03/06/2014: Trading Outlook ahead of the US session

The big focus for traders this morning has been the Eurozone flash CPI data for May. With the data for federal German states coming in weaker yesterday there were fears of a very poor number for the Eurozone. A flash +0.5% was lower than the +0.7% that had been forecast by consensus and was lower again from last month’s +0.7%. The data was though low enough to seemingly validate the almost four big figure decline on Euro/Dollar since Mario Draghi’s ECB press conference four weeks ago. Market reaction has been fairly stable in the wake of the announcement. Eurozone unemployment improved slightly to 11.7% (down from 11.8% last month).

With only a little improvement in volatility, the movement in Euro/Dollar has been fairly well contained within around 30 pips. Volumes have been higher than previous trading days without being too significant. Perhaps this will change when US traders come on-line this afternoon, and already it looks as though there is potential appetite for a Euro rally.

EURUSD   03062014

However, once things calm down, traders will now be looking forward to Thursday and for the ECB decision. This inflation data (in addition to the weaker PMIs and GDP data over the past few weeks) now almost guarantees a cut to the main refinancing rate (most likely from 0.25% to 0.10%). But how extensive will the package of monetary easing be? Deposit rates are also highly possible, as is an extension to the Long Term Refinancing Operation. Draghi has previously brushed off the prospect of ending the sterilization of bond purchases but if the Governing Council want to portray that they are serious about tackling disinflation/deflation then a form of quantitative easing will be needed.

So in forex, it is much as you were from early this morning. No significant moves on any of the majors and only a few pips here and there being made or lost. Even the Aussie dollar has pared some of its earlier gains.

The big moves have been seen in the equities, which have seen profit -taking. The DAX is around half a percent lower with the CAC around a quarter of a percent down. The FTSE 100 is once again the laggard trading around seven tenths lower. The DAX is now trading at a five day low as a correction back towards 9810 breakout support looks ever more likely. The support of the 6 week uptrend also comes in at 9475. The FTSE 100 continues to concern me as once again it is shying away from a test of the key highs as momentum indicators take on more of a corrective outlook. The key near term support is 6782 and looks an likely test.

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