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20/05/2014: Trading outlook ahead of the US session

As the morning has progressed, equities have once more fallen out of favour. European equities are lower, with FTSE and CAC both around half a percent lower (DAX is largely flat). In forex, the US dollar continues to benefit against most major currencies with the Dollar Index slightly higher. The main exception to this is Sterling which has strengthened after the higher than expected UK inflation release. Jumping by 0.2% to 1.8% marked the first increase in UK CPI since June 2013.

The safe havens are being supported today, with the yen strengthening and gold holding above $1290 once again. Bond markets are also suggesting safe haven trading is once more in favour. US Treasurys and German Bunds are largely being supported, however Italian and Spanish debt are coming under significant selling pressure.

US traders have little to focus on in terms of economic releases, so there may be extra attention paid to the speeches of FOMC members this afternoon. It could be a mixed message, with Charles Plosser (on the hawkish end of the spectrum) and Bill Dudley (who errs on the dovish side) set to speak. The only surprise would probably be if Dudley alludes to being supportive of tightening, which would strengthen the dollar and pull EUR/USD and GBP/USD lower.

EUR/USD has backed away from the resistance at $1.3734 and the prospect of completing the base pattern are fading as the initial support around $1.3680 is tested. A consistent breach would re-open the $1.3647 low. Technical indicators are falling away again and rallies are seen as a chance to sell.

GBP/USD saw a spike up and down after the UK inflation release. The technicals suggest that there is resistance around $1.6840 where the neckline of the two week top pattern comes in. The falling 200 hour moving average is also holding back the advance. Now the price is settling down if the support at $1.6800 fails this would be a rejection of the bullish control and a sell signal.

USD/JPY has backed off from 101.60 today and downside pressure continues. Using rallies as a chance to sell looks to still be the best way to play this. There is a potential caveat with the Bank of Japan releasing a monetary policy update tomorrow early morning, so perhaps it would be best to keep the powder dry until then.

Gold continues to consolidate and hold up above $1290 which has been a basis of support over the past six days. The price is almost exactly mid-range and the risk/reward remains extremely balanced at these current levels.

The FTSE 100 has been supported since the early losses of this morning and there is now a level around 6804 which needs to hold to prevent the near term outlook from testing the key support at 6767. However, the sell signal on the daily Stochastics and crossover on the MACD suggest the pressure is building. The DAX has held up fairly well today and is now open to the prospect of another higher low at 9535 (yesterday’s low). The DAX seems to be a far more positive outlook than the FTSE 100 of late.

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