Written by Lukman Otunuga, Research Analyst at FXTM
The mounting speculations around the possibility of central banks unleashing further stimulus measures to quell the global turmoil following the abysmal economic reports from Asia on Monday has offered stock markets a ’sticking plaster’ solution. Asian equities rallied with the Nikkei surging over 7% as Japan’s tepid fourth quarter growth spurred hopes that the Bank of Japan would intervene in boosting growth within its ailing economy. This sudden shift in risk appetite trickled down to the European arena with most European equities edging higher amid the modest bounce in banking stocks which renewed some optimism. American equities were closed on Monday in observance of President’s Day, but may be poised for a welcome boost during trading on Tuesday following Draghi’s dovish remarks signaling further stimulus measures to accelerate growth and inflation in Europe.
Although short-term gains may be observed in the stock markets, the medium-term trajectory still points to more downside moves as concerns over the global economy remain elevated, while violent swings in the oil markets continue to sour investor risk appetite. There are some high risk economic releases this week from the FOMC meetings, to the inflation report from the States, which may act as a catalyst in renewing a wave of risk aversion and which consequently may send stock markets back into the red territory.
Draghi is ready to do his part
Euro bears were installed with inspiration during trading on Monday following Mario Draghi’s dovish rhetoric on the health of the Eurozone and global economy which spurred speculations around the Central Bank unleashing further stimulus measures in March. Draghi’s direct statement suggesting the ECB is ready to do its part was accepted by market participants and this consequently sent the Euro lower as bets intensified over the central bank taking action. For an extended period, the Eurozone has been victim to falling commodity prices which have sabotaged its 2% inflation target, while slowing growth in Germany and France have added to the nation’s woes. Although markets are heavily pricing an 86% probability that the central bank will cut negative deposit rates by another -0.2% in March, if the ECB under delivers once again as in December then the Euro may experience an aggressive appreciation. As of now sentiment towards the Eurozone is firmly bearish and the Euro should remain pressured as investors bet on the likelihood of the Central bank taking action in March.
The EURUSD has been dragged in various directions and the latest upsurge was on the back of Dollar weakness. This pair has become increasingly bullish on the daily timeframe and previous resistance at 1.1050 may act as a dynamic support which should encourage a further incline back towards 1.1300. If the ECB ends up unleashing further stimulus measures in March then bears may be offered a lifeline to send prices back towards 1.055.
Sterling pressured ahead of UK CPI
Sterling bears received ample encouragement during trading on Monday following previous lone hawk BoE Ian McCafferty’s dovish tone towards a UK rate hike which reduced any surviving expectations around the Bank of England taking action in 2016. Anxieties have elevated over slowing global growth, while the heavy declines in oil prices have exposed the UK economy to downside risks. Domestic data continues to follow a soft path and growing fears over a possible Brexit which has left the Sterling vulnerable only adds to the UK’s woes. Inflation growth continues to be notoriously low in the United Kingdom and if the CPI report follows the same tepid pattern, investors may be encouraged to attack the pound as speculation rises over the possibility of the BoE implementing negative rates in the future.
The GBPUSD remains bearish on the daily timeframe as long as prices can keep below the firm 1.4600 resistance. Prices are trading below the daily 20 SMA while the MACD has also crossed to the downside. A decisive break below 1.4400 should encourage a further decline towards 1.4200.
Commodity spotlight – Gold
The unexpected rebound in the global stock markets following the inflated expectations around central banks unleashing further stimulus measures to sooth the financial turmoil has consequently punished Gold with the metal declining over $60 from its $1263 peak. Regardless of these short term losses, the troubled economic landscape and noticeably low confidence in the global economy may renew a wave of risk aversion, which should provide Gold bulls the foundation to propel prices back up. We are in the age of negative rates and with expectations over the Fed raising US rates in 2016 rapidly crumbling, bullish investors may take advantage of this correction before stock markets start to decline once again. From a technical stand point, this metal is heavily bullish on the daily timeframe as prices are still above the daily 20 SMA while the MACD also trades to the upside. Previous resistance around $1185 may act as a dynamic support which should encourage an incline back towards the $1263 high.
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