Volatility in forex markets centred around the dollar has spurred diverging performance within not only sectors of the stock market but between countries.

Today’s expected lower open in European markets is at odds with a higher close on Wall Street yesterday and positive trading in Asia. Within Europe, UK markets are faring best thanks to a heavy weighting of resource companies.

The Dow Jones closed Thursday in positive territory for 2016 having successfully unwound the rout from the beginning of the year. The repatriation of foreign earnings into more dollars is beneficial for US multi-nationals to the detriment of European competitors. The Dow transports index surged 3% thanks in part to an 11.8% gain in FedEx shares after well-received earnings.

With a lacklustre economy and declining corporate profits, accommodative monetary policy has been the only game in town for Europe. However, despite suggestions of a refocus on credit, the rally in the euro on the last two occasions that the ECB announced more stimulus reveals a feeling that monetary policy has run its course. Moreover, the “divergence trade” between the monetary policy stance of the Fed and the ECB (and the BOJ) is getting unwound as the Fed hesitates on hiking rates.

The sharp drop in the dollar in the wake of the Fed meeting has created renewed demand for commodities. Oil is close to making new highs for 2016 whilst silver and copper are already there as of Thursday.

On Friday German producer price inflation is expected to slide to -2.6% y/y in February from -2.4% but is likely to do little to impact bullish sentiment toward the euro.

 

EURUSD – The euro has rallied 200 pips in the past two days and has closed above 1.13 and just shy of its close on its February 11 peak. The short-term trend is higher but faces risk of a larger pullback while under 1.14.

GBPUSD – The pound took out its March 11 peak on Thursday to form a higher high on the daily chart. The HOD was the 1.45 round number but there is bigger potential resistance at 1.46 near the February peak.

EURGBP – The euro-pound cross formed a bearish engulfing candlestick pattern on Thursday’s daily candle after a fakeout above 0.79. The pair remains range-bound between 0.77-0.79.

USDJPY – Dollar-yen dropped sharply on Thursday, falling beneath its double-bottom low before closing higher above 111. There is scope for a triple bottom, but the higher probability move looks to be a break lower towards 1.10.

Equity market calls

FTSE100: to open 6 points lower at 6,195

DAX: to open 20 points lower at 9,872

CAC40: to open 12 points lower at 4,430

 

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