As the dollar has just seen some profit-taking today, as the sharp move higher towards the September 2013 resistance on the Dollar Index begins to see a small retracement. The suggestion is that currently this move is just temporary, but it may be a few more days before we know for sure.
There has been an interesting shift back into the safe haven assets (such as gold, silver, Japanese yen and core sovereign bonds) this morning. This has come about as it appears as though Russian troops are moving into Ukraine. Whether the apparent incursions are covert or overt, the Ukrainian government has now announced it on their website, which will certainly compromise any potential attempts to diffuse the conflict. If this is true, then this is a Russian invasion of a sovereign nation which comes without any international agreement. The result is that equity markets are falling away as suddenly markets seem devoid to good news.
Perhaps this afternoon’s economic data will help to stabilize markets. Through the morning the German regions have been announcing their flash inflation data, which will be followed by the German national data at 13:00BST. So far, all of the four regions that have announced inflation have all met or seen a 0.1% increase on last month. This bodes well for German CPI which is forexast to be 0.8%, however looking at the bigger picture of Eurozone CPI which is announced tomorrow, this would also bode well following the slight improvement in Spanish deflation that we got this morning. If German inflation (and subsequently Eurozone inflation) holds up well, this would add support to the Euro after the reports yesterday that the ECB would not look to engage QE unless inflation continued to fall.
US data today includes preliminary Q2 GDP, weekly jobless claims and pending home sales. Each of these numbers are not expected to contain any real surprises, with GDP expected to slide slightly to 3.9% on the second reading, jobless claims basically flat at 300,000 (versus 298,000 last week) and a mere 0.5% improvement in pending home sales. If these numbers come through as expected, there should not be too much of an impact and it will mean that investors’ attention will remain elsewhere today (ie. on Ukraine and German inflation).
The Dollar Index has had such a strong run recently, but to think that the dollar is a one-way bet would be naive. At some stage it is likely that the profit-takers will eye an opportunity. The Dollar Index has retreated from a test of the September 2013 high at 82.6 already and if a correction takes off then there is little real support until back at the 81.3 breakout – which is 1.5% lower.
EUR/USD is under conflicting forces (the risk-off impact of geopolitics versus the solid German inflation number) which could mean increased volatility. So far the reaction has been for a decline (as the Ukrainian news has broken) but a solid German inflation number could result in a rebound this afternoon. Technically there is still resistance around $1.3215/20 which needs to be overcome for a near term recovery, but a break below $1.3151 would merely continue the downside.
GBP/USD has been relatively better supported than the euro, but despite an initial upside break that was rebuffed, Cable has again struggled to overcome the resistance at $1.6600 which has held it back for over a week now. The recovery bulls will need to just calm down until there is a sustained breakout. Until this happens we must continue to expect further downside.
Of the safe havens, the strength of the yen is helping to pull Dollar/Yen back towards the initial support around 103.50. I would still view this as a healthy move but there could equally be further retreat towards 103.00 too if the support breaks. Both gold and silver have benefited this morning from the geopolitical tensions. Gold needs to breach a band of resistance $1300 to $1310 for this to be considered to be anything more than a near term technical rally. Silver though is trying to breach the 7 week downtrend, but really would need a move above $20.15 to again suggest this is anything more than another chance to sell.
The selling pressure is once again ramping up on the DAX. In recent months the DAX has dramatically underperformed fellow European indices when geopolitical tensions have flared up and once again this seems to be ringing true, with the FTSE 100 only down 0.5%. The support around 9400 is key for the near term prospects for the DAX as this is a pivot level and also a close below would close a gap higher from Monday.