The Day So Far
The trading week has been a good learning curve for some of our less experienced traders in reference to looking ahead and planning their trading strategies accordingly. Given the hype around the March FOMC meeting, and the tail risk of a surprise from the Dutch election, Wednesday was certainly the main day of activity in what otherwise has been a fairly quiet week.
Taking stock on what has occurred and upon reflection one can only applaud Janet Yellen for final obtaining the holy grail of having been able to manipulate the market, via verbal communication, to execute the second hike in three months with minimal disruption to financial markets. For now at least, it appears that unlike 2016 the Fed remain on track with their intended forecasts and two more rate hikes in 2017 seem a distinct possibility. Meanwhile, the EUR has seen some movement in the past 12-hours following a report run in the German Handelblatt suggesting that the ECB could raise the deposit rate before its main refinancing rate, according to Austrian council member Ewald Nowotny. What is becoming apparent is that the ECB seem to be beginning the slow process of feeding in soft signals that the period of accommodative policies are drawing to an end. Although actual changes maybe someway off it is likely the strategy of the Bank to desensitise the market to the idea that someday soon, if inflation keeps rising, policy direction will ultimately have to change. Finally, a quick look at the BoE where GBP traders were caught off guard yesterday by a hawkish dissent from out-going member Kristin Forbes. Although I am not one to step in front of the freight train when it sharply rallied yesterday I do think the reaction was overdone and personally I do not foresee the Bank of England hiking rates until at least Q2 of 2018 if inflation out performs the Banks existing forecasts. The issue officials have is that Brexit is only just about to begin so pulling the trigger now in the context of a weakening economic environment in the UK, as price pressures put additional burden on the consumer, seems enough to believe the BoE will hold fire for some time to come.
The Day Ahead
Looking ahead to today I think it needs to be taken in context of the week in its entirety, so I don’t see much need for the market to push aggressively in either direction. As such we fall back on the main fundamental themes to drive direction and then apply the technicals to play out that view. Hence, long oil on the latest verbal intervention from the Saudi’s to extend cuts, long EUR/USD following hawkish comments and a dovish Fed hike. While, we maintain the long in equities and look for the traditional inverse correlation with T-notes.
Finally, a Happy St Patrick’s Day to our Irish followers, wishing you a fantastic weekend!