Dovish Fed and no bullish reaction in equities – has a bearish market appeared?

March 25, 2019 16:00

Economic Events: March 25 – 29, 2019

Source: Economic Events Calendar March 25 – 29, 2019 - Admiral Markets' Forex Calendar


DAX30 CFD

Not only was the initial reaction in the DAX30 CFD bearish after the (dovish) ECB announcement on March 7, but it was still increasingly bearish after the very dovish Fed on Wednesday (more details in the US dollar subsection below).

Both cases point to rising scepticism towards global central banks, and if they are still in control of current developments in financial markets.

This may come as a surprise, since not only US equity markets, but also the German DAX30 saw quite a positive start for the year, with gains of nearly 10%.

However, the upwards push for the DAX30 CFD failed to reconquer the SMA(200), even though the ECB and Fed both delivered a lot of fuel for a successful attack, despite rhetoric hinting at a potential slowdown in economic growth. The DAX30 CFD hit short-term peak due to the disappointing German manufacturing PMIs for March last Friday, coming in at 44.7 points-- the lowest reading for 6.5 years.

While this may have raised investors' eyebrows, a weekly close below 11,400 points could trigger further weakness. And from a technical perspective, could result in further losses likely due to the psychologically relevant region around 11,000 points.

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD daily chart (between November 23, 2017, to March 22, 2019). Accessed: March 22, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the DAX30 CFD increased by 2.65%, in 2015, it increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, meaning that after five years, it was up by 10.5%. Check out Admiral Markets' most competitive conditions on the DAX30 CFD and start trading on the DAX30 CFD with a low 0.8 point spread offering during the main Xetra trading hours!


US Dollar

In last Friday's weekly market outlook, we discussed the dovish Fed announcements after last Wednesday's meeting, and the US Federal bank delivered as expected.

Not only did the Fed hold rates at the current level of 225 to 250 basis points, but the Fed 'dot plot' does not see any rate hikes coming in 2019 (down from 2 to 3 in the last 'dot plot' from December 2018), and only one rate hike for 2020.

As a result, 10-year US yields collapsed to new yearly lows, and the US dollar was offered on a broad front, with the USD index future re-testing the region around 96.00 points.

While the USD could stabilise a bit going into the weekly close, a look at the Commitment of Traders Report points to further losses for the USD likely in the coming days, mainly due to a potential unwinding of USD long positions.

A drop below 96.00 points in the USD Index Future holds the potential to trigger further losses towards the region around 95.00 points:

Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between January 2016 to January 2019). Accessed: March 22, at 10:00pm GMT

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Euro

In our weekly market outlook last Monday we wrote: "If, on the other hand, the Fed doubles down on dovish rhetoric, the EUR/USD could sustainably stabilise above 1.1300, with further upside potential limited due to inherent Euro weakness after the ECB rate decision."

Not only did the Fed deliver further dovishness last Wednesday, as the Fed 'dot plot' didn't predict any rate hikes for 2019, and only one rate hike for 2020, but the EUR/USD went for a short stint above 1.1400.

But no further bullish momentum was taken on by the EUR/USD. The currency pair closed the week around 1.1300, mainly thanks to a very disappointing German PMI manufacturing reading last Friday, which came in at 44.7 for the month of March, indicating the lowest level since almost 6.5 years.

That said, the picture for the EUR/USD hasn't changed for the coming days, remaining neutral. The outlook for the Euro stays bearish, particularly with midterm long engagements in the European currency looking very optimistic after the last Eed rate decision. The outlook for the US dollar is probably even a bit worse, and if 10-year US Treasury yields keep on moving lower, the EUR/USD will probably see another attempt to push back above 1.1400, even though a break out of the range on the upside seems very unlikely.

Source: Admiral Markets MT5 with MT5SE Add-on EUR/USD Daily chart (between November 29, 2017, to March 22, 2019). Accessed: March 22, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the EUR/USD fell by 11.9%, in 2015, it fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, meaning that after five years, it was down by 16.5%.


GBP

While we projected a stint and potential break above 1.3350/3400 in our last weekly market outlook last Monday, GBP/USD couldn't take on bullish momentum.

While an extension of the Brexit deadline is still on the table, it seems as if a significant extension beyond the European election at the end of this coming May is very unlikely. And not only is it unlikely, but it is also not very clear how, in less than two months, a Brexit deal is to be negotiated and make its way through the UK parliament and manage to meet the demands of the EU.

Due to all these uncertainties, a sustainable break above 1.3350/3400 seems difficult to achieve.

Nevertheless, the Bank of England saw economic growth in the UK for Q1 last Thursday, announcing growth of 0.3%. With that in mind, if the GBP/USD trades above 1.2950, another attack and potential break above 1.3350/3400 becomes an option:

Source: Admiral Markets MT5 with MT5SE Add-on GBP/USD Daily chart (between December 12, 2017 to March 22, 2019). Accessed: March 22, 2019 at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the GBP/USD fell by 5.9%, in 2015, it fell by 5.4%, in 2016 it fell by 16.3%, in 2017, it increased by 7.4%, in 2018, it fell by 5.6%, meaning that after five years, it was down by 22.9%.


Gold

In our last weekly market outlook, we wrote: "If Gold bulls can hold the precious metal above 1,275/277 USD, and push it back above the pre-weekly highs around 1,310 USD, further gains up to 1,330 USD become an option. This would be doubly true if the Fed expands upon dovish policy rhetoric at next Wednesday's meeting."

Since the Fed delivered exactly that, with the 'dot plot' not projecting any rate hikes for 2019 and only one for 2020, the significant push back above 1,300 USD for the precious metal into the weekly close does not come as a big surprise.

If further speculation around the meeting between US president Trump and the Chinese prime minister Xi arise, indicating scepticism towards any deal in regards to the current trade negotiations or a potential risk-off move (which would also drive 10-year US Treasury yields lower), Gold could see further gains in the coming days with an initial target of around 1,330 USD and above around 1,360 USD.

On the other hand: as long as Gold trades between 1,275 and 1,350 USD, from a technical perspective, another drop towards and push below 1,275 USD remains an option:

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between December 13, 2017, to March 22, 2019). Accessed: 22 March 2019 at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of Gold fell by 1.7%, in 2015, it fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, meaning that after five years, it was up by 6.4%.

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