Financial market research and analysis

The US dollar trades higher across the board as the US House of Representatives passed the budget resolution, rising hopes on feasibility of President Trump's tax overhaul despite the split at the heart of the Republicans.

There are talks that the new Federal Reserve (Fed) Chair choice is down to Jerome Powell and John Taylor cited some sources (Reuters). According to the Taylor’s rule, which has been developed by John Taylor in 1992, the nominal interest rates should respond to underlying economic conditions such as inflation, growth, output and employment. Based on the Taylor principle, for every one percent rise in inflation, the central banks would tend to raise the interest rates by more than a percentage point. Hence, the Taylor rule would set the Fed funds rate to somewhere near 4%, significantly higher than its current level of 1.16%. This does not mean that Taylor would raise the rates drastically if he takes the reigns of the Fed, but the likelihood of a hawkish shift could squeeze the US dollar higher.

The US 10-year yield consolidated above 2.45%, highest levels since March. The US will release the 3Q growth data today. The US GDP growth may have retreated from 3.0% to 2.6% quarter-on-quarter annualized in the third quarter (advance data). A soft read could temporarily halt the USD appreciation, but the positive trend will unlikely be impacted unless there is a big negative surprise.

On the corporate side, good news was on the menu of Thursday’s agenda. Amazon, Twitter, Microsoft and Google announced solid results. Twitter gave hope with signs of recovery in terms of user growth. All stocks jumped on the post-trade after releasing results. Amazon soared by 7.7% and Alphabet traded at a record high level ($1’052.95) in late trading. The Dow Jones (+17.00 points), the S&P500 (+2.75 points) and Nasdaq futures (+19.25 points) gained as the latest earnings showed that cloud computing generated massive revenues for the US tech stocks and the business has clearly more to grow.


Gold, yen fall with improved US yields

Gold is set to extend losses toward its 200-day moving average ($1’259) under the pressure of the US yield surge.

Improved US yields pushed the USDJPY higher in Tokyo. Japanese inflation came in line with expectations in September and triggered little price action posterior to the release. The pair is preparing to test the 114.48 (July resistance) before targeting the 115.00 mark. Decent call options trail above 113.50/114.00 at today’s expiry and should give a hand to the positive trend.


Euro retreats to 3-month low post-ECB

The euro edged lower on the back of a dovish European Central Bank (ECB) statement on Thursday. In his press conference, President Mario Draghi said that the ECB’s monthly bond purchases will indeed be halved from January and the bank will be buying 30 billion euro worth sovereign bonds instead of 60 billion euro until September. Yet the Quantitative Easing (QE) will not end abruptly at the end of this period and the reduced monthly purchases should not even be considered as tapering according to Draghi. We note that this is the second time the ECB cuts monthly bond purchases, while warning that this is not tapering. As a result, the endless QE program continues running. The EURUSD plunged to the lowest level in three months. The slide could extend toward the critical 1.1509 (major 38.2% retracement), which should distinguish between a consolidation within 1.15/1.18 zone and a mid-term bearish reversal against the greenback.

The Catalan crisis doesn’t help. Spanish government will vote to take control over Catalonia, while there are talks that the Catalan President Puigdemont would step back from independence and call an election. Catalan lawmakers will be debating the issue from noon. Protests are expected.

European stocks traded higher at the open; the risk-on feeling helped overcoming the Catalan worries at the start of the session, yet traders should be cautious with Spanish stocks.


Cable down on strong USD, dip buyers wait in lie

The pound didn’t have a chance to consolidate the post-GDP gains as the USD picked up a solid upside momentum. Offers kicked in at the 50-day moving average (1.3249). The pair broke below the 100-day moving average under the pressure of a stronger USD.

Dip-buyers are eyed at 1.3028 (October low) and 1.30 mark before next week's Bank of England (BoE) meeting and Quarterly Inflation Report (QIR). The probability of a BoE rate hike at next week's meeting stands at a solid 89%.

The FTSE 100 hit 7500p level at the open on the back of firmer oil prices and softening pound. 

Energy stocks (+0.27%) were better bid as the WTI crude tested the $52.90 resistance. A positive breakout could pave the way toward $54.00 (April high) before $55.00 (February high) and $55.67 (January & year high). Support is eyed at $52 (200-hour moving average). 


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