03/03/2014: Geo-political events in Ukraine driving a flight to safety

Market Overview

The foreign exchange markets re-opened with an instant flight to safety as geo-political events in the Ukraine threaten to escalate. With pawns being moving into place by both sides in the conflict, currently it is difficult to say exactly how this will pan out from here. The most immediate threat will be seen through the investor preference for safer haven assets such as the dollar, US treasurys, gold and the yen; while with Russia being such a large exporter of energy, the oil price has also jumped.

With politicians pushing for economic sanctions, investors will need to weigh the impact that this will have on growth figures around the world. This also puts an added dimension on this week’s plethora of data releases.  The manufacturing PMIs will first come into focus, which are announced at various times throughout the day (UK at 09:30GMT, with the US ISM at 15:00GMT). Both Chinese manufacturing PMIs fell over the weekend.

Asian markets had the first opportunity to react to the events in Ukraine and amid the backdrop of a strengthening yen, stocks were sharply lower, with the Nikkei down around 1.5%. European markets have also opened lower. For now, investors are uncertain how this situation will play out and this mind-set should ensure that today is one for the outperformance of the defensive assets.

Chart of the Day – AUD/USD

The outlook for the recovery is under pressure once more. The rate has been moving in a sideways band for the past three weeks, but there is a series of lower highs on the daily chart, the latest from Friday at 0.8989 and overnight there has been a move under the support at 0.8924 which suggests the selling pressure is building. The daily momentum indicators continue to fall away which reflects increasing weakness. The intraday chart shows a bounce has set in, but with hourly moving averages in decline and a band of resistance around 0.8950/0.8960 this could be a chance to sell. A move back above 0.8989 would give the bulls a boost.

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EUR/USD

The initial reaction to the escalation of events in the Ukraine has pulled the Euro lower overnight, and the chart suggests perhaps this is a chance to buy. The daily chart shows the rate having bounced off the lows and now trades back above the key resistance level of $1.3775. Also with momentum indicators remaining in bullish configuration the outlook remains positive. On the intraday hourly chart there is a range of support now which the buyers can work with between $1.3752/$1.3773, however it would not be positive if a correction went much below $1.3740 area of support. Momentum indicators are still positive and look to have used this weakness overnight as a chance to unwind some overbought momentum for the retest of the high at $1.3824.

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GBP/USD

On a technical basis the outlook for Cable has been only slightly impacted by the initial reaction by European traders to the Ukrainian developments, so far. The move higher on Friday reflected a large shift in sentiment to the bulls since the consolidation over the past week and opens a retest of the key high at $1.6822. On the intraday hourly chart, there is a series of highs in place and the bulls will be looking out for any potential correction to find support above the $1.6674 low. Technical indicators appear to give more of an outlook of sideways consolidation so far today, so it will be interesting to see how the mood develops once European trading gears up. Friday’s high at $1.6768 is the key high to open renewed upside.

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USD/JPY

The technical outlook has shifted back towards yen strength amid a flight to safety this morning with a rare gap down as FX markets re-opened after their weekend break. The rate is back and challenging the key support around 101.37 and if this level is rejected as support, the way could be open for a quick move back towards the key February low at 100.77. The daily chart shows the breakdown of the old 3 week uptrend which, coupled with momentum indicators turning lower once more with renewed downside potential, suggests that the 100.77 low could easily be pressured in the coming days. Intraday, the outlook is not much more promising on the hourly chart, although momentum indicators are threaten a bounce. The gap lower has been filled perfectly overnight but the resistance is now at 101.65 and any strength towards there could be seen as a chance to sell today.

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Gold

During times of geo-political conflict, gold is a traditional safe haven asset to own and certainly the reaction this morning would go a long way towards that assertion. Since trading re-opened after the weekend, the price has shot higher once more and is within touching distance of the $1350 technical target from the base pattern. The bout of consolidation threatened to pull the recovery off course but the buyers are back with force. From the overnight price action, there is now a slight band of support just above $1340, but the daily chart shows little resistance until the $1361.60 key October high. The price is 1.7% higher today as the momentum increases to the upside

Gold   03032014

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