Financial market research and analysis

The US dollar is stronger against the majority of its G10 counterparts before the Federal Reserve (Fed) Chair Janet Yellen’s speech due later today at the National Association for Business Economics Annual Meeting, in Cleveland. Janet Yellen has delivered a decidedly hawkish speech at last week’s FOMC meeting. As long as the US recovery remains satisfactory, the Fed will continue tightening the monetary conditions in the US. Else, New York Fed’s William Dudley signaled the possibility of an additional rate hike before the end of the year, Chicago Fed’s Charles Evans and Minneapolis’ Neel Kashkari are reluctant for more rate action before seeing further signs of price and wages inflation. The overall sentiment is positive and the US dollar is in the bulls’ hands. The probability of a December rate hike stands at 63.2%.

Meanwhile, the risk-off trades dominate, capital flows into safe-haven assets as tensions between North Korea and the US continue occupying the headlines.

Gold jumped above the $1’300 mark. The technical indicators give bearish signals and the improved US yields are supportive of a further cheapening in gold, however the geopolitical tensions take priority over the macro fundamentals and technicals now. Sellers are expected to return once the geopolitical tensions ease. Trading above $1’300 could remain short-lived.


Euro-bulls are losing control

The EURUSD slipped below its 50-day moving average (1.1865) for the first time since April. German election results dampened the mood and the Catalan referendum is a downside risk to the euro markets. The positive outcome in the recent Brexit and Grexit referendums hint that the risks should be considered seriously.

On the other hand, the European Central Bank (ECB)’s Benoit Coeur said that the ECB is not scared of tapering the Quantitative Easing (QE), yet the QE exit would be conducted ‘in light of the price stability mandate’. This means that the ECB will opt for a gradual tapering, as already priced in, and the latest price action could confirm a toppish development in the EURUSD from the post-ECB meeting peak of 1.2089.

From a technical perspective, the EURUSD could extend its decline toward 1.1825 (intra-day support, optionality) and 1.1800 (psychological level). A mid-term support stands at 1.1730 (minor 23.6% retracement on April – September rise).

Short-term resistance is eyed at 1.1895/1.1915 (option barriers) and the 200-hour moving average (1.1933).


Cable: positive momentum slows

Cable finds buyers below 1.3450, yet the weakening positive momentum suggests that the post-Bank of England (BoE) rally may need a break before further expansion. The Fed hawks could give a short-term relief to the pound’s recent marathon. In the mid-term, the pound has certainly more to explore on the upside.

Next supports to the post-BoE rally stand at 1.3400 (Fib 50% retrace on post-BoE rally) and 1.3345 (major 61.8% retrace). A rebound from this level should encourage a mid-term recovery toward 1.3795 (major 61.8% retracement on post-Brexit rally).

The EURGBP sees support at 0.8775. The next natural target for the EURGBP-shorts is the 200-day moving average (0.8740).

Softening pound could help the FTSE extending gains toward the 200-day moving average (7338p). Energy stocks (+0.30%) edge higher in London and could further strengthen on the oil rebound.


Brent versus WTI

The spread between the Brent and WTI crude widened to $7 due to tensions over Kurdistan. The widening spread could encourage short Brent / long WTI trades, hence traders are attentive to signs of reversal. The Brent will likely encounter resistance past $60/barrel, while the WTI crude could pursue the positive trend after having cleared the $52-offers. Solid resistance is eyed pre-$55.

Meanwhile, there are oil-supportive talks in the market. Analysts believe that the Golden Cross formation on the Brent crude (50-day moving average surpassing the 200-day moving average) could challenge the $60-resistance and increase the price gap with the WTI, if the latter fails to pick up momentum.

From a supply/demand perspective, latest analysts reports suggest that Libya, Nigeria and Iran may be already pumping at full capacity and could not boost the global supply to an extend where it would be harmful for the mid-term price recovery. Yet the market mood swings quite fast. Renewed OPEC concerns could rapidly erase the recent gains.


Japan preparing for renewed energy boost from Abe

The situation in JPY-crosses is puzzling. The yen benefits from risk-off inflows even though the political uncertainties in Japan and the proximity of the North Korean threat do not fully justify the Japanese currency’s safe-haven status presently. On Monday, Japanese PM Shinzo Abe announced his plans to dissolve the government to clear the way for a snap general election on October 22nd. He aims to consolidate his power and the recent opinion polls hint that he could come out stronger after the election. His plans to boost the economic recovery involve a 2 trillion yen economic package including education and child care, in expense of the fiscal consolidation. He will also push for higher long-term JGB rates, which should encourage the Bank of Japan (BoJ) to maintain its bond purchases program in place for longer, and eventually to further boost it. The combination of simultaneously looser monetary and fiscal policies should clearly increase the selling pressure in JPY. Therefore, the price pullbacks in USDJPY could attract the dip-buyers. The USDJPY sees support near the daily Ichimoku cloud top (111.55). Decent call options trail from 110.50 to 113.00 at today’s expiry, hinting at the upside potential in this market. The 115.00 could be a plausible medium-term target.

On a side note, PM Abe also hinted at an eventual increase in sales taxes from 8% to 10% on October 2019, an action that has been previously bypassed given that the first attempt to increase taxes from 5% to 8% had a significantly negative impact on Abenomics. The inability to raise funds, combined to a weaker yen, may increase the solvency risk.


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