USD profit-taking intensifies
For months, the European Central Bank and its President Mario Draghi have been calling for a weaker Euro exchange rate. A combination of the ECB adding more stimulus to reinvigorate the EU economy alongside the continual consistency of alarming data weakening the EU sentiment achieved some Euro weakness. However, for the bear run to continue, demand for the USD would need to remain strong, otherwise the pair would appreciate very suddenly. Unfortunately for Draghi and the bears, USD profit taking last week resulted in the Eurodollar reversing to the upside.
This upside move was not encouraged by Euro strength but instead, USD weakness. Despite fears over Europe’s largest economy (Germany) heading for a recession intensifying following the latest ZEW Survey falling into negative territory, heightened fears over global economic growth encouraged suspicions that the Fed might delay raising interest rates and as such, investors took profit on the Greenback.
Aside from Thursday’s EU Markit PMI’s, economists will be looking for clues regarding whether the EU economy is stagnating, where the Eurodollar fluctuates is dependent upon how the markets react to US economic news. The United States economic release to look out for is September’s inflation data. If suspicions arise that the Federal Reserve will unexpectedly continue QE, expect the Eurodollar to make moves towards 1.29 and 1.30.
Looking at the technicals, the EURUSD patterns currently paint an interesting picture. Not only does the pair remain inside the same bearish channel it has been involved in for months, meaning the pair can still technically move lower - but a bullish trendline within the channel has also formed. Therefore, if the USD does weaken over the upcoming week, there is a technical pattern that will support the pair moving to the upside.
If the Eurodollar appreciation continues, resistance can be found at 1.2884 and 1.2905. If the US inflation report suggests the Federal Reserve will conclude QE as planned, the USD is likely to strengthen and as such, support can be found at 1.2705 and 1.2624.
In line with what has been noticed in the past few weeks, the Cable continued to struggle to find any direction last week and alternated between a bullish and bearish sentiment. The pair recorded a new yearly low (1.5874) following the news that annualised inflation for September was 1.2%, way below the Bank of England’s (BoE) 2% threshold target before they will consider a rate increase. However, the pair then encountered a complete reversal on Wednesday afternoon when the US markets experienced a sell-off. Comments from James Bullard, renowned to be the most hawkish member of the Federal Reserve, on Thursday evening that the Fed might consider continuing QE led to the pair reversing all of its previous losses.
Volatility for this pair is likely to intensify with two crucial economic releases scheduled to be announced. GBP bulls will be hoping the BoE Minutes release will show that a third member of the Monetary Policy Committee (MPC) voted for a UK rate rise in October, while the United States inflation data for September is also released. The recent FOMC Minutes suggested there is concern among the Fed that the higher valued USD would be detrimental to US inflation targets. If there is an unexpected slowdown in inflation, confidence in the Greenback will weaken quickly and as such, the GBPUSD could continue its reversal.
From a technical standpoint, the pair is clearly experiencing a downtrend but appears to have pulled away from the bearish channel it previously found itself within. Instead, the GBPUSD has formed some sort of wedge pattern, which can lead to an upside rally later on. Before traders get carried away and see this wedge pattern as a “buy now” opportunity, it must be pointed out that this pair still has plenty of room to move both on the upside and downside, before a potential breakout. If the pair continues to move to the upside, resistance can be found at 1.6152 and 1.6225. If the pair moves in a bearish direction, support can be found at 1.650 and 1.6007.
During the previous weekly review, we mentioned Gold declining and hitting the $1180 target a few weeks earlier than previously forecast.
Reaching the $1180 target also represented a “triple bottom” technical pattern, encouraging investors to enter the market. At first, I was apprehensive this would be a false breakout – mainly due to the expectation the Fed will conclude QE later in October. The US market-sell off during the previous week, alongside comments from the Fed’s James Bullard that the Fed may not actually conclude QE after all has changed my weariness towards a false breakout. With the right fundamentals connecting together, we could now be looking at Gold going on a bull run.
The two major economic releases over the upcoming week involve Chinese GDP and US inflation for September. However, despite all the political/economic uncertainty around the world, Gold has continued to trade only in accordance with US economic news. Therefore, investors in Gold must keep an eye out for US inflation data.
If the inflation data heightens anticipation that the Fed will delay normalising monetary policy and continue QE, there are high chances Gold will become very attractive to investors. Gold seems to have found some resistance around 1250 but if this is surpassed, resistance can be found at 1270 and 1290. If the Fed concludes QE as planned, this would encourage Gold to erase its recent gains, with support found at 1220 and 1204.
Both the Stochastic Oscillator and RSI are suggesting that Gold could move in either direction.