RBA Governor Plays Down Financial-Market Turmoil

• RBA Governor plays down financial market turmoil RBA Governor Glenn Stevens stated in his testimony to the parliament that financial markets have now chosen to focus more strongly on issues that have been there all along. The key question is whether the recent turbulence will have a negative effect on aggregate demand in Australia or abroad, and that cannot be answered yet. If the recent chaos has indeed affected the Australian economy, the RBA has the flexibility and willingness to cut rates further, should that be appropriate. At its last meeting, the Bank remained on hold, but in the update of its forecasts a few days later, it revised down expectations for GDP growth and inflation over the next two years. Following Governor’s comments, we would expect that the RBA decision on the 1st of March will be driven primarily by any changes in the incoming data that suggest the global turmoil has fed into weaker demand.

• Global stocks continue to slide European and US equity markets posted another day of significant declines on Thursday, while Japanese stocks suffered during the Asian day Friday as well, with Nikkei 225 closing 4.8% down. It appears that markets are pricing the rising risk of a sharper slowdown or even recession in the global economy. The effectiveness of central banks’ policies has also been called into question, with many market participants suggesting that negative interest rates will damage the profitability of commercial banks and further exacerbate this risk-off environment. The winners continue to be the safe havens, and as long as we see no signs of a fundamental change in this risk-off environment, we expect these assets to gain even more. We would like to sound a note of caution however as far as JPY is concerned, as the BoJ’s Kuroda said that they are “closely watching market moves”. As such, sharp spikes in yen crosses like yesterday cannot be ruled out.

• As for today’s indicators, we get the preliminary GDP data for Q4 from Germany and the Eurozone as a whole. Both the figures are expected to show that the two economies grew by 0.3% qoq, the same pace as in Q3. The German growth data have already been released and came in line with their forecast, which increases the probability for Eurozone’s data to follow suit. Germany’s final CPI rate for January is also coming out and is expected to confirm its preliminary estimate. As for Eurozone’s preliminary growth rate, the fall in global demand, warmer-than-usual weather and the Paris terror attacks may have all weighed on the economic growth. However, these could have been offset from falling unemployment, lower energy prices, and a large boost in public spending as a result of the huge migrant influx. As a result, we view the risks to the forecast as balanced and we believe that the reaction on the euro could remain muted. Also from Eurozone, industrial production for December is forecast to have risen, a turnaround from a fall in November. Bearing in mind that industrial production in Eurozone’s two largest economies, Germany and France, fell unexpectedly in December, we see a high likelihood for a soft IP print from the entire bloc as well.

• In the US, the main event will be the retail sales for January. Both the headline and the core figures are expected to have risen after a fall in December. In January, the labour market continued to tighten, energy prices fell further and cold weather across the country may have boosted sales. Also, the Conference Board consumer confidence index improved further during the month, which suggests that consumers remained optimistic despite the international turmoil. As such, a rebound in retail sales seems likely and could support the dollar, at least for a while. We also get the preliminary U of M consumer sentiment for February and the forecast is for the figure to remain unchanged from the previous month.

• We have two speakers on Friday’s agenda. New York Fed President William Dudley and Dallas Fed President Steven Kaplan speak.

h3 The Market/h3 h3 EUR/USD slides after hitting resistance at 1.1385/h3

• EUR/USD traded higher on Thursday, but hit resistance at the 1.1385 (R1) line and then it retreated. Bearing in mind that on the 3rd of February the pair emerged above the 1.0985 hurdle, which is the upper bound of the sideways range it had been trading since December, I would consider the short-term outlook to be somewhat positive. Nevertheless, for now I see signs that the pair is likely to continue correcting lower for a while. A clear move below 1.1270 (S1) could confirm the extension of the current setback and could open the way for another test at the 1.1160 (S2) barrier. Our short-term oscillators support the case as well. The RSI hit resistance at its 70 line and turned down, while the MACD has topped and fallen below its trigger line. There is also negative divergence between these two indicators and the price action. Switching to the daily chart, I see that yesterday’s slide started after the rate hit the prior upside support line taken from the low of the 13th of March 2015. This is another reason that amplifies the case for further retreat in the near term. However, as long as the rate is trading between the 1.0800 key zone and the psychological area of 1.1500, I would keep the view that the broader trend remains sideways.

• Support: 1.1270 (S1), 1.1160 (S2), 1.1085 (S3)

• Resistance: 1.1385 (R1), 1.1450 (R2), 1.1500 (R3)

h3 GBP/USD looks ready to slide again/h3

• GBP/USD traded higher yesterday after it hit support at 1.4380 (S1). Nevertheless, the advance was stopped near the psychological barrier of 1.4500 (R1) and then the rate retreated somewhat. Cable looks to be trading within a descending triangle since the 3rd of February and this makes me believe that the forthcoming wave is likely to be negative, perhaps for another test near 1.4380 (S1). A clear move below that zone could initially aim for the 1.4320 (S2) barrier and then for the 1.4200 (S3) zone. Taking a look at our short-term oscillators, I see that the RSI hit resistance near its 50 line and turned somewhat down, while the MACD, already below its trigger line, has just obtained a negative sign. These studies support somewhat the case that the pair is possible to trade lower for a while, at least for a test at 1.4380 (S1). In the bigger picture, the price structure remains lower peaks and lower troughs below the 80-day exponential moving average, which is pointing down. Thus, I still see a negative longer-term picture and I would treat the 21st of January – 4th of February recovery as a corrective phase for now.

• Support: 1.4380 (S1), 1.4320 (S2), 1.4200 (S3)

• Resistance: 1.4500 (R1), 1.4570 (R2), 1.4670 (R3)

h3 USD/JPY continues its plunge/h3

• USD/JPY continued falling on Thursday, but hit support at 111.00 (S1) and then it rebounded to find resistance slightly below the 113.25 (R1) zone. As long as the rate is still trading below a short-term downtrend line, the short-term outlook stays negative in my view. I would expect the bears to take control again at some point and drive the battle lower for another test at 111.00 (S1). Nonetheless, for now I see signs that the current corrective bounce may continue a bit more before the next negative leg. This is also supported by our short-term momentum indicators. The RSI exited its oversold territory, while the MACD has bottomed and could cross above its trigger line soon. As for the bigger picture, I believe that the close below 116.00 has turned the longer-term outlook negative as well, something that leaves the door open for more bearish extensions.

• • Support: 111.00 (S1), 110.00 (S2), 108.35 (S3)

• • Resistance: 113.25 (R1), 114.20 (R2), 115.15 (R3)

h3 Gold surges but hit resistance at 1265 and slides/h3

• Gold surged yesterday and managed to hit resistance fractionally below the 1265 (R2) barrier. Subsequently, the metal retreaded and is now trading back below 1250 (R1), heading towards the 1225 (S1) support. The price structure on the 4-hour chart still suggests an uptrend. Nevertheless, taking a look at our short-term oscillators, I see the likelihood that further retreat could be looming before the next positive leg. The RSI has topped within its overbought territory and now looks able to fall below 70, while the MACD, has topped and could fall below its trigger line soon. A decisive move below 1225 (S1) could initially aim for the 1215 (S2) level. Switching to the daily chart, I see that on the 4th of February, the price broke above the long-term downside resistance line taken from the peak of the 22nd of January 2015. As a result, I would consider the medium-term outlook to be positive as well. I would treat any further near-term declines as a corrective phase for now.

• Support: 1225 (S1), 1215 (S2), 1200 (S3)

• Resistance: 1250 (R1), 1265 (R2), 1275 (R3)

h3 DAX futures hit support slightly above 8650/h3

• DAX futures continued declining on Thursday but the decline was stopped slightly above the support barrier of 8650 (S1), defined by the low of the 21st of October 2014. Subsequently, the index traded in a consolidative manner, staying between that support line and the resistance of 8900 (R1). The price structure on the 4-hour chart still suggests a short-term downtrend and therefore, I would expect a clear move below 8650 (S1) to open the way for the 8360 (S1) zone, marked by the low of the 16th of October 2014. Taking a look at our short-term oscillators though, I see the possibility for a short-term corrective bounce before the bears seize control again. The RSI rebounded from near its 30 line, while the MACD, although negative, stands above its trigger line. There is also positive divergence between the RSI and the price action. On the daily chart, I see that since the 1st of December the index has been printing lower peaks and lower troughs, something that keeps the longer-term picture negative as well.

• Support: 8650 (S1), 8360 (S2), 8100 (S3)

• Resistance: 8900 (R1), 9100 (R2), 9300 (R3)

h3 BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS/h3

h3 MARKETS SUMMARY/h3

Written By: IronFX Strategy Team