European equity markets continue to post declines for the week after the US Federal Reserve signaled that its quantitative easing program has reached completion as stronger economic figures have removed the need for additional policy stimulus. The Euro Stoxx 600 dropped 1 percent, futures contracts in the S&P 500 are 0.7 percent lower, and the MSCI Asia Pacific Index saw the largest decline, closing 1.5 percent lower during the Tokyo session.
Low trading volumes exaggerated some of the moves, as a lack of liquidity tripped stop loss orders and created price gaps. The Federal Reserve story was the initial driver, with the latest FOMC minutes showing that the QE program will not be restarted unless GDP figures disappoint or unless consumer inflation fails to reach the target rate of 2 percent. The next major US data to watch will be the ADP employment report, as this is one of the key indicators for how Non Farm Payrolls will come in at the close of the week. The next major event risk will be the ECB Interest Rate decision. Currently Eurozone interest rates are at record lows of 1 percent but the market expectation is that there will be no changes in the base rate.
After the decision, ECB President Mario Draghi will hold a press conference and outline the ECB’s policy stance. We will also see Retail Sales figures out of the Eurozone, with markets expecting a drop of 0.2 percent for the month of February. In Germany, Factory Orders will also be released, with the consensus looking for a rise of 1.5 percent after the downside surprise of -2.7 percent seen in January.
Given the market response to the FOMC minutes it would not be surprising to see a large increase in volatility after the ECB press conference, as traders will be paying special attention to the policy bias in the Eurozone finance ministry. With the declines seen last night, traders might take the opportunity to buy on weakness if the Factory Orders report in Germany rebounds and the comments from Draghi bring some confidence in lifting risk sentiment.
The EUR/USD is reversing its rally from the previous month and the turning point has come at significant trend line resistance from the highs posted last September. This does suggest that a medium term top is in place now at 1.3380 and the bearish bias will only be altered if prices can push through this area. To the downside, the next target is seen at the 1.2990 double bottom, which comes in near major psychological levels so any rallies from here are expected to be met with eager sellers.
The Nikke is looking similar in structure to the price activity seen in the Euro, as long term trend line resistance is containing prices. Resistance at the 200 week moving average is also seen in this area, so any pushes above from here are less likely. The RSI indicator supports the view that prices were oversold and the weekly reading suggests that there is much more room to extend on the downside. Wait for short term retracements before initiating new sell entries, targeting a drop into the low 9000s.