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Market Opportunities in Focus
BY Janne Muta
|April 9, 2024S&P 500
In the wake of robust job creation and a climbing participation rate, the US economy demonstrates significant strength, underscoring the persistent challenge the Federal Reserve faces in moderating inflation to its 2% target. The upcoming March CPI report is projected to reveal a continuation of this trend, with both the core and headline inflation rates expected to underscore sustained inflationary pressures. Specifically, forecasts suggest the core inflation rate will remain stable on a year-over-year basis at 3.8%, while the monthly figure is anticipated to replicate February's 0.4% rise. Concurrently, the headline inflation rate is predicted to increase, potentially reaching 3.2% year-over-year, with a monthly rise also expected at 0.4%.
This backdrop of enduring inflation is set against a backdrop of substantial economic data, including a remarkable increase in non-farm payrolls in March, pushing the unemployment rate to 3.8%. Such data not only reinforces the narrative of a resilient US economy but also complicates the Federal Reserve's inflation-targeting mandate. The forthcoming FOMC minutes and economic projections are keenly awaited for further insights into the central bank's policy trajectory, particularly in light of the sustained inflationary environment and robust labour market.
Moreover, the Dollar Index's recent movements indicate a potential upside, suggesting a recalibration of market expectations in anticipation of continued robust US economic performance. Despite a slight pullback, the overarching trend highlights investor confidence in the dollar's strength, reflecting the broader economic divergence between the US and its major trading partners.
The S&P 500 has lost some momentum since the failure to rally above 5261.53. On Friday, the market successfully tested the bull channel low at 5145, a level that is closely aligned with the 23.6% Fibonacci retracement level. The ensuing rally indicates that the bulls are still in charge as the green team managed to keep the market within the rising trend channel. The nearest minor support level is at 5186.80. If higher low (bullish) holds or more buyers are attracted to the market above it, we could see the S&P 500 rallying to 5249. Alternatively, below 5186.80 look for a move to 5154.
EURUSD
The US economy is characterized by a strong labour market as evidenced by consistently exceeding expectations in non-farm payroll numbers and maintaining a low unemployment rate. Such strength in the job market, coupled with a slight uptick in inflation rates, has prompted the Federal Reserve to maintain a relatively high interest rate at 5.5%. This aggressive stance on interest rates, aimed at tempering inflation, not only underscores the Fed's commitment to stabilizing prices but also enhances the appeal of USD-denominated assets, potentially limiting the upside potential in the EURUSD.
Conversely, the EU area presents a more tempered economic narrative. While inflation rates have seen a gradual decrease, moving from 2.8% in January to 2.4% by March, the European Central Bank (ECB) has opted for a more cautious approach, maintaining its deposit facility rate and the main interest rate steady at 4% and 4.5% respectively.
The ECB's upcoming meeting this Thursday is not expected to bring any hawkish surprises, with anticipation leaning towards ECB President Lagarde setting the stage for a potential rate cut in June. This outlook is supported by the final March composite PMI, which rose above 50 for the first time in ten months, indicating a possible bottoming out of the regional economy despite the lack of strong upward momentum, particularly in core areas.
Following last week’s bullish candle, the EURUSD has continued to rally this week. In the 4h chart the market has created two higher reactionary lows at 1.0791 and 1.0821. The upside is currently limited by a historical resistance area around the 1.0873 level. This level has acted as both a support and a resistance level over the last 12 months. US CPI is expected to come in firm and should it surprise to the upside we might see traders taking profits around the last week’s high (1.0876). This might bring the two reactionary lows at 1.0793 and 1.0821 in play. Below, 1.0793 the 1.0780 level could be likely to be tested. Alternatively, if the market rallies strongly above last week’s high, look for a move to 1.0935 or so.
GBPUSD
Inflation has been a concern in the UK, with the rate oscillating yet showing signs of persistence above the Bank of England's target. The Consumer Price Index (CPI) inflation remained stable at 4% year-over-year in January, underlining sustained price pressures despite the Bank of England's monetary policy measures. This inflationary environment, partly fuelled by external factors like energy prices and supply chain disruptions, has placed significant strain on consumer purchasing power and business cost structures.
The recent GDP figures have reflected the economic challenges faced by the UK. The economy contracted by 0.3% quarter-over-quarter in the final quarter of 2023, with a slight year-over-year decline as well, indicating a challenging economic climate. Moreover, expectations for the UK's GDP in April 2024 are modest, with a forecasted growth of 0.1% month-over-month, reflecting cautious optimism amidst the recovery efforts. These figures suggest that the UK grapples with the impacts of inflation, geopolitical tensions, and internal pressures that have hampered growth. However, monthly data from January 2024 shows a modest rebound, hinting at underlying resilience.
The labour market, surprisingly, presents a brighter spot amidst these economic challenges. Unemployment rates have remained relatively stable, with a slight decrease in December 2023, demonstrating the labour market's resilience. This stability, however, coexists with inflationary pressures, making wage growth and living standards critical areas of focus.
Retail sales data provides a glimpse into consumer confidence and spending habits, with a notable rebound in January 2024 after a previous slump. This volatility in consumer behaviour underscores the ongoing adjustments within the economy as it navigates inflationary pressures and seeks pathways to growth.
In the weekly chart the market has created a bullish candle with a long wick to the downside indicating loss of downside momentum and therefore potential market reversal. In the 4H chart the market is still in a downtrend but given the bullish weekly chart we could see the market breaking out of the channel. The last week’s high at 1.2683 is the key resistance point and needs to be penetrated decisively though. Above this level, look for a move to 1.2730 and then possibly to 1.2750. Alternatively, the nearest 1.2613 might get tested.
How will you trade the markets this week?
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Janne Muta holds an M.Sc in finance and has over 20 years experience in analysing and trading the financial markets.
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