We could be in for an entertaining afternoon if the movements from this morning’s trading are anything to go by. Traders are preparing now for the US Retail Sales and a key testimony from Janet Yellen which could have a significant impact on markets. This comes after sterling and the euro have both had contrasting performances as economic data (UK CPI and German ZEW economic sentiment) have been announced.
EUR/USD fell back towards the support around $1.3600 again after the German ZEW economic sentiment not only dropped for a 7th month in a row, but also missed the forecast of 28.2 to fall to 27.1. This deterioration in German economic conditions is becoming a concern after the recent poor performance in the industrial output and decline in trade figures. Although the lower highs are in place, the support band $1.3574/$1.3585 remains intact. This could come under pressure this afternoon though if there is any strengthening of the US data.
UK CPI jumped well ahead of expectations to 1.9% from 1.5% last month and significantly above the 1.6% that the market had forecast. Cue a jump in sterling, because this increase in inflationary pressure will increase the clamour for rate tightening and bolsters the case for the hawks on the MPC. A 50 pip jump in GBP/USD has accelerated the rate higher and through a couple of intraday highs. The multi-year high is not far off now with $1.7179 within striking distance now.
Whether this resistance on Cable is tested today will depend on firstly the US Retail Sales which are announced at 13:30BST (a +0.6% month on month growth is expected). However, the volatility is likely to be cranked up when Janet Yellen takes to the stand in her testimony to the Senate Banking Committee at 15:00BST. The market will be looking for some sort of hawkish leaning after the recently strong Non-farm Payrolls data. Senators may be interested to hear why Yellen thinks the recent jump in inflation is just “noise” and how she broaches this subject could be the hint that the hawks were looking for. However, for several months now, Yellen has remained dovish in her stance and is unlikely to shift quite yet.
Dollar/Yen could be a beneficiary if Yellen does signal a slight shift, but moving into the meeting the resistance around 101.60 appears to be well set. I would still see a move into the 101.80/102.00 resistance band as a chance to sell.
Equity markets have been a touch more cautious today in front of a Yellen’s testimony. The strong gains seen yesterday on both the DAX Xetra and the FTSE 100 have been pared slightly. FTSE 100 has been weaker since the inflation announcement, whilst the DAX was sold after the ZEW data. A hawkish hint from Yellen would probably be negative for indices, especially if it is driven by increasing inflation (which tends to be negative for equities).
Gold has remained supported throughout the morning and continues to trade above the support band around $1306. It is likely that traders are waiting to see if Yellen remains on a dovish stance (gold supportive) or gives a hawkish hint (which would be dollar positive, gold negative).