Markets are currently in preparation mode for the next three central bank meetings this week as the ECB, BoE and RBNZ are all scheduled to release their interest rate policy statements in the coming sessions. Markets are only expecting a rate move from the European Central Bank (a 25 basis point reduction) but this will still be the second time this week we have seen measures taken by a governmental body to make monetary policy more accommodative and bring some stability back into equity markets, so the general theme of policy easing remains clear.
The market reaction to these events should be interesting as we come to a close for the week, as markets were not able to show much positive activity after the RBA cut rates on Tuesday. The most likely scenario is that traders will need to see a more significant surprise (such as a larger ECB rate cut or perhaps even a similar event from New Zealand) before we see a sustainable rally. But risk assets did manage to perform reasonably well yesterday after Australian GDP and the Canadian Ivey PMI surpassed market expectations, so there will be some upward momentum for markets to work off of into today’s meetings.
Other news headlines focused on the commerce ministry in China, which released statements suggestive of future plans to halt currency appreciation. Their main argument was that elevated domestic inflation levels will continue to weigh on demand in the country’s export markets, and many are viewing this as a veiled way of saying that currency values are likely to remain where they are for the near term. This story would match what we have been seeing in USD/CNY values over the last month and this essentially points to continued strength in the US Dollar (at least against Asian currencies).
Looking forward, we expect choppy trading conditions to continue ahead of the event risks in Europe (with statements coming from both the ECB and the Eurozone Finance Ministry). Total liquidity levels should be the key factor in determining the level of volatility that we see when these meetings come to a close, so if we see comments from the central bank members that these liquidity issues will be addressed, we are likely to see markets stabilize. If not, prepare for an active end to the week that could see equity markets and the high yielding currencies finish sharply lower. The next key macro data will come with the Australian monthly employment report, which is expected to show a rise of 10,000 new jobs.
The GBP/USD is showing a small bounce on the shorter term time frames but momentum is stalling at the 50% Fibonacci retracement of the decline from above 1.57. This isn’t entirely surprising, given the neutral indicator readings but the longer term trend is clearly downward, so we expected the selling pressure to continue. First resistance comes in at 1.5660.
The S&P 500 is making new highs on the shorter term timeframes, and this is positive for the longer term perspective, given that we have overcome psychological resistance at 1250 and closed above there on an hourly basis. So far, however, follow through has been lackluster, so we will probably need to see a period of consolidation before we can expect another run higher. First buy entry comes in at the 38.2% Fibonacci support seen just below 1260.