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Risk Appetite Softens, BoE Decision Enters The Spotlight

Feb. 04, 2021 3:37 AM ET
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  • EU indices continued trading north yesterday, but investors’ morale softened during the US session, and even deteriorated today in Asia.
  • Perhaps hit by tight liquidity in China after the nation’s short-term interest rates rose again.
  • As for today, the main event on the agenda may be the BoE monetary policy decision.
  • With no action expected, all the attention could fall on the Bank’s economic projections and its findings on the negative interest rates study.

Original Source

Market Sentiment Softens during the US and Asian Sessions

The US dollar traded higher against all but one of the other G10 currencies on Wednesday and during the Asian session Thursday. It gained the most versus GBP, NZD, SEK and CHF in that order, while it underperformed only against AUD.

USD performance G10 currencies

The strengthening of the risk-linked Aussie and the weakening of the safe-haven Swiss franc suggest that markets continued trading in a risk-on manner yesterday and today in Asia. However, the weakening of the Kiwi, combined with the strengthening of the US dollar, points otherwise. Thus, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, most major EU indices continued to drift north on hopes of a faster economic recovery, with Italy’s FTSE MIB gaining the most after former ECB President Mario Draghi accepted the task of trying to form a new Italian government.

That said, investors’ morale softened during the US session, although data suggested that the US economy is recovering faster than anticipated. The final Markit services PMI for January was revised up to 58.3 from 57.5, while the ISM non-manufacturing index fell by less than anticipated, to 59.9 from 60.5, while the forecast was for a slide to 57.3. On top of that, the ADP employment report for the month showed that the private sector gained 174k jobs, more than the forecast of 49k, while December’s print was revised up to -78k from -123k. In any case, market appetite eased more, and even deteriorated, during the Asian session today, perhaps hit by tight liquidity in China after the nation’s short-term interest rates rose again.

Major global stock indices performance

As for our view, it has not changed. We stick to our guns that the vaccinations, the monetary policy support around the globe, and a large fiscal package in the US, are a blend of developments which could keep the broader investor morale supported. However, recently we noted that the inverse correlation between equities and the US dollar is fading. In other words, the US currency may have started losing its safe-haven status and this may be due to better-than-expected US economic data. Recent releases suggest that the world’s largest economy is recovering faster than many may have expected, which lessens the likelihood for additional easing by the Fed, and thereby allows the greenback to recover some of the ground it lost lately.

DAX – Technical Outlook

Yesterday, DAX made its way further north, rising above a short-term tentative downside resistance line, drawn from the high of January 8th. Looking at the cash index this morning, despite a slight correction lower, the price still remains above that downside line. If DAX continues to balance above that line, the bulls might step in again and drive the index higher. That’s why we will stay somewhat positive for now.

A rebound from the aforementioned downside line may bring the price back to the current high of this week, at 13992. If the buyers are still feeling comfortable, they might easily push the index above that barrier, this way confirming a forthcoming higher high and sending DAX further north. That’s when we will start aiming for the 14025 obstacle, a break of which could set the stage for a push to the 14134 level, marked by the highest point of January.

Alternatively, if the index falls back below that previously-mentioned downside line and then slides below the 13863 hurdle, marked by yesterday’s intraday swing low, that may attract more sellers into the game. DAX might then fall to the 13717 zone, a break of which could clear the way to the 13565 level, marked by an intraday swing low of February 1st.

BoE Takes the Central Bank Torch

Staying in the FX world, the British pound was yesterday’s main loser, with its traders awaiting today’s BoE monetary policy decision. Its previous meeting proved to be a non-event, with officials reiterating that they stand ready to increase their QE purchases pace should market functioning worsen. However, with the UK CPIs rising by more than expected in December, and the employment report for November coming in better than anticipated, we don’t expect any change in the Bank’s policy settings at this gathering. Therefore, all the attention will fall on the Bank’s economic projections and its findings on the negative interest rates study.

Bank of England interest rates

Recently, BoE Governor Andrew Bailey played down the prospect of negative interest rates and it remains to be seen whether the findings will be on the same page, namely that negative interest rates are not as likely as previously though. Diminishing even further such a likelihood may be pleasant news for GBP traders, especially following the Brexit trade accord between the EU and the UK. However, for the pound to extend notably its recent gains, the economic projections would have to be less pessimistic than many believe. The UK entered a full lockdown in January, with the government hinting that this may drag until March, a situation that may weigh notably on the British economy, and thereby hinder any potential recovery.

GBP/JPY – Technical Outlook

On Monday, after hitting the 144.10 area, GBP/JPY started making its way lower, trading below a short-term tentative downside resistance line, drawn from the high of January 1st. Although we could see a further decline, this move lower might still be seen as a temporary correction, before another leg of buying, if the short-term upside support line, taken from the low of January 5th, remains intact.

A further slide could send the pair to the 142.86 hurdle, marked by the high of January 27th, or all the way to the aforementioned short-term upside support line, which may provide a decent hold-up. If so, the rate might rebound and climb back up again, potentially making its way to the previously-discussed downside line. If that downside line fails to withstand the bullish pressure this time, its break may open the door for further advances. We will then aim for the 143.68 level, marked by yesterday’s high.

Alternatively, if the previously-discussed upside line breaks and the rate also falls below the 142.19 hurdle, marked by the lows of January 27th and 28th, that could attract more sellers into the game. GBP/JPY might drift to the 141.65 zone, marked by the low of January 25th, where it could stall temporarily. That said, if the selling continues, the next support levels to consider may be at 141.28 and 141.08, marked by the lows of January 26th and 20th respectively.

As for the Rest of Today’s Events

Apart from the BoE decision, we also get the US initial jobless claims for last week, which are expected to have declined slightly, to 830k from 847k the week before, as well as the US factory orders for December. Headline orders are expected to have slowed to +0.7% mom from +1.0%, while no forecast is available for the core rate.

As for tonight, we get the RBA’s quarterly Monetary Policy Statement and Australia’s retail sales for Q4, which are forecast to have slowed to 6.0% qoq from 6.5%.

We also have one speaker on today’s agenda and this is San Francisco Fed President Mary Daly.

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