18/02/2014: A dovish Bank of Japan gives sentiment a boost

Market Overview

With the US on Presidents Day public holiday yesterday and therefore little steer from US investors, Asian markets were fairly muted overnight. That is with one significant exception, Japan.  In its monetary policy statement that concluded a two day meeting, the Bank of Japan decided to continue its easy monetary policy, whilst also opting to extend a special lending programme to support the economy which had disappointed in its Q4 GDP data previously released. This announcement has weakened the yen, pulling Dollar/Yen higher and subsequently boosting Japanese equities significantly, with over 3% gains for the Nikkei. The European traders will be quickly looking forward to two pieces of data announced this morning. An uplift in UK CPI data released at 09:30GMT would further support sterling and help cable regain the initiative after yesterday’s correction. The euro bulls will be looking for a strong German ZEW number out at 10:00GMT.

Chart of the Day – EUR/GBP

The old saying, “the trend is your friend” continues to hold true on Euro/Sterling and the outlook remains bearish. On the daily chart, all moving averages are falling in bearish sequence, with momentum indicators in bearish configuration. However, yesterday’s bounce gives the prospect of another technical rally within the big downtrend channel. A sharp pick up has left a 13 month low at £0.8154, with the intraday move higher continuing this morning. A move above £0.8227 would now complete a small recovery base pattern which would then suggest a move back higher towards the £0.8280/£0.8300 resistance band, which would coincide once more with the resistance of the falling 55 day moving average on the daily chart.

EURGBP   18022014

EUR/USD

Yesterday was the lowest volume for Euro/Dollar in 2014 and the lack of interest showed in the extremely tight trading range the rate settled into. Despite this the daily chart continues to bolster its improving outlook, settling nicely above the moving averages which are turning positive, while momentum indicators are also in bullish configuration. Intraday the chart shows a 41 tick range over the past 48 hours of trading, but with the US back from public holiday we can expect more of a move. The German ZEW Economic Sentiment is out at 10:00GMT and a positive number could give the Euro a boost to help a challenge of the key resistance at $1.3739, above which opens a test of $1.3775. Hourly momentum indicators suggest a bullish set up for the next leg higher. A breach of support at $1.3681 would suggest that this consolidation was a topping phase.

EURUSD   18022014

GBP/USD

On a day that saw the second lowest volume in over a month due to Presidents Day public holiday in the US, cable underwent a correction. After 7 straight days of gains this is not to be unexpected, however after consolidating overnight the early European trading has seen selling pressure mounting now, losing over 50 pips in an hour. The next band of support on the intraday chart comes in at $16620/$1.6645. Hourly momentum indicators suddenly look to be in corrective mode.  perhaps there is concern that the announcement of UK CPI at 09:30GMT will be disappointing. The trend has been for inflation to be falling in recent months and if this continues it would drag cable lower.

GBPUSD   18022014

USD/JPY

The Bank of Japan has given a boost to Dollar/Yen. The decision overnight following the conclusion of its two day meeting has been to keep the stimulus programme of 7 trillion yen per month on track and to also extend a special lending programme by a year. The daily chart shows that this has taken the rate back towards the resistance of the old support at 102.83, but it has not yet breached it. This could now be a pivotal time for the Yen in the near term. A breach and hold above 102.83 would begin to suggest the dollar bulls were regaining control, but if this resistance remains intact even after a dovish monetary policy statement, then downside pressure could resume. Initial intraday support comes in at 102.40.

USDJPY   18022014

Gold

Overnight we have seen the first signs of a correction that may suggest a bout of profit-taking for this huge run higher in gold. This comes with the RSI turning lower from overbought and a crossover sell signal on the Stochastics. The daily chart suggests that a correction would ultimately be a positive development. Intraday hourly momentum indicators are already unwinding quickly, with RSI and Stochastics both looking to turn up again. However, with the strength of the run higher, there is little price support to go on, so it will be interesting to see how far a correction would go before finding a corrective low. There is decent support in the band $1295/$1300 for a correction.

Gold   18022014

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