USD profit-tak­ing in­ten­si­fies

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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