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Focus on the ECB this week

In another positive week for equity markets last week, investors appear to be slowly starting to drip feed money back in after a turbulent start to the year. As equity markets enjoyed their third successive week of gains it is notable that the sectors driving the current rebound are the same sectors that came under the most pressure at the start of the year.

Basic resources, oil and gas and financials have all had a nice run of gains, helped by a stabilisation in commodity prices with iron ore, copper and oil prices all showing signs of bottoming out, as well as evidence that Chinese authorities may well be taking steps to deal with the overcapacity problems in their own economy. Chinese authorities also laid out their new economic targets for 2016 including a highly ambitious growth target of 6.5% to 7%, which they could well be hard pressed to meet. 

Despite this recovery in equity markets there is still some evidence of caution with gold prices also enjoying a decent run, up over 18% year to date, which would seem to suggest that not everyone is totally convinced by the current rebound, or that investors are hedging their bets.

While equity markets have managed to recover a good proportion of this year’s losses, recent economic data has continued to remain patchy, good in parts, and disappointing in others.

The US economy continues to be a case in point after US payrolls posted a better than expected February number coming in at 242k, with a nice upward revision to the January number of just over 20k.

While on the face of it these numbers were a welcome sign that the disappointment of January appeared to be a one-off, on digging a little deeper there was also evidence that the main job gains were in lower paid sectors of the US economy like healthcare, food, retail and leisure.

Wage growth was disappointing declining 0.1%, after the surprise jump of 0.5% in January, which was, as suspected, skewed by the rise in minimum wage levels at the start of the year.

This decline in wages makes it highly unlikely that the Federal Reserve will make any move on rates at its March meeting, despite some suggesting that a move on rates still remains on the table. We could get some colour on that later today when Stanley Fischer, Deputy Fed Chairman and Fed board governor Lael Brainard are due to give speeches later today, in the wake of last Friday’s data.

As a result the US dollar slid back on the week against most of its major counterparts, which is likely to make this week’s European Central Bank rate meeting slightly more problematic for ECB President Mario Draghi.

At the end of last week various reports from ECB officials suggested that there was little consensus amongst governing council members apart from a deposit rate cut. This lack of consensus could be bad news for Mr Draghi, given that he fell short of expectations in December, damaging his credibility in the process.  If he does the same thing this week the euro could rise further.

On the other hand ECB officials could be boxing clever by playing down expectations only to over deliver later this week.

Either way it is becoming increasingly clear that the ability of central banks to make a difference in terms of driving economic momentum is running out of road, something markets are starting to become much more aware of, particularly given the damage negative rates could potentially do to an increasingly fragile banking sector, a point the central bankers central bank the Bank for International Settlements reinforced at the weekend. The BIS warned that it was impossible to predict how borrowers or savers would react to the increasing possibility of negative rates for an extended period of time.

The recent G20 meeting also touched upon the problem in their recently published communique which acknowledged that monetary policy alone wasn’t enough on its own to boost global growth.

EURUSD – last week’s rebound ran into resistance at the 200 day MA at 1.1050 again, with a break targeting the 1.1200 area. Support remains at last week’s low at 1.0800, with a break targeting 1.0600.

GBPUSD – last week’s rebound managed to almost reverse all of the previous week’s losses, falling back from 1.4250. To maintain the current momentum we need to hold above the 1.4080/90 area, to push on towards 1.4400. A fall below 1.4080 retargets the lows at 1.3835.

EURGBP – last week saw a bearish engulfing reversal suggesting the potential for further losses towards 0.7520. We need to get below support at 0.7690 for this to unfold, and stay below the 0.7830 level.

USDJPY – currently range bound between support at 110.00 and resistance at 114.90 we need to see a break one way or the other for clues as to the next move. With resistance at 114.80 we would need a technical break of 116.00 to argue a short term base is in place. While below 115.00 the risk is for a larger move lower to 106.00 in the longer term. 

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