The two main drivers this morning have come with the continued rebound in equity markets amid improving geopolitical tensions and the weakness of sterling after the benign inflation data out of the UK.
The “moderate progress” in talks between Russia and Ukraine is encouraging and investor sentiment has reacted positively. The VIX continues to fall back, whilst equity markets continue to push higher and safe haven assets are beginning to underperform again.
The S&P 500 futures show that the cash index should be opening with gains of around 3 points as the rally looks to continue. Traders will now be looking towards the release of the US economic announcements this afternoon. The US inflation is announced at 13:30BST and if the CPI sees anything hitting the forecast of 2.0% should maintain the downside pressure on Cable. The housing data (also at 13:30BST) could have an impact on equities, with the building permits and housing starts both expected show further improvement and if the Housing Market Index from yesterday is anything to go by then confidence is improving in the US housing market.
The UK inflation rate is making it increasingly hard for the hawks on the Monetary Policy Committee to justify a hike in interest rates. Today, the CPI fell to 1.6% down from 1.9% last month and well below the 1.8% that had been forecast. Cable fell 75 basis points on the announcement and is now the lowest since early April. This opens a test of the April low at $1.6552, but then GBP/USD is increasingly likely to now test the $1.6459 key March low. At some stage the rolling back of interest rate hike expectations will be priced in, with well over 500 pips now having been shed in the past 5 weeks. However for now, selling rallies on sterling is the only way to play it.
After a few days of fluctuation and consolidation, the major forex pairs have settled back into the theme of dollar strength seen over the past few weeks. The only real exception to this has been the Aussie dollar which has pulled some strength today after the RBA meeting minutes reaffirmed a pause in interest rates at the current 2.5%.
EUR/USD has been weak in the past couple of days and is now close to a test of $1.3330 again. The last two weeks has seen a closing low at $1.3362 so a close below that today would be a concerning development for the euro bulls, even if the $1.3330 intraday level remains intact. The momentum indicators are still suggesting a technical rally is due, but the buying pressure is just not coming through.
Once again, as geopolitical tensions with Russia have begun to recede, the DAX has jumped higher, today trading around a percent higher. The move towards the 9490 implied target of the intraday base pattern is still on, but keep in mind the hostoric 9400 pivot level which is looming overhead now and could limit the gains. FTSE 100 on the other hand has already completed its implied target of 6770 from the equivalent base pattern. FTSE 100 looks good for further steady gains and with much less volatility than the DAX seems to be far more of a calmer index to play. The next upside resistance is the late July high of 6834.
The precious metals are fairly muted today. Gold is trading around $1300 which I see as a near term pivot, however the old support turned resistance at $1305 is also overhead. Silver is struggling to move back into the overhead supply area of $19.69/$20.15. I see gold as struggling near term without the “war premium”, whilst silver continues in its stepped decline and any minor bounce is being sold into.