The risk recovery is taking a pause for breath this morning as the bull run on equities begins to show signs of easing. It comes as Treasury yields have pulled a shade lower, the US dollar has found a degree of support across major currencies, and equity futures are tailing off.
In recent days there have been some mixed reports over how US and China relations could be developing. After a claim by Reuters that China could pull back on its US imports was officially denied, there are still suggestions that this may be the case. The official denial a couple of days ago had previously fanned the flames of the risk rally. Could this now begin to douse those flames with cold water? The consolidation comes ahead of what could be another momentous European Central Bank monetary policy decision. No change on rates is expected, but the ECB is likely to add to its Pandemic Emergency Purchase Programme (PEPP). PEPP purchases have been running at around €5bn of assets per day. It means that the €750bn fund size will be exhausted by around August/September.
The expectation is that the ECB has seen the PEPP as a successful operation and in order to get ahead of its exhaustion, will increase the program by around €500bn today, enabling the purchases can run into Q2 next year. This would be ongoing supportive for the euro as it reduces the risk premia for the single currency of the Eurozone. In the near term there has been a consensus build up for this move and could mean some “buy on rumour, sell on fact” profit taking. However I would still see near term euro weakness as a chance to buy.
I'm going to be watching two levels on Thursday – the previous session’s low at 97.155 and the previous session’s close at 97.259.
Taking out 97.155 will signal a resumption of the downtrend. However, taking out this level then moving above 97.259 will form an intraday reversal bottom. This would be the first sign that the buying is greater than the selling at current price levels.
Additionally, an inside day could also be interpreted as the market getting ready to transition from down to up.
However, don’t get too excited about the upside potential of any rally, we could see 3 days of limited upside.