Weekly Outlook. 2 nd June 2014 by Richard Perry, Market Analyst. Macro Outlook. Must watch out for: European Central Bank monetary policy

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1 Forex and CFDs are high risk leveraged products that can result in losses greater than your initial deposit and you should therefore only speculate with money you can afford to lose. FX and CFD trading are not suitable for everyone. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. You should first carefully consider your investment objectives, level of experience, and risk appetite and only invest funds you are prepared to lose entirely. For our full risk warning, please go to the end of this report Macro Outlook Simply speaking, after a quiet end to May, the new month begins with a bang, as a series of market critical economic data is announced. Investors have been building up to the ECB s decision o monetary policy since Mario Draghi said in the last monthly press conference that the Governing Council was comfortable with action at the next meeting. Although he added that action would be dependent on the ECB staff forecasts which will be available prior to Thursday s meeting, the economic data since then has been all rather weak, with Q1 growth data and flash PMIs disappointing. The weakness in the euro since the last meeting, trading around 350 pips lower suggests that the market is ready for a potential rate cut. If Draghi does not act this time round, then traders may begin to question the integrity of forward guidance and whether he is indeed all talk and no action. There is a growing voice that is demanding quantitative easing, and while the Bundesbank has been supportive in its rhetoric, in practice it may be a tougher ask, not to mention the question of legality. Traders will certainly be on tenterhooks coming to Thursday s decision, with a volatile week in prospect. Must watch out for: European Central Bank monetary policy ECB Main Refinancing Rate WHEN: LAST: +0.25% FORECAST: +0.10% Thu, 29 th May, 13:30BST. Impact: A rare occasion that Non-farm Payrolls will not dominate the economic data. Tuesday s Eurozone flash CPI could have a significant impact on the ECB Governing Council s decision on monetary policy. A cut to the main refinancing rate is widely expected but if the flash CPI underwhelms then the ECB could go further with negative deposit rates, an extension to the Long Term Refinancing Operation, and maybe even full blown QE (highly unlikely at this stage). A less dovish response could see sizeable short covering on the Euro and negatively impact equities. Key Economic Releases Date Time Country Indicator Consensus Last Mon 2 nd Jun 09:30 UK Manufacturing PMI Mon 2 nd Jun 15:00 US ISM Manufacturing PMI Tue 3 rd Jun 02:45 China HSBC Manufacturing PMI (Final) Tue 3 rd Jun 10:00 Eurozone CPI (Flash) +0.7% +0.7% Wed 4 th Jun 09:30 UK Services PMI Wed 4 th Jun 13:15 US ADP Employment Report 217k 220k Wed 4 th Jun 15:00 US ISM Non-Manufacturing PMI Thu 5 th Jun 12:00 UK Bank of England rates decision 0.5% 0.5% Thu 5 th Jun 12:45 Eurozone ECB rates (Draghi s press conference at 13:30) 0.10% 0.25% Fri 6 th Jun 13:30 US Non-farm Payrolls 219k 288k N.B. Please note that all times are BST (GMT+1); data source Reuters 1

2 Foreign Exchange The Dollar Index (.DXY) broke out to a new three month high last week as its performance against the forex majors improved significantly. The Euro and Sterling both broke below key support areas, whilst the technical rallies on Friday afternoon should give another chance to sell early this week. However this is a significant week for Euro traders. Tuesday s inflation data is the last chance to avoid some form of monetary easing by the ECB. An in-line inflation figure (at +0.7%) could pose a few questions though. To what extent is easing already factored in by traders? The Governing Council might see just a cut to the main refinancing rate as an adequate first step. However, this is already expected and a failure to act more decisively (further action is likely to be needed ultimately) then this might be seen as a disappointment and result in Euro short covering. It promises to be a volatile week for both the Euro and the Dollar. WATCH FOR: An absolutely enormous week in forex. The manufacturing PMIs, and US employment data alone (including Non-farm Payrolls) would be enough normally, but the Euro will be under huge scrutiny throughout the week, with Eurozone flash CPI on Tuesday to come before a massive ECB meeting and press conference on Thursday. FX Outlook EUR/USD Watch for: Medium term outlook implies $ but risks a near term bounce Outlook: After breaking below the key support at $ the implied move is for downside towards $ On last Friday we saw a pullback towards the neckline of the pattern which simply gives another chance to sell. However this week promises significant volatility throughout with so many crucial economic announcements. The biggest risk to the bearish Euro position is a sharp bout of short covering if the ECB underwhelms in its monetary policy. Above $ improves the outlook. GBP/USD Watch for: The positive Sterling outlook increasingly coming under pressure Outlook: Last Wednesday there was the first major question asked of the sterling bulls as the uptrend in place since November was breached. This now makes the rising 89 day moving average (at $1.6689) that has supported the major corrections in 2014 increasingly important. A breach, in addition to that of the support at $ would negate the medium term bullish outlook. Friday s rally brings an immediate test of the resistance now posed by the old uptrend.. Expect significant volatility this week with all the data releases. 2

3 Indices Earnings season is all over bar the shouting, however the S&P 500 continues to push into new high ground. With seven successive higher lows and four consecutive all time highs achieved the outlook for equity markets remains positive (although it does come amid the contradictory backdrop of falling Treasury yields). But, how long can this run last for? Well, this week will certainly be the biggest test for a while. The sheer volume and importance of the economic data that is released throughout the week should prove to be the ideal test of the bulls appetite. The temptation to take profits will be high, but at the end of this week we will know more about the global growth and whether the ECB is willing to at least try and get ahead of the curve. A failure on either front to meet the expectations of a demanding market could result in profit-taking to run through these equity markets, many of which find themselves moving into the week trading around all time highs. WATCH FOR: The manufacturing PMIs will start to drive sentiment on Monday, whilst Eurozone inflation will give a strong indication of what the ECB should be doing on Thursday s monetary policy meeting. Nonfarm Payrolls finish off a hectic week on Friday. INDEX Outlook FTSE 100 Watch for: Can the Footsie hit a new 14 year high again? Outlook: Whilst major indices have been breaking through key resistance levels, the FTSE 100 has been a notable laggard during the last few weeks and it is still around a percent under its 6895 recent high. With volume disappointingly low throughout the week, there is a real sense of caution with Thursday s volume the lowest since 3 rd January. With momentum indicators tailing off it would appear that upside momentum is waning and it ay be a struggle to achieve a breakout during this bull leg. Support comes in at DAX Xetra Watch for: Key support coming in at the old breakout Outlook: DAX spent last week consolidating a break into new high ground. The formation of a 6 week uptrend channel is guiding the DAX now towards the psychological 10,000. However, with a gap still open at 9810 there could be a retracement to help unwind some of the overbought momentum. The big caveat to the bullish technical outlook could come if the ECB failed to give the market the monetary easing measures that it expects, at which point there could be some profit taking. 3

4 Other Assets: Commodities & Bonds Despite the ongoing civil tensions in Ukraine, the fact that Russia entered into negotiations over the gas contract with the newly elected administration reflected a removal of a certain degree of tensions and subsequently an element of support for the precious metals was removed last week. This resulted in significant selling pressure on Gold which has broken to 4 month low, whilst Silver continues to test its critical multi-month support at $ The recovery that the dollar has seen in the past couple of weeks has also not helped the prices. Any dollar strengthening data this week could exacerbate. The huge breakdown of Treasury yields to an 11 month low on the 10 year reflect the concerns that bond market investors have over growth projections and the speed of the tightening cycle of interest rates at the Fed. This disconnect between bond markets and equities at all time highs poses many questions and gives few answers. The PMI and employment data this week could help to shed some light, because something has to give. WATCH FOR: The raft of data provides much volatility through the week. Dollar positive data would drag on precious metals, while oil could benefit, whilst encouraging bond investors to lock in profits. COMMODITIES & BONDS Outlook Gold Watch for: Downside break has now opened $1231. Outlook: terrible week for the gold bulls came after the breach of the support at $ The continued downside has meant that there should now be a test of the $1231 low. Near term oversold momentum indicators may induce a technical rally now, but any strength towards the resistance band $1260/$1268 should be seen as a chance to sell. With the strength of the primary downtrend and the force of the selling this week, a test of the $1184 critical December low should not be ruled out in due course. US 10yr Treasury Yield Watch for: Further weakness in Treasury yields this week Outlook: A significant support was breaching last week. The failure of the support at 2.47% has now completed an 11 month top pattern which suggests that there will be further weakness in the Treasury yields with the next real support not coming in until 2.29%. The technical outlook is subsequently poor, with momentum indicators and moving averages all confirming the deterioration. It would now need a move above 2.67% to even question the overall corrective outlook now. 4

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