03/04/2014: Trading outlook ahead of the ECB and US trading

The muted moves in both equities and currency markets this morning suggests that traders are waiting for something. That is surely going to be the ECB rate decision and subsequent press conference this afternoon. However that is not to day that trading has been flat. Sterling has come under pressure after the UK services PMI missed expectations with a fall to 57.6 (58.1 expected) from last month’s 58.2.

The Euro has been especially flat even though retail sales for the region beat expectations this morning with a month-on-month rise of 0.4% compared to an expected decline of 0.6%.  A mixed set of services PMI for the Eurozone members have also paled into insignificance ahead of the ECB this afternoon. The consensus is not expecting any change to policy, however the press conference could be where the real action is seen. Draghi is likely to be grilled on falling inflation and the potential for monetary easing in the future (that is, if the ECB does not act this month), and what format any easing might take.

EUR/USD has settled into a tight range of just 19 pips today ahead of the ECB, but you can guarantee this range will become significantly wider as Draghi takes to the floor. It is difficult to know what he might say and therefore picking a direction on Euro/Dollar is almost futile. However, the technicals suggest that the market is leaning towards the bearish side. However, last month Euro/Dollar jumped over 100 pips during the press conference as Draghi continued to deny the presence of deflation and projected inflation rising close to the ECB’s target of 2.0% towards the end of 2015. The consensus seems to be so firmly Euro negative with the apparent divergence of the ECB and the Fed on monetary policy, that anything that slightly goes against that view creates a short squeeze higher. My feeling is that the ECB will not change policy, but Draghi will try to jawbone the Euro lower by mentioning the possibility of future rate cuts. The market would take this as slightly Euro negative but not hugely and Euro/Dollar will fall away.

GBP/USD has been hit by the miss on UK Services PMI today. The rate has now completed a head and shoulders top pattern on the intraday chart with a move below $1.6620 which implies a move back to $1.6555. I will be looking to use a pullback to the neckline around $1.6620 as a chance to sell.

USD/JPY remains supported by the rising 21 hour moving average and the 3 day uptrend as the rate holds above the 103.75 breakout. The upside is open towards 1.4.83 which is the next resistance. Momentum indicators remain strong, albeit not as strong as they have been. I still back the outlook of buying into corrections and continue to do so whilst the rate continues to leave a series of higher daily lows and higher daily highs.

Gold has fallen back towards the support of the rising 55 hour moving average(@ $1286.02). This could become an important test for the attempted recovery. Whilst this move is continuing, gold is a difficult trade as it could be a basing process that bumps along the bottom for a while. Also, you cannot rule out a retest of the low at $1277.29.

The European indices are very much in consolidation mode today, waiting for the ECB. The impact on equity markets will not be as significant as in forex but still traders are cautious. The DAX has flattened off its recent recovery in the past couple of days and is no basically trading sideways. The FTSE 100 is also consolidating and could easily see a retreat back towards the rising 55 hour moving average at 6626 which has been used as the basis of support for the last two intraday corrections.

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