Financial market research and analysis

The Jackson Hole meeting has been explosive for the euro and the US dollar traders.

The EURUSD rallied to a fresh 2-1/2-year high of 1.1965 as the European Central Bank (ECB) President Mario Draghi didn’t repress the euro bulls at his Friday’s speech. His speech has been perceived as a green light for speculations that the ECB may announce the much-expected Quantitative Easing (QE) tapering plans on September 7 policy meeting.

The euro bias is positive. Leveraged funds more than doubled their net positive euro positions last week. Option calls trail above 1.19 at today’s expiry. Some profit taking could temper the positive momentum by the 1.20 psychological level. Price pullbacks should be limited as traders remain buyer on lows.

The strong euro is weighing on the European stock markets. The DAX (-0.55%) and the CAC (-0.56%) made a bearish start to the trading week. Tapering talks could further demoralize stock traders on the run up to the ECB verdict. The IT stocks are again on the chopping block.

The DAX is preparing to test the 200-day moving average (12’026) on the downside.


USD weakens ahead busy economic agenda, Trump’s public rally

The US dollar weakened after the Federal Reserve (Fed) Chair Janet Yellen sounded less hawkish in her Jackson Hole speech. Yellen concentrated on post-crisis regulatory reforms, including regulations on bank reserves and lending standards. The US 10-year yields shortly retreated below 2.17% and the probability of a December rate hike remained below 40%.

The US President Donald Trump will rally public on tax reforms this week. The US equity futures opened the week in the red. The Dow Jones (-56 points), the S&P500 (-6 points) and NASDAQ (-19.50 points) futures fell. The Dow is called 43 points lower at $21'770 in the US market open.

The Trump risks are two-sided. The market reaction should give an indication on Trump’s credibility following his administration’s inability to achieve concrete results so far. The 'phenomenal' fiscal cuts would be positive for the company earnings and the stock prices, yet they need to be implemented first. In this respect, Trump needs to convince the Senate to move forward with the promises and his relationship with the Republicans appears to deteriorate.

The VIX index (11.28) is down to the 100-day moving average and could be an interesting possibility for hedging the long positions.

The US has a busy economic calendar this week. Traders will focus on the second quarter US GDP and the ADP employment report on Wednesday, personal income and spending data on Thursday and the nonfarm payrolls on Friday. The US economy may have added 180K new non-farm jobs in August according to analysts, versus 209K printed a month earlier.


Soft US yields supportive of the yen, gold

The USDJPY opened under pressure due to soft US yields. The 110.00 resistance (minor 23.6% retracement on July – August decline) is still in play. The yen bears are not sufficiently strong to fight back the broad-based US dollar weakness. Nikkei (-0.01%) and Topix (+0.20%) lacked appetite in Tokyo.
Gold benefits from a solid rising trend on the back of the soft US yields. The market conditions remain favorable for positive breakout above $1’300.


Oil facing upside vol on Hurricane Harvey

Oil markets are face to upside volatility due to supply disruptions caused by Hurricane Harvey. According to news, the hurricane halted more than 20% of crude production in the Gulf of Mexico and 10% of US refining capacity.

Gasoline futures gap opened and hit their highest level since January. WTI crude (-1.02%) started the week downbeat, yet the limited activity in refineries could reverse the trend. Heavy floods are expected to push the gasoline prices higher this week. The upside pressures could translate into higher oil prices as well.

The WTI crude could attempt to $50/barrel if the hurricane theme picks up momentum, although the supply to demand relation is not fully convincing for the fundamental buyers. Short-term support is at $46.95 (50-day moving average).


UK closed, GBP under pressure as Brexit talks resume

UK markets are closed due to bank holiday.

The GBPUSD started the trading week under pressure. The pair quickly pared Friday’s gains (mostly due to the broad-based USD weakness) as the Brexit talks resume this week. The Labour Party came up with a new request to stay in the European Union’s single market and customs union for four years after the divorce. The Labours’ request could trigger a negative pound volatility in the short-term by causing more turmoil among the Tories. The proposal could bring several Conservatives, who are willing to keep the EU-UK ties strong, to consider a cross-party cooperation. This would further weaken PM Theresa May's hand in the internal negotiations and increase uncertainties in the short-run. Offers are eyed at 1.2920 (100-day moving average) and there could be a potential pullback toward 1.2775 (last week low).

In the long-run, a softer, more business-friendly Brexit is positive for the UK businesses and the pound. Key medium-term support is eyed at 1.2695 (200-day moving average).