Markets Digest China Data; Focus Remains On Earnings

Asian shares finished mixed on Tuesday, shrugging off the initial boost from China’s better-than-expected Q1 GDP as signs of an uneven recovery stalled risk taking. The world’s second largest economy smashed forecasts by expanding 4.5% in the first quarter from a year earlier. However, the disappointing readings on industrial production suggested that weakness still lingered in the economy, even as retail sales surged. European markets edged higher despite the caution from Asia as investors focused on the global economic outlook and corporate earnings. Wall Street could be injected with fresh volatility this afternoon, especially when considering the slate of earnings from big banks and companies.

The British pound has appreciated against most G10 currencies this morning after data showed wages rose more than expected in February. This development has reinforced expectations that the Bank of England will raise interest rates in May, with traders currently pricing in a 90% probability of a 25-basis point hike.  Sterling is currently up 0.5% against the dollar today with prices pressing against 1.2445 weekly resistance. A break above this point could encourage a move back towards the 1.2500 region.

What next for the dollar?

Shifting expectations around future Fed policy tightening continue to heavily influence the dollar.

Expectations for a 25-basis point rate rise in May have risen to 86%, but the greenback has weakened against most G10 currencies this month with Fed official’s speeches and key US economic data this week impacting its short to medium-term outlook.

On Monday, Richmond Fed President Thomas Barkin said that he wanted to see more evidence that inflation was easing back to the Fed’s goal of 2%. The rest of the week is filled with a host of Fed speeches from policymakers who will give their final guidance in the run-up to the blackout period and the next FOMC meeting. This “Fedspeak” will be the main focus for markets, although it may be wise to also keep an eye on the US weekly initial jobless claims on Thursday and US PMI figures for April which are released on Friday.

Taking a technical look at the Dollar Index, prices remain in a bearish trend on the daily charts. Sustained weakness below 102.00 could result in a selloff back towards 100.79 and 100.00, a level not seen since April 2022.

Currency spotlight – EURUSD

The euro brushed off darkening investor sentiment in Germany’s economy in April amid fears over the banking sector and high inflation. The ZEW business survey expectations reading declined for a second month to 4.1 in April from 13 in March and well below market estimates of 15.3. But the current conditions did see a marked improvement, hitting the highest level since June last year. 

The euro is being supported by ECB rate hike expectations with markets pricing in a 25bp hike in May and two more similar size moves at the June and July meetings. Given how inflation remains well above the ECB’s target of 2%, hawks remain behind the wheel and this should keep euro bulls in a position of power.

Looking at the technical picture, EURUSD remains in an uptrend on the daily charts with prices again approaching 1.1000. A strong daily close above this point could encourage a move back toward the recent high at 1.1075. Should 1.1000 prove to be reliable resistance, prices may slip towards 1.0900.

Commodity Spotlight – Gold

Gold is attempting to nurse the deep wounds inflicted by the recent selloff that saw prices fall more than 2% in two days. Renewed expectations around the Fed extending its rate hike cycle deeper into 2023 hammered zero-yielding gold, with prices flirting around the psychological $2000 level as of writing. This could be another volatile week for the precious metal due to more speeches from Fed officials.

Focusing on the technical picture, last Friday’s heavily bearish daily could shift the balance of power in favour of the sellers. Sustained weakness below $2000 may open a path back towards $1950 and $1900 respectively. If bulls are able to close back above $2000, gold could see $2025 and $2048.50.