Vaccines become political as COVID concerns increase

We could see a quieter day today as investors wait for the US update and are concerned that Europe has again lost control of Covid.

BoJ’s Kuroda has said there is no need to change the yield curve control framework which makes this Fridays central bank meeting a little less interesting.  The focus will therefore be on whether they will continue ETF purchases with equity markets at such elevated levels, but overall we are expecting no change to monetary policy.

The Italian-German yield spread popped higher yesterday from a fresh low on Monday.  This move was helped by renewed lockdowns in Italy and the concerns around the AstraZeneca vaccine, which will slow the vaccine roll out.  The resurgence of the virus in Europe also means that France is considering weekend lockdowns for Paris, as hospitals are overwhelmed.

The ECB’s Lane spoke in an interview with the Financial Times yesterday.  He said that their objective is to ensure that yield curves do not move ahead of the economy.  They prefer to use forward guidance to achieve this rather than targeting specific yields.  This firms up the view that the ECB will stem any premature tightening of financial conditions.  

US Retail Sales and Industrial Production were weak yesterday. Retail Sales -3% MoM and IP -2.2% MoM. Although there were upward revisions to Jan.  Jan Retail Sales revised up to 7.6% from 5.3% and Jan Industrial Production Revised up to 1.1% from 0.9%.  US yields continue higher despite the data.  It is almost certain that the lower data will be blamed on the bad weather which hit a number of states.

US yields continuing higher despite the weaker US data.  FX is likely to be quiet today ahead of the FOMC.  There are plenty of different outcomes around dot plot projections, SLR exemptions and IOER changes but expect the overall message of being willing to look through any temporary inflation spikes will hold.  With inflation still below target the message will be unlikely to be changed.  

We have already heard FOMC members push this view but the market has mostly ignored it as growth and inflation expectations continue to lift US yields higher.  Expect the move higher in US yields to continue after the noise of the FOMC is out of the way and for USD to continue higher.

Short EURUSD below 1.2010 still makes sense looking for a test of the 1.1836 low this month. The AstraZeneca vaccine concerns adding some extra pressure on EUR this week and ECB’s Lane making it clear yesterday that the ECB are willing to act to stem adverse moves in the yield curve.

Short GBPUSD is also potentially in play, as the sharp move lower in GBPcrosses yesterday showed that the market is long and the risk is now skewed to the downside.  A Times article also warning about excessive long positioning in GBP due to high foreign holdings of sterling deposits.  

The New England Journal of Medicine has shown that the efficacy of the AstraZeneca jab against the South African variant is just 10%, which is another blow for the vaccine programme.  This along with the EU taking legal action against the UK could be enough to drive a wave of position cutting in GBP into this week’s BoE.  1.4000 resistance, possible pull back to 1.3500 over the coming weeks on the back of GBP profit taking and a stronger USD as US yields continue higher. Medium term longs look attractive again down there.

Our overview and outlook of the key trading pairs and indices is as follows

EURUSD – The Euro is consolidating in a very tight range around 1.19 ahead of the FOMC monetary policy decision later this afternoon. Although no policy shift is expected, the focus will be on the central bank's response to the recent bond yields upsurge. If the USD keeps finding haven bids, we could see the pair drop towards 1.1835. However, if Fed Chair Jerome Powell's tone is deemed not dovish enough, a drop in the US Dollar may trigger a short-term reversal on the EURUSD.

GBPUSD – Cable dropped to near £1.38 yesterday following news that the EU launched legal action against the UK for breaching the Northern Ireland protocol. Additionally, BoE Governor Andrew Bailey said that the BoE is committed to buying bonds at an elevated pace, putting additional pressure on the Pound. However, buyers took advantage of the GBP dip pushing price back above £1.39 ahead of the FOMC decision due after the London market close. If the recent strong momentum persists, we could see the British Pound retest the key important £1.40 level.

USDJPY – The USD/JPY attempted to move lower yesterday encouraging buyers to buy the dip and push back the US Dollar against the Japanese Yen to the resistance level at ¥109.20 with the direction today to be determined by Fed Chair Jerome Powell’s comments later this afternoon. A tone not deemed dovish enough will push both yields and US Dollar lower with the 200-period moving average around ¥108.90 as closest support level and the key support at ¥108.50 in extension. Alternatively, a breach of the ¥109.20 resistance level will trigger accelerated buying with the June 2020 high around ¥109.80 as target.

FTSE 100 – FTSE100 closed only a few points above the 6800 resistance, not enough to be considered a clear breakout, while the UK blue-chip is seen opening slightly lower this morning, as investors look ahead to the FOMC decision after the London market close. Looking ahead, as US yields are nudging higher this morning, we expect equities to decline. Moreover, technical indicators favour a move lower, with the next support for the Footsie at the 6750 level.

DOW JONES – The Dow Jones Industrial declined slightly yesterday ending at 32826 as investors continue to fear a correction in stocks despite a surprisingly pleasant surge in tech-dominated Nasdaq. Moreover, the FOMC will end a two-day meeting later in the day and US bond yields and the US Dollar could jump if Powell’s statement is not deemed dovish enough, causing further declines in stocks, with next support levels for the Dow index at 32800 and 32610.

DAX 30 – German stocks closed slightly higher yesterday as health regulators offered their support to AstraZeneca's Covid-19 vaccine. However, markets are fairly quiet this morning ahead of the US Federal Reserve interest rates decision with risk sentiment remaining overall positive thanks to hopes that the economic recovery will accelerate in the coming months. Technically speaking, the DAX index has a strong proven resistance around 14600 and the RSI drifting lower suggests declining momentum, with 14468 as next support level and target.

GOLD – The greenback held ground in yesterday’s session despite disappointing Retail Sales and Industrial Production data out of the US, with the yellow metal still stuck in a trading range between $1718 and $1740 support/resistance levels ahead of today’s highly anticipated FOMC economic projections and Powell’s press conference. Transitory inflationary pressures and the usual dovish stance from Fed Powell likely to keep the bullion under pressure.

USOIL – WTI Crude Oil hit our short support target at $63.85 in yesterday’s session as a slower than expected vaccine rollout in the EU on the back of the suspension of the AstraZeneca shot, weighed on investor sentiment and in turn increased concerns of a slower recovery in oil demand. On the other hand, a surprise drawdown in API inventories of 1Mb. (vs. a previous build-up of 12.792Mb) supported higher prices with focus on EIA data today, as a drawdown confirmation could favour a retest towards $66.35 resistance level.