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Stocks set to open lower as oil jitters continue

Updates from US Federal Reserve members Janet Yellen, Patrick Harker and Stanley Fischer have given traders a lot to absorb.

The Fed chair, Ms Yellen, believes we will not see a repeat of the 2008 financial crisis in our lifetime, as the regulation brought in after the crisis should prevent it from happening again. Ms Yellen feels the Fed should continue on its path of monetary tightening, but it will be gradual and predictable. Mr Harker foresees one more interest rate hike from the US central bank this year, even though he thinks inflation will taper off towards the end of 2017. Mr Fisher believes the high stock market valuations reflect the higher risk appetite of investors. 

The head of the European Central Bank (ECB), Mario Draghi, was speaking in Portugal yesterday at the ECB forum, and he is content to keep the current monetary policy in place. Mr Draghi noted that the health of the eurozone is improving, and that the loose monetary policy is clearly having a positive impact, but there are some factors which concern him. The ECB chief pointed out that inflation is ‘more muted’ than he expected.

Mario Draghi is keen to keep the ECB’s monetary policy loose as a soft euro would continue to assist the eurozone.  There has been calls for the ECB to tighten their policy, but Mr Draghi knows full well that a stronger euro would slow down the recovery process, so it is in his interest to keep the single currency relatively low.

Mario Draghi wasn’t the only central banker that is exercising caution. The Bank of England (BoE) Governor, Mark Carney, is increasing the capital buffers required at UK banks, in an effort to discourage the banks from over stretching themselves. The BoE is asking British banks to set aside £5.7 billion over the next six months, and another £5.7 billion by the end of next year.

Mr Carney expressed concern that UK consumers are relying too heavily on credit. A certain amount of borrowing and spending keeps an economy ticking along, but if it is not kept in check, it can lead to problems in the form of bad debt. The UK central bank are adopting the policy of, prevention is better than cure. The BoE have been very aggressive in their loosening of monetary policy as a reaction to Brexit, and Mr Carney stated that monetary policy was a last line of resort.

The fundamentals for the oil market haven’t changed. The number of active rigs in the US has been increasing for the past 23 weeks in a row, and OPEC members like Nigeria and Libya don’t have to adhere to the oil production cut, and both are increasing their output. Yesterday the American Petroleum Institute (API) report showed the stockpile of oil barrels rose by 851,000.

There has been no new developments to suggest the over-supply problem is being addressed. The Energy Information Administration (EIA) report at 3 30pm will be closely watched as it has been a major source of volatility in recent weeks. The consensus is for a drop of 2 million barrels, and last week saw a decline of 2.45 million barrels.

Forex snapshot

EUR/USD – yesterday the currency pair surged and it cleared the resistance at 1.1300 – which is now acting as support. If the support at 1.1300 holds, the resistance at 1.1428 will be the next price to watch. A drop back below 1.1300 could see it return to 1.1220.

GBP/USD – ran into resistance at the 50-day moving average at 1.2858, a break above it would put 1.2977 on the radar. If it fails to clear the 50-day moving average at 1.2858, we could see it fall back to 1.2716 and the 100-day moving average at 1.2640.

EUR/GBP – 0.8844 is providing support, and if the level holds the resistance at 0.8866 and 0.8900 will be the upside targets. A break below 0.8844 would bring the support at 0.8810 and 0.8770 into play.

USD/JPY – the 100-day moving average at 111.80 is acting as support, and bulls will be looking to the resistance at 112.46 and 113.00. A move below the 100-day moving average at 111.80 will put the 200-day moving average at 111.00 into sight, and 110.30 is the next support level.

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