yields pull back from highs: The US 10 year yield hit 2.98% this morning before pulling back, with the 2-year yield hitting 2.63%. These are around three-year highs.

The PBoC holds rates: The People’s Bank of China has held its interest rates steady (1yr Loan Prime Rate at 3.7%, 5yr LPR at 4.6%). This was as some had expected a potential cut to the rate.

NASDAQ hit by Netflix after-hours decline: Netflix announced quarterly results after hours yesterday and it was a disappointment. The shares have fallen by -25% in after-hours trading, which will weigh on the NASDAQ (and S&P 500) today.

Fed’s Evans is confident: Evans is not a voter on the FOMC until 2023 but is confident that the economy can do well despite the tightening of monetary policy. Evans is considered to be the second most dovish on the FOMC (behind Kashkari).

Cryptocurrency rebounds along with risk appetite: Rallies have been seen across the major crypto coins. Bitcoin picked up into the close last night and is holding on to the gains today, trading around one-week highs.

Economic Data:

• Eurozone Industrial Production (at 1000BST). Consensus is looking for month-on-month growth of +0.7% in February (after zero growth in January) which would improve year on year growth to +1.5% (from -1.3%)
•  Canada inflation (at 1330BST). Forecasts are looking for inflation to increase to 6.1% (from 5.7 in February), with core inflation increasing to 5.0% (from 4.8%)
• US Existing Home Sales (at 1500BST). The consensus is looking for sales to decline to 5.80m in March (from 6.02m in February)

Major markets outlook

Broad outlook: Market sentiment is recovering, but the direction of Treasury yields could be a decisive factor in how long this lasts.

Forex: USD is underperforming major currencies today, even against the JPY.

• EUR/USD has held support at around 1.0760 and rebounded in the past 24 hours. The market is now testing key near term resistance around 1.0820/1.0830. A decisive move above would suggest building momentum for a near term recovery. It would bring 1.0920/1.0940 resistance back into play. Support at 1.0780 is an initial higher low.

• GBP/USD closed a shade under 1.3000 for the first time since November 2020 yesterday (at 1.2995). However, the move has again been tentative and comes with a sense of lacking conviction as buyers still seem to be happy to support around the 1.3000 area. The outlook remains on a knife-edge. A decisive move clear below 1.2970 opened a move towards 1.2850. The initial resistance is 1.3045/1.3075.
• AUD/USD retreated to rebound from just above the 10-week uptrend (c. 0.7330). Moving above 0.7400 resistance is encouraging, and opens a move towards 0.7495 which is the next important resistance within the recent correction. Support is growing at 0.7342. 

Commodities: A sharp pullback correction on precious metals is now testing key support. Oil is also trying to build support after a sharp pull lower.

• Gold has been hit by a corrective move that has shaken the positive outlook. However, support from a ten-week uptrend comes in around $1930 with price support of $1930/$1940. With the daily RSI back around 50 this is a key moment. Support needs to hold for the buyers to retain some sense of control. Initial resistance at $1960.
• Silver has pulled sharply lower in a test of the positive outlook. The market is unwinding towards the support areas of the old key highs around $24.55/$24.85. This also coincides with the support of a 10-week uptrend and so this is a key moment. 
• Brent Crude oil unwound sharply yesterday but has looked to build support this morning at around $107.90. The decisive move lower yesterday and the negative candlestick suggests that the near to medium-term outlook remains uncertain. Swings higher and lower are likely to continue to be seen and this will make conviction trading difficult. Resistance is building now around $111/$112. 

Indices: Indices have picked up and there is a key test of the recent run of lower highs over the past three weeks. 

• S&P 500 futures have just posted two consecutive positive closes for the first time in almost three weeks. The rebound is testing what is now a key pivot area between 4444/4465 which is a combination of old support and now new resistance. Subsequently, the bulls will be looking for a pull above 4465 to open the recovery. Momentum is looking more improved, and a sequence of new higher lows will help to build on this improvement. Initial support is between 4370/4410.
• DAX has been consolidating in recent sessions and this is allowing a slightly more encouraging momentum outlook to develop. However, the market needs to pull above resistance at 14,325 to end the sequence of lower highs and lower lows and then move to test the big three and a half month downtrend (currently around 14,600). Support is building around 13,890/14,020.
• FTSE 100 has picked up in recent sessions and buyers are still happy to support near term weakness. With mild positive configuration on moving averages and momentum, there is a positive bias to moves. Another higher low above 7562 would help to build on the improvement. Above initial resistance at 7632 re-opens 7677 again.

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