Markets brace for an explosively volatile week

March 14, 2017 09:53 AM

A strong sense of caution has gripped the financial markets on Tuesday with investors on standby ahead of an explosively volatile data-packed week. Asian shares were mostly mixed today amid the anxiety with the cautious trading mood exposing European markets to downside losses. With risk aversion set to heighten as uncertainty and political risk weigh on sentiment, the financial market could be vulnerable to further losses this evening. The unnatural calm ahead of a string of major central bank policy meetings, imminent U.S. rate increase, and Dutch elections continues to send ominous warnings of the storm that has yet to come this trading week.

Sterling tumbles towards 1.2100
The Sterling found itself under renewed selling pressure on Tuesday as concerns heightened over a potential second Scottish Referendum compounding to the Brexit uncertainty. Anxiety over Brexit has been a recurrent theme this quarter with sellers exploiting the uncertainty to limit gains on Sterling. With the threat of an independence vote for Scotland adding to the horrible Brexit mixture, one can understand why the buying sentiment towards Sterling remains frighteningly low. Although Parliament has passed the Brexit bill ultimately paving the way for the government to trigger Article 50, this does not change the bearish bias towards Sterling. The great unknowns over the impact Brexit may have on the UK economy could ensure that the Pound remains depressed for prolonged periods. From a technical standpoint, the British pound/U.S. dollar (GBP/USD) currency pair fulfils the prerequisites of a bearish trend on the daily chart as there have been consistently lower lows and lower highs. A breakdown and daily close below 1.2100 could entice sellers to send the GBP/USD to the psychological 1.200 support level.

Dollar bulls remain wide awake
The heightened speculations of a probable U.S. interest rate increase this week has inspired Dollar, bullish investors, to send the Dollar Index towards 101.50 as of writing. Sentiment remains firmly bullish towards the Greenback with further gains expected as speculators bet on the Federal Reserve raising U.S. interest rates repeatedly this year. Investors may direct their attention to the pending PPI report which could provide the Dollar a final welcome boost if the release exceeds estimates. From a technical standpoint, the Dollar bulls may be back in town with a breakout above 101.50 opening a path higher towards 102.00.

Currency spotlight – EUR/USD
The Euro stumbled into this trading week noticeably depressed as political uncertainty in Europe haunts investor attraction towards the currency. Although last week’s hawkish surprise from the ECB offered the Euro a lifeline, a strong Dollar coupled with anxiety ahead of the Dutch elections has slowly confiscated gains. Investors will be paying attention to how the Dutch elections play out this week with any signs of Eurosceptic parties gaining popularity pressuring the Euro further. Although the economic fundamentals of the Eurozone have displayed signs of stability, it is the persistent uncertainty and political risk that continues to weigh heavily on investor sentiment. Technical traders may observe how the Euro/U.S. dollar (EUR/USD) currency pair reacts below 1.0650 which could act as a dynamic resistance for a sharp depreciation back towards 1.0500.

Commodity spotlight – Gold
Gold remains at the mercy of U.S. rate hike expectations with the prospects of an imminent interest rate increase this week quelling investor attraction towards the zero-yielding metal. Prices are under pressure on the daily chart and a strengthening Dollar should encourage bears to install fresh rounds of selling throughout this week. There is a likelihood that gold bears will challenge $1,190 when the heavily anticipated rate increase becomes a reality. From a technical standpoint, weakness below $1,200 could spark a selloff towards $1,190.

About the Author

Lukman Otunuga is an FXTM research analyst