UK Opening Call from Alpari UK on 28 February 2013
Today's UK opening call provides an update on:
• Investors unconcerned about the sequester as long as the Fed keeps its foot on the gas;
• The gap between Germany and the eurozone widens, with unemployment in the former falling again in February;
• Eurozone CPI could fall below 2% in January, opening the door to a rate cut from the ECB next week;
• US fourth quarter GDP to be revised up by around 0.6% from the first estimate.
It would appear that investors in the US are more concerned about the Fed's policy than both the political uncertainty in Italy and the sequester, which is due to come in to play tomorrow.
US stocks had their best day since the start of the year on Thursday as investors were boosted by comments from Ben Bernanke over the last couple of days, when he has made it perfectly clear that those who fear that the Fed will start scaling back QE in the coming months can relax. Bernanke said on numerous occasions that the program will continued to be linked to the labour market and suggested that the minutes did not suggest there would be any change in the
short term, as people in the markets believed.
The surprising thing about the reaction yesterday was the very relaxed attitude towards the sequester, with big spending cuts due to begin tomorrow. Especially with the eurozone starting to look shaky again, I would expect there to be more traders opting to wait on the sidelines and see how it plays out, but instead what we saw was the exact opposite. I expect the approach today to be a much more cautious one, and with little hope now of avoiding the sequester, we may see investors shield themselves from a short term pull back in the stock markets.
It's going to be another busy one in terms of economic releases on Thursday. It kicks off this morning with the release of fourth quarter GDP figures from Switzerland and Spain, which are expected at 0% and -0.7% respectively. No surprises are expected from the latter, with it being a second estimate, however any major shift in the former will probably be felt in the swissy pairs.
German unemployment is expected to continue in the right direction in February, falling by 5,000, a third consecutive monthly drop. The overall rate is expected to remain at 6.8%, following the surprise drop last month. This data clearly highlights the divide between Germany and the rest of the eurozone at the moment, with unemployment in the region as a whole not seeing a drop since March 2011 and currently at its highest ever level at 11.7%.
With the next ECB meeting taking place next Thursday, the release of the eurozone's CPI figure for January will be watched closely, with a drop below 2% opening the door to the first rate cut since July. Mario Draghi has previously stated that the ECB cannot cut interest rates in order to combat the strong euro, however he did mention that it may begin to affect price stability, with a strong currency having a deflationary effect, which is within the ECB's mandate.
The CPI figure is expected to remain at 2% in January, however if we do see it creep below this level, it will increase the probability of a rate cut at the next meeting which could therefore push the euro lower today. Especially when you consider that the ECB recently cut its growth forecast for the region, which suggests it's currently expected to remain in recession until early 2014.
Finally, in the US, we have the second estimate of the fourth quarter GDP figure which is expected to be revised much higher, from -0.1% to 0.5%. At the same time, the weekly jobless claims will be released and are expected to remain around their longer term average of around 360,000.
The euro is trading flat against the dollar this morning. The pair is looking quite bullish in the short term, after finding strong support over the last three days around 1.3060, the 61.8% retracement of the move from 13 November lows to this year’s highs. Tuesday’s candle is particularly bullish as it’s a perfect doji which indicates a trend reversal. The break back above the 100 day simple moving average is another major bullish signal given that it has previously acted as support for the pair. Confirmation of the bullish outlook will come if today’s candle closes above Monday’s candle.
Sterling is trading higher against the dollar this morning. The pair looks to have entered a period of consolidation following a big move lower over the past couple of months, which is typically quite a bearish signal. We could now see it come back to test 1.53 as a new area of resistance. This is a very key level for the pair, given how strong a support level it was previously. If the pair fails to break back above here when tested, it would suggest that it is bearish in the short term, with the next target being 1.49. However, it’s worth noting that we may not necessarily see 1.53 tested, there doesn’t appear to be many buyers at the moment which could just lead to further consolidation, followed by a breakout.
The dollar is trading higher against the yen this morning. The pair has been edging higher for a few days now but has failed to make any real strides, which suggests we may see some more downside in the short term. The weekly chart looks particularly bearish, with the stochastic now crossing in overbought territory and breaking below here and the RSI looking like breaking out of overbought territory in the coming days. This weeks candle is also quite bearish, having found firm resistance around 94.75. If we see a further drop in the pair, it could target 88.80, which was previously a key level of support and resistance. In the shorter term, the pair should find further support around 92.0, 91.75 and 91.25.
The euro is trading flat against the pound this morning. The pair has lost momentum in its move to the upside, however the fact that it found support once again from the 61.8 fib level is quite a bullish signal. A break back above the descending trend line would act as confirmation of this bullish move, with the next target then being 0.9082. First though, the pair will probably find further resistance around 0.875, 0.88 and 0.89. In the shorter term, given the uncertainty in the euro area at the moment, we the pair could continue to consolidate for a while yet, before we see a breakout again.
Ahead of the open we expected...
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