While markets in Europe slipped back yesterday in the wake of growing concern about rising yields, they still remain well off the lows of the week. US markets finally managed to find a bid after five days of losses, with the S&P 500 finding support at its 200-day MA to finish the day higher, which in turn should translate into a modestly positive open here in Europe this morning.
The US dollar continued its move higher yesterday, pushing up to three-month highs, as bond yields continued to firm up, with the US 10-year closing at its highest level since January 2014. More importantly the 2-year yield also made a new multi-year high above 2.5%.
With US interest rate levels starting to rise to new multi-year highs on an almost daily basis, investors are asking themselves, despite a bumper earnings season, is this likely to be as good as it gets. And with companies beating expectations in the way that they have been thus far, the bar for the rest of the year has suddenly been pushed a little bit higher.
At the end of last year, the ECB’s main problem was in trying to keep a lid on the euro, against the backdrop of an improving economy and an expectation that we would start to see the Bank lay out a timetable for paring back on the enormous amounts of stimulus that has been pumped into the European economy.
Having seen the amount of monthly asset purchases halved to €30bn a month at the beginning of this year, investors have been working on the assumption that this would fniish at the end of September; however there has been some speculation that it might be extended until the end of the year.
A lot has changed since the beginning of the year, as well as the last meeting in March, when the easing bias was removed, and to some extent it complicates the picture for the central bank. Economic data has slowed since the end of the year, while the Trump administration has upped the ante on trade, introducing a whole new level of uncertainty into the global economy. Inflation hasn’t played ball either despite a significant surge in oil prices since the turn of the year.
One thing the ECB won’t have to worry about too much is the value of the euro, which has backed off the 1.2500 level, something that ECB president Mario Draghi may want to encourage at his press conference later today. With yields starting to show signs of flickering higher across the world, a lower euro would certainly help the ECB in meeting its inflation target, as well as giving a boost to European exporters who have seen profit margins hit as a result of the run up in the euro.
In a nutshell, with no change to policy expected, Draghi’s job will be to keep the press conference low key, balance out the risks and focus on the June meeting, where we could get greater clarity on the timing of when the asset purchase programme might finally end.
EUR/USD – closing in the support which is 1.2160 and March lows, a concerted move below the 1.2150 area opens up the prospect of a move towards 1.1800 in a topping pattern reversal. A move back above 1.2320 is needed to argue for a return towards the recent highs.
GBP/USD – downside pressure remains intact while below the 1.4020/30 area. A move below this week’s low at 1.3918 opens up the prospect of a move towards the lows this year at 1.3710. We need to break back through the 1.4030 area to stabilise in the short term and argue for a return to the 1.4130 level.
EUR/GBP – continues to slip lower with the prospect we could head back towards the 0.8690 area. Resistance remains back near last week’s peaks at 0.8790, and below the 50 and 100-day MA’s. Only a fall back below 0.8680 retargets the 0.8620 lows of last week.
USD/JPY – moved through the 109.20 area and could well follow through towards the 200 day MA at 110.20. For that to unfold we need to hold above the 108.80 area. A move below 108.70 reopens up a move back towards 108.20.
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