Image Source: Pixabay

What is driving the markets today?

Price action on the dollar, stock indices and other major asset classes in the first half of Tuesday’s session continued in the direction of the underlying trends. This therefore suggests that traders are not too concerned about the impact of higher crude oil prices, as a result of the OPEC’s surprise decision to sharply cut oil production, on the economic recovery and inflation outlook. Traders are betting that the major central banks, especially the Federal Reserve, will not speed up the pace of interest-rate hikes, for otherwise bonds would have sold off on Monday, causing their yields to rise. For the same reason, we would not have seen a fresh 2023 high for the German DAX index today, or a move above 1.25 handle on the GBP/USD. But let’s see how much further will oil go up in the coming days and whether the market’s perception changes. For now, risk appetite remains positive, which should keep the pressure on the Dollar Index.

EUR/USD Outlook: Still likely heading towards 1.10

This morning saw the GBP/USD break sharply above the 1.25 handle and we think the EURUSD is going to follow suit by breaking the 1.10 handle soon. Like the cable prior to its breakout, the EUR/USD has been consolidating beneath this key hurdle for a while now. If it wanted to go lower, it shouldn’t have been consolidating in a bullish manner, making interim higher lows and chipping away at 1.0930ish resistance.

With oil prices being on the ascendency again – thanks to the OPEC – this should keep the pressure on the ECB’s Governing Council to continue raising interest rates to fight record-high core CPI inflation. Thus, the EUR/USD’s bullish trend is likely to remain intact. So, we continue to expect the EUR/USD to climb to 1.10 and possibly higher as the divergence between US and Eurozone monetary policies narrows further.

Source: TradingView.com

USD/JPY Outlook: Inverted hammer but not much follow-thru

The USD/JPY huffed and puffed, but ultimately closed lower on Monday and created an inverted hammer on its daily chart. This is normally a bearish technical sign on its own. But the fact that risk sentiment has been positive, the yen has remained under pressure. Still, if oil prices continue to rise, then this should encourage the BOJ to change its policy settings at some stage, given that Japan is a big oil importer and will thus be impacted more by a weakening yen. Obviously that process could take a while to work through the economy, but markets typically price in risks ahead of time. So, do watch out for a potential break below 132.20 support to trigger a fresh wave of selling on the USD/JPY, in light of the formation of the inverted hammer candle on Monday.

Source: TradingView.com

AUD/NZD Outlook: All eyes on RBNZ after RBA held policy

The AUD/NZD will remain in focus as the traders eye this week’s other major central bank rate decision after the Reserve Bank of Australia decided to keep monetary policy unchanged overnight. The Aussie dropped, keeping the AUD/NZD’s descending triangle pattern intact – for now. The RBA decided to pause its hiking cycle overnight after it had raised the Cash Rate by 25 bps to 3.6% at its previous meeting. That was the 10th consecutive hike in this cycle. The 350 basis points worth of tightening is likely to weigh on economic activity and put further pressure on inflation. The pause in hiking should keep the AUD relatively less attractive than the NZD.

Meanwhile, the Reserve Bank of New Zealand is expected to raise the Official Cash Rate (OCR) by 25bp to 5.00% at its Monetary Policy Review on Wednesday. But after the RBA’s decision to pause, there is a risk the RBNZ might follow suit and decide against raising rates. However, if it decides to meet market expectations and hike, then this will increase the divergence between the two central banks’ monetary policies. As a result, the AUD/NZD could fall further below the 1.07 handle.

Ahead of the RBNZ meeting, the AUD/NZD is struggling to find any support as it continues to drift inside a descending triangle pattern:

Source: TradingView.com

A descending triangle pattern is created by drawing one trend line connecting a series of lower highs and a second horizontal trend line connecting the flat lows. This is commonly considered to be a bearish continuation pattern since price is not finding much love at support and the sellers remain active every time it bounces. So, a break down could see rates fall quite sharply.

Silver Outlook: Metal set for bullish breakout

Silver continues to print higher highs and higher lows on the smaller time frames ever since it bottomed out at $20.00 per ounce in early March. That low was actually higher than the previous ones it had formed in September and November. Thus, silver has formed a couple of higher lows on the higher time frames now. I think it is likely to soon post a higher high above the peak of around $24.50 it had reached earlier this year. If that happens, silver will have also broken its long-term bearish trend line that has been in place since its last peak at $30.00 in February 2021. Conservative traders may wish to wait for that higher high to form, while the more aggressive traders may continue to look for bullish trades on any short-term weakness given the overall bullish price structure.

Source: TradingView.com

On a side note, silver outperformed gold in March. As a result, the gold-silver ratio has broken below its bearish trend line. This points to further outperformance for XAGUSD over XAUUSD. If the bullish trend remains intact for both metals, silver should shine more brightly, is what this chart is telling us.

Source: TradingView.com

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