05/03/2014: Investors opting for caution ahead of a heavy day of data releases

Market Overview

Geopolitical tensions surrounding the Russian occupation of Crimea have eased over the past 24 hours, with Russian President Putin noting that there was no need “yet” for his forces to take action in Ukraine. This suggests that the situation is stabilising and should allow for an improvement in risk sentiment for investors. This was certainly shown on Wall Street last night with the S&P pushing back to post another all-time high at 1874 and a gain of 1.5%.

Asian trading was positive, with equity markets higher as the Nikkei 225 jumped over a per cent on the back of a weaker yen, with Dollar/Yen back above 102 once more. The only drag on the region was Chinese stocks which reacted slightly negatively to the announcement that China would once more be targeting 7.5% growth this year with an inflation target of 3.5%. Australian GDP came out strongly with a jump to 2.8%.

However, after such impressive gains on European markets yesterday, a degree of caution has taken over early trading today, with equities slightly lower and fx pairs consolidating. With tensions in the Ukraine beginning to subside, focus for investors today has turned to a raft of market moving economic data that will be released. The services PMIs are released at various times throughout the day (European PMIs up to 09:00GMT, UK at 09:30GMT and US ISM Non-Manufacturing at 15:00GMT), however there is also a rate decision from the Bank of China at 15:00GMT. Today also marks the beginning of three days of key US labor market releases, starting with the ADP Employment Report at 13:15GMT, which is expected to show a growth of 158,000 jobs.

Chart of the Day – EUR/JPY

The outlook for the daily chart remains fairly neutral, with the rate stuck underneath the gradually falling 55 day moving average (currently 141.01) which caps the top of a trading band. However, the flight to safety on Monday could not breach support at 138.63 and the intraday outlook is strengthening now. Finding support above the 140 psychological level, the rate has today broken back above the overnight high at 140.57 and is now building towards a retest of the key range highs in at 141.26. Although daily momentum indicators are rather neutral, intraday studies are suggesting an improving outlook and a possible test of the range highs will be seen.

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EUR/USD

As the geopolitical risks of the Ukraine have eased in the past 24 hours, this should theoretically be of benefit to currency pairs such as Euro/Dollar. However, the Euro is yet to see any upside boost from this improvement. The rate has settled above support around $1.3720 and with hourly momentum studies also giving little indication, investors are yet to make their move. The bulls will be looking at breaking the consolidation with a move above yesterday’s high at $1.3781, whilst the reaction low at $1.3692 will also be watched. This is a difficult call today, but with the strength of Friday’s move higher still fresh in the mind, the overall bias still remains to the upside.

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GBP/USD

Cable has a similar picture to Euro/Dollar in the past day or so. The rate has become settled above support at $1.6638, with intraday hourly momentum and moving average studies increasingly becalmed. The period of consolidation is more prominent on Sterling/Dollar with less of the upside to unwind. The key intraday supports come in at $1.6615 with the key basis around the 38.2% retracement of the $1.6250/$1.6822 bull run still in play at $1.6603. The bulls will be keen for a test of yesterday’s high at $1.6716. For now we await the next move, which could come with the services PMIs today. We could therefore see some volatility around 09:30GMT and 15:00GMT.

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USD/JPY

Dollar/Yen has entirely unwound any of the decline that was seen on Monday and is back to testing the highs seen last Friday. The move has taken the rate encouragingly back above the intraday hourly moving averages and has spent the Asian session testing Friday’s peak of 102.28, to finally breach the resistance in early European trading. One concern is that once more the underside of the old uptrend may still act as resistance. However if the rate can hold above 102.00 which is broadly mid-range in the trading band that has developed then the outlook can begin to turn more positive and thoughts can turn towards pushing up to test 102.61. A failure of 102.00 would though put pressure back on to the downside.

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Gold

As the move higher from Monday’s flight to safety has unwound, gold has settled into over quite a tight trading band over the past 24 hours. The bulls will be pointing to the support of the rising 200 hour moving average which continues to hold up corrections, while the 61.8% Fibonacci retracement of the $1319.61 to $1354.80 rally is also supporting. However, the price is once more back below the old uptrend, which was used as resistance yesterday. Intraday momentum indicators are fairly weak, while on the daily chart there is still the caveat of bearish divergences on the RSI and Stochastics. This puts increased emphasis on the current consolidation. A breach of $1331.14 would open the key intraday low at $1319.61 which is taking on an important role as it protects what could be a much larger correction. Above $1341.20 would improve the near term outlook.

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