European markets follow the U.S. pattern, as inflation pressure intensifies – Market Overview

By: Miguel A. Rodriguez

16:57, 23 February 2021

Despite the comments of ECB’s President Christine Lagarde, ensuring the continuity of low-interest rates, the markets in Europe appear to follow the U.S. pattern.

The uncertainty that originates in the market due to potential inflationary tensions has adverse effects on European stock markets, like what happened in the United States.

At this moment, everything appears to be revolving around inflation expectations that have resurfaced strongly in recent weeks due to the rise in the price of oil and raw materials in general and the expectations of a speedy recovery in consumption levels thanks to the administration of COVID vaccines.

The inflation figures published in Europe partially corroborate this inflationary expectation with a year-on-year CPI in January of + 0.9% from -0.3% in December.

The German Bund falls in price to the support zone around 173.50, below which it would work its way to lower levels at 169.75. In terms of yield, the German bond has gained 30 bps to the level of -0.30%, still in the negative zone.

The downward corrective movement continues in the DAX index that technically forms a reversal pattern, more specifically a potential double top whose trigger point is in the 13358 area.

Activity in the foreign exchange market continues to be choppy without definite directional movements in the major currencies. The U.S. Dollar continues to move in a tug of war, while the Australian Dollar is the only one on an uptrend due to its positive correlation with commodities.

Gold – the potential winner?

In a scenario of increased inflation expectations, Gold, an asset that is considered a hedge against the depreciation of the currencies that causes inflationary tensions, should rise if these expectations will be confirmed over time.

Here you have to take into account another factor which is the price of the U.S. Dollar. A weaker Dollar would favor the upward price of the precious metal, but as we have been observing in recent weeks, the Dollar's downward movement has slowed and has no continuation, at least for now.

Technically, Gold should overcome the resistance zone located around 1860, where the 100-day SMA line also passes, to end the last bearish leg and begin a new upward trend.

Sources: WSJ, F.T.

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