Espresso Morning Call: USD pares gains as yields drop back

What are we looking at today:

• USD is unwinding gains, but for how long: There is key near to medium term resistance levels to watch on major pairs as currencies look to recover against the dollar. Reaction to these resistances will be key. 
• Indices rebounding but need to continue the recovery: Selling into near-term strength has been the strategy for the past two weeks. These recovery moves need to continue to break this sequence.
• Data trading: Will the ECB begin to hint at a more hawkish positioning in the gith against inflation? US Retail Sales are notoriously erratic but slight monthly growth is still expected in March. The April Michigan Sentiment is expected to show only a slight deterioration, but as inflation continues to bite the consumer, there could be a negative risk to the forecast 

Overview

There has been a shift in broad sentiment in the past 18 or so hours. A strong US PPI should have strengthened inflation expectations, however, US bond yields have fallen. There is talk of short covering on US Treasuries (i.e. the practice of buying back overstretched short positions). This is pulling US yields back lower and the USD is suffering from profit-taking as a result. This is showing through on major forex pairs such as EUR/USD and especially on GBP/USD. This is also impacting equity markets too. Lower yields are better for risk appetite and growth indices such as the NASDAQ have pulled higher. This has also been reflected in a rebound in European indices such as the DAX.

However, there are question marks over the sustainability of this move. Already this morning, we are seeing these nascent recoveries slipping. This comes as key resistance on indices left during the recent declines, lies overhead. Reaction over the next 24 hours will be key. Add in the bulk of tier-one data, headlined by the ECB meeting, and it could be an important run-up to the Easter holidays.

The economic calendar is packed with important data today. Top of the bill is the ECB monetary policy. The Governing Council will not be changing rates, but the hawks are growing in voice in the battle against inflation. This may induce a hawkish lean on the winding down of the Asset Purchase Programme, whilst the signal for a first potential rate hike will also be eyed. The US consumer is also in focus, with US Retail Sales (expecting only a small monthly increase) and prelim Michigan Sentiment (expecting a small deterioration). 

Today's news

Market sentiment has improved, but is it sustainable?: Indices rallied on Wall Street and European markets are ticking higher today. The paring of USD gains is also being seen again this morning. Oil is also just easing back.   

Treasury yields fell yesterday, down again today: Yields fell during the US session yesterday, led by the shorter-end. The 2-year yield is now -29bps from the 2.60% recent high. The 10-year yield is down -17bps from the 2.83% high. The yield spread continues to widen, now up to 35 basis points.

Australian unemployment slightly misses improvement: The headline rate remains at 4.0% which was higher than the expected improvement to 3.9%. The participation rate also did not improve to where the consensus had expected, remaining at 66.4% (66.5% forecast). The AUD has suffered slightly, as a result, this morning.  

The Fed’s Waller talks about inflation peaking: Waller is a voter in 2022 and a hawk on the FOMC, believing that inflation is pretty much at its peak. He does though favor aggressive hiking now, with +50bps in April and May, and possibly again in June and July, wanting a neutral rate (c. 2.50%) during the second half of 2022.   

Cryptocurrency higher with the improved risk appetite: There was a decisive rally yesterday as crypto continues to be positively correlated to broader risk sentiment. Bitcoin has rallied to above $41,000 although is consolidating this morning. 

Economic Data:

• European Central Bank monetary policy (at 1245BST). The ECB is not expected to make any changes to its interest rates, with the main refinancing rate of 0.0% and the deposit rate of -0.50%. The press conference from ECB President Lagarde is at 1330BST. 
• US Retail Sales (at 1330BST). Consensus is expecting core sales (ex-autos) to increase by +0.2% in March (after groing by +1.0% in February).
•  US Weekly Jobless Claims (at 1330BST). Claims are expected to increase slightly to 171,000 (from 166,000 last week). Also, watch for the Continuing Claims which are expected to fall to 1.500m (down from 1.523m last week).
• Michigan Sentiment (at 1330BST). Consensus is expecting a slight decline to 59.0 in April (from 59.4 in March).

Major markets outlook

Broad outlook: Market sentiment improved since the US session yesterday. This comes with lower bond yields, a weaker USD, and indices rebounding.

Forex: The USD has pared gains since yesterday, with key levels approaching on several major pairs.

• EUR/USD has rebounded decisively to bolster the support at 1.0805. The move has continued this morning, but the key test lies ahead. The resistance is strong between 1.0940/1.0960, and this is the key gauge for a near to medium-term rally. Above 1.0960 opens 1.1120/1.1185 again. The ECB meeting will be the key event today. Initial support 1.0870/1.0890.
• GBP/USD has rallied sharply and formed a big bullish engulfing (bullish key one-day reversal) candlestick. This move has broken the mini three-week downtrend and suggests a shift in sentiment. Reaction to the resistance band 1.3165/1.3195 will be key as to whether this recovery can develop now. Initial support is 1.3090/1.3110.
• AUD/USD has fluctuated in the past few sessions but is struggling to get back above the 0.7445  previous support. These failures point to the difficulty the bulls have in regaining control. A decisive move above 0.7495 would be a sign that the shackles are being released. Support is at 0.7390 which protects a retreat back towards the 10-week uptrend (c. 0.7310).

Commodities: Precious metals rally remains on track despite consolidation this morning. Oil is just easing back from sharp gains in the past 48 hours.

• Gold has strengthened considerably in the past five sessions, with a succession of strong bull candles that has taken the market well clear of the $1966 previous resistance. Coming with strengthening positive momentum (daily RSI above 60) this is opening further recovery towards $2000. Intraday weakness is increasingly being bought into and there might be another opportunity today, with the early consolidation. Initial support is now at $1950/$1962.
• Silver has rallied strongly and is now testing the top of the resistance band at $25.60/$25.85. With strengthening momentum (again RSI above 60), a close above $25.85 would be bullish for a full move back towards the March high of $26.95., Intraday weakness is being bought into, with initial support at $25.50/$25.60 and then $25.35. 
• Brent Crude oil has broken a near three-week downtrend and moving above $107.00 has formed an improving trend. The key test is now at $112.50 which was the latest key lower reaction high of the March/early April decline. The is now a pivot band between $105.30/$107.00 which is now supportive. 

Indices: Markets have rebounded but the moves need to continue as near-term rebounds have been a feature of the correction in the past two weeks. 

• S&P 500 futures have ticked higher from 4375 and are trying to engage in recovery. Reaction around the 4444/4466 initial resistance will be a gauge for today’s session, but a move above the resistance at 4520 (which is a key lower high) will be the important test. Momentum on the daily and 4-hour charts suggests this is a bear trend rally still, so this move needs to continue higher to break this sequence. Initial support is at 4415/4428.

• DAX recovery has just pulled up to the resistance between 14,180/14,325 and is just consolidating this morning. With the 4-hour RSI again just unwinding towards 50 this is an important moment as another bull failure could re-engage selling pressure. A move above 14,325 would engage a recovery again. Initial support is at 14,033/14,075.
• FTSE 100 has seemed to be trading on a different plane to the other indices, simply consolidating above the initial support around 7525/7530 but failing to find any recovery traction either. Hence a consolidation has formed. A decisive move above 7600 would suggest positive momentum again, but momentum on all time horizons (hourly, 4-hour and daily) is looking rather neutral for now. Support at 7485 is key.

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