Financial market research and analysis

The geopolitical tensions rise as the US President Donald Trump threatens to ‘totally destroy’ North Korea in case of an attack against the US or its allies. News that Saudi Arabia and the UAE had to back off from an eventual military action against Qatar due to US request at the beginning of their dispute added some more spice to the globally tense headlines. The US implication could add an additional layer of anxiety if the tensions within the GCC escalate.

Precious metals gained. Industrial metals traded in the green, as the US dollar depreciated.

The FTSE opened slightly downbeat and could remain under the pressure of a stronger pound. Offers are presumed into the 200-day moving average (7314p). Energy stocks (+0.26%) traded marginally higher at the open. However, the fading appetite in oil prices could weigh on the energy stocks later in the session.

The GBPUSD found buyers below the 1.35 mark. The UK’s retail sales data is due today. Analysts expect a slower expansion in August retail activity compared to a month earlier. A relatively soft data should not deteriorate the pound appetite, unless there is a bigger disappointment. Support to the post-Bank of England (BoE) rally stands at 1.3438 (major 38.2% retracement).

The 3-month (25-delta) GBPUSD risk reversals spiked to the highest levels in three years (-0.18), hinting that investors are unwinding their hedges against a further pound depreciation.

The WTI crude remained capped at $50.80 for the second consecutive session. The formation of a double top could indicate a local top and encourage a downside correction toward the 200-day moving average ($49.75). The EIA will release the weekly oil inventories data today. The US oil inventories may have increased by 2.8 million barrels last week, versus 5.9 million barrel a week earlier. A slower rise in inventories could limit the downside potential. A minor support to August 30 to September 17 rise stands at $49.60 (minor 23.6% retracement).


EURUSD: golden-cross formation on hourly chart

The EURUSD extended gains above the 1.20 level on the back of a broad-based USD weakness before the Federal Reserve (Fed) decision. Depending on the post-Fed USD-appetite, the EURUSD could return to its 200-hour moving average (1.1962), or pursue its short-term positive trend following the golden cross-formation on the hourly chart (50-hour moving average crossing above the 200-hour moving average). Resistance is eyed at 1.2080/1.2100 (post-ECB top). Decent call options at 1.1950/1.2000 are due today.

The EURGBP saw support at 0.8772 and bounced to 0.8898 (minor 23.6% retracement on August 28 to September 14 decline) on Tuesday. The positive correction could meet further resistance at the 100-day moving average (0.8930) before the critical 0.8976 (major 38.2% retrace). Trend and momentum indicators remain negative on daily basis; the 200-day moving average (0.8740) is still on the radar.

Event risk due the German election (on September 24) could prevent the euro from breaching important technical levels before the weekly closing bell.


Will the Fed announce Quantitative Tightening?

The Fed decision is the main highlight of the day. The Fed is expected to maintain the interest rates unchanged at this month’s meeting. There could be an announcement concerning the balance sheet normalisation.

The FOMC is expected to start unwinding its $4.47 trillion worth balance sheet by $10 billion and increase the shrinkage to $50 billion in the coming months.

To us, the Fed could refrain from shrinking the balance sheet immediately after the announcement. The Fed tends to guide the markets toward where it wants them to be before implementing important policy decisions. Yet, the absence of guidance, combined to some discomfort regarding the low inflation, hint that the balance sheet normalisation may not start before later this year.

Although a gradual balance sheet normalisation should not have an impact greater than a 25-basis-points rate hike, it would be a clear inflection point in the US' decade-long expansive monetary policy and mark the beginning of a new era, the Quantitative Tightening. Therefore, the Fed could be expected to announce a start in November or December. This being said, a baby-step start with $10 billion decline is plausible starting from September.

On a side note, we do not rule out the possibility of no comment on the balance sheet strategy. In this alternative case scenario, the US dollar could take a significant hit across the globe.

Regarding the interest rates, the December rate hike will likely be kept on the table. Many Fed members may have digested the low inflation setting, given that the US labour market keeps on posting solid results and the economic recovery is encouraging. Therefore, the Fed’s opinion regarding the lagging inflation is going to be an interesting focus point and should hint at the possibility of an interest rate hike in December. The probability of a December rate hike has improved to 53.2% before the decision.

Quick glance to the US stock markets

Either way, it will be difficult to dampen the stock traders’ appetite. As mentioned in our earlier reports, both dovish and hawkish Fed expectations attract enough buyers to sustain the bull market. While a dovish Fed hints at a longer period of low-cost liquidity, a hawkish Fed revive the optimism on better growth prospects. This way of reasoning has been ongoing since Donald Trump's election and has been positive for the stock valuations regardless of the news. Finally, the expectation of tax reforms is still a last resort.

The Dow Jones extended gains to a fresh all-time (22386.01) on Tuesday, as the S&P500 consolidated at the historical high levels.


Gold traders to watch $1’300

Gold rebounded from $1’304 and recovered to $1’314, as investors preferred to stay safe after the US threatened to 'destroy' North Korea. The $1’300 is the level to watch today. If the Federal Reserve (Fed) decision triggers a USD-rally, the $1’300-support, which is the major 38.2% retrace on July-August rise, could be cleared despite the risk-off demand. A negative breakout should suggest a bearish reversal on the two-month positive trend and encourage a further slide toward the 50-day moving average ($1’286).


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