Financial market research and analysis

The FX markets are quiet ahead of the Federal Reserve (Fed) Chair Janet Yellen and the European Central Bank (ECB) President Mario Draghi’s speeches in Jackson Hole due later in the day. The expectations are low.

Mario Draghi will certainly not breathe a word about the ECB’s bond purchases program, which is due to end in September. Therefore, the September 7 ECB meeting will likely be the breaking point for the hawkish speculations.

Low euro rates encourage buyers to realize profit on small moves and prevent the EURUSD from taking a clear bullish direction. Traders are expected to remain buyer above 1.17. Below this level, the EURUSD could take a chance on a short-term downside correction. Light put options trail below 1.17 at today’s expiry.
The final GDP data confirmed Germany’s 2.1% growth in the second quarter. The DAX recorded timid gains at the open. The upside potential could be limited as traders refrain from taking positions before the critical ECB decision. The European equity funds redeemed $231 million over the week to August 23 according to EPFR.

Against the pound, the single currency came down from its highest levels since October 7 flash crash. The overbought pressure is easing with the correction and a deeper downside move is possible. The key support is eyed at 0.9020 (minor 23.6% retrace on April – August rise). Day traders may target 0.9180 and 0.9150 (100 & 200-hour moving averages).

FTSE is better bid on softer pound. Financials (+0.73%) and technology stocks (+0.90%) are leading gains in London. Mining stocks (+0.40%) are in demand on the back of firmer commodity prices and the possibility of a further recovery.

Cable met support at 1.2775 after the second quarter GDP estimate showed decline in British households’ consumption and business spending. The sentiment is fundamentally negative due to Brexit uncertainties and the implications on the UK’s economy. The GBPUSD could extend weakness toward the 200-day moving average (1.2690).


USD rangebound, gold holds the ground

The US dollar is rangebound as mixed messages from the Fed bankers hit the wires. Janet Yellen is not expected to reveal any secret about the Fed’s policy outlook at today’s Jackson Hole speech.

The US will release the July preliminary durable goods orders, which may have fallen by 6.0% compared to 6.4% rise printed a month earlier. Weak economic data could revive the Fed-doves and increase the downside pressure on US dollar and rates.

President Donald Trump is planning to rally public on fiscal reforms next week. The market reaction is difficult to predict. Tax reforms are encouraging for stock prices, yet Trump’s declining credibility could keep investors sideways before a concrete step is taken. Public discussions may not suffice to revive the enthusiasm among the stock traders. The Fed expectations may not be impacted.

The Fed is given less than 40% probability to proceed with another rate hike before the end of this year. Traders are still looking for more details regarding the beginning of an eventual balance sheet normalisation. With the fading Trump effect, the Fed has no pressure to act in the coming months.

Gold consolidates above the 200-hour moving average ($1’284). Soft US yields give the precious metal a solid ground for the moment. Key support is eyed at $1’278 (minor 23.6% retracement on July – August rise).


Some colour out of Asia

The Japanese inflation excluding fresh food (monitored by the Bank of Japan (BoJ)) advanced from 0.2% to 0.4% year-on-year in July, versus 0.3% expected by analysts. Improved inflation is good news for the BoJ, even though the Japanese economy is still very far from the 2% inflation goal.

The USDJPY traded at 109.77 in Tokyo. Option barriers could reinforce resistance at 110.00, the 23.6% retrace on July – August decline. Intra-day support could be found at the hourly Ichimoku cloud, 109.33/109.12.

Cheap yen is needed for the inflation to improve in Japan and the BoJ is decided to keep its policy accommodative for the foreseeable future. Despite a softer Fed, the policy divergence between the Fed and the BoJ is supportive of a stronger US dollar against the yen. Key mid-term support is eyed at 108.60 (August low).

The Aussie has recently failed to put legs on the global metal rally and gradually became insensitive to good news from China, and/or iron ore prices. Iron ore gained 45% during summer and pushed the AUDUSD above 0.80 level. Softer US yields helped. Presently, the Aussie’s positive trend is vanishing despite favourable conditions and it appears that the 0.80 mark has been too much to handle for the AUD-bulls. The correction could extend toward 0.7800, the 38.2% retracement on June – July rise. Breaking the 0.78 support would suggest a bearish reversal on the three-month positive trend.

The Chinese yuan consolidated gains versus the greenback. China’s credit default swaps are at the best levels since 2013. Shanghai’s Composite (+1.83%) is preparing for a second weekly positive close. Hong Kong energy stocks (+1.91%) rallied as big oil companies posted encouraging first half results.