Written by Lukman Otunuga, Research Analyst at FXTM
The explosive levels of volatility that rattled the financial markets earlier in the week may have worn off with stock markets displaying signs of exhaustion as renewed levels of risk aversion diminishes attraction towards riskier assets. Previous short-term gains in the European arena were halted during trading on Wednesday by the declines in energy stocks and the heightened caution ahead of the Easter holiday break which left the FTSE100 under noticeable pressure. The resurgence in Dollar strength from the growing optimism of further US interest rate rises in 2016 punished American stocks while sharp declines in oil prices weathered confidence towards the global economy. Asian stocks tumbled to a one week low and may be poised for further declines in the future as boosted appetite for the safe haven Japanese Yen amid the risk-off environment drags Japanese stocks lower, consequently leaving Asian equities vulnerable to further losses.
ECB LTRO targets in focus
The Euro may be exposed to bursts of volatility ahead of the heavily anticipated long-term refinancing operations (LTROs) targets which should provide some clarity on how much the ECB is willing to lend to boost Eurozone growth. For an extended period the ECB has been in an ongoing losing bout, with falling inflation levels that have failed to pick up while external global events continue to expose the Eurozone to downside risks, consequently sabotaging the central banks efforts. A weaker Euro is what the European Central Bank yearns for but against all odds despite the aggressive stimulus measures implemented, Euro bulls stand firm. Investor fears have already dispersed over the possibility that the central bank has run out of ammunition to boost Eurozone growth and this may provide Euro bulls the inspiration to obstruct the central banks goals further.
The EURUSD has sunk over 100 pips this week and this nothing to do with a weakening Euro but a strengthening Dollar. Although prices have managed to break above the important 1.120 support level, this pair remains bullish as long as 1.105 is not breached. From a technical standpoint, prices are still trading above the daily 20 SMA while the MACD has crossed to the upside. A break out back above 1.120 may open a path towards 1.130.
Sterling tumbles pre-retail sales
The Sterling has been punished by risk aversion while the elevated expectations of a possible Brexit following the attacks in Brussels continue to encourage bearish investors to attack the currency at any signs of weakness. While Brexit fears have haunted investor attraction towards the currency, the tepid CPI reading of 0.3% which renewed concerns over the health of the UK economy simply provided another reason why the Bank of England may not raise interest rates anytime soon. This horrible cocktail of events, from the Brexit fears, to political rifts and the lackluster economic data may have left the Sterling heavily vulnerable to further losses moving forward. Investors may focus their attention on the retail sales today and if this fails to meet expectations then the bearish momentum which dominated the pound this week may sink to lower depths.
The GBPUSD declined aggressively this week almost erasing last week’s gains and may be set to trade lower after prices breached the firm 1.42 support. This pair is bearish on the daily timeframe as the candlesticks are trading below the Daily 20 SMA while the MACD has crossed to the downside. Previous support at 1.42 may act as a dynamic resistance which should encourage a further decline towards 1.40.
WTI Oil breaks $40 support
WTI bears were offered ample encouragement on Wednesday following the fresh reports from the EIA illustrating a 9.36 million buildup in inventories which intensified the ongoing concerns over the unrelenting oversupply in the saturated markets. The bearish reaction towards the crude stockpile buildup was aggressive which suggested that despite the growing optimism towards the likelihood of a positive meeting in April, concerns over the oversupply in markets were still at frightening highs. Although WTI bulls have enjoyed the speculative boosts in oil prices from the inflated expectations of a solution to the supply glut, the fundamentals of an unrelenting oversupply should provide some headwinds and send oil prices lower.
From a technical standpoint, a breakdown back below $40 should encourage a steeper decline towards $38 and $35 respectively.
Commodity spotlight – Gold
Gold experienced a very steep $30 decline on Wednesday as the negative effects of an appreciating Dollar outweighed the safe-haven’s glimmer that followed the attacks in Brussels earlier in the week. Regardless of these short term losses, this precious metal remains fundamentally bullish and ongoing global uncertainties should boost its attraction once risk aversion takes center stage. Although the growing expectations over the possibility of the Fed raising US rates have been an attribute which has sent Gold prices lower, overall fears towards slowing global growth and ongoing China woes may eventually provide a foundation for bulls to send prices towards $1250 and potentially higher. From a technical standpoint, prices are trading below the daily 20 SMA while the MACD still trades to the upside. A weakening Dollar may be the final ingredient which should open a path back above $1250 but a break below $1200 signals bullish weakness.
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