Next 24 hours: Brexit Bumps and Dollar Jump
Today’s report: Big Rotation Ahead?
Most of the attention in markets on Monday will be away from the economic calendar and on the overall state of investor risk appetite following Friday's sharp setback in the US equities market. Draghi and US ISM non-manufacturing ahead.
Wake-up call
Chart talk: Major markets technical overview video
- ECB Draghi
- Brexit bumps
- global sentiment
- Unwelcome inflow
- RBA decision
- Canada manufacturing
- sentiment shift
- jobs report
- Metal demand
- BITCOINÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Goldilocks Era Nearing An End, L. Christensen, Bloomberg View (February 2, 2018)
- Investing in India? Call Your Tax Lawyer, A. Mukherjee, Bloomberg  (February 2, 2018)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The Euro has entered a period of consolidation off the recent 2018 high, though overall, the uptrend remains firmly intact and there is still room to run. The break of the 2017 high set up a bullish continuation and the next major measured move upside extension into the 1.2700 area, which coincides with monumental resistance in the form of a falling trend-line off the record high from 2008. In the interim, any setbacks should be very well supported ahead of 1.1900.
EURUSD – fundamental overview
The Euro has pulled back in the aftermath of a US jobs report that showed a higher than expected jump in hourly earnings, something that will put pressure on the Fed to stick to, if not potentially accelerate its monetary policy normalization timeline. Still, setbacks have been contained, with the market hung up on the impact of US administration soft Dollar policy. On Monday, the market digests ECB Draghi and US ISM non manufacturing.
GBPUSD – technical overview
Daily studies are in the process of unwinding from overbought levels. This in conjunction with the market reaching the measured move extension objective following the breakout above 1.3660, warns of either a period of consolidation with limited upside, or deeper setbacks over the coming sessions. This sets up the possibility for a double top formation on the daily chart, with a break below the 1.3981 neckline opening a deeper drop and measured move back towards the 2017 high, which is now previous resistance turned support. But any setbacks are viewed as corrective, with the market now seen well supported into that previous resistance turned support in the form of the 2017 high at 1.3660.
GBPUSD – fundamental overview
Softer UK data in the previous week had weighed on the Pound, with the UK currency unable to retest the recent 2018 high. Meanwhile, a hawkish slant in the FOMC decision, with respect to the outlook on inflation, was backed up in the US employment report, with hourly earnings jumping above forecast, to weigh on the Pound even further. Brexit bumps are also returning and the PM is facing additional pressure from within. As far as the Monday schedule goes, US ISM non manufacturing is the only notable standout. Later this week, we get an important decision from the Bank of England.
USDJPY – technical overview
The major pair has been confined to a range trade for much of 2017, with rallies well capped ahead of 115.00 and dips well supported below 108.00. The latest topside failure off the range high encourages this outlook, with the break back below 110.85 opening the door for an acceleration towards the 107.00-108.00 area range base in the sessions ahead. Look for any bounces to now be well capped ahead of 111.50.
USDJPY – fundamental overview
The major pair has been in recovery mode in recent sessions, perhaps getting some help from the technical side as it trades into major multi-month range support. Of course, the more hawkish read of the mostly uneventful Fed decision and the subsequent release of above forecast US hourly earnings, have also inspired renewed Yen weakness. But overall, the Yen has been well bid in early 2018 despite another run in US equities and with stocks rolling over a bit, this actually could warn of even more Yen strength (USDJPY weakness) over the coming days, with a liquidation in risk correlated assets to inspire a flight back into the funding currency that is the Japanese Yen. The fact that the US administration has been campaigning for a soft Dollar, makes this even more relevant, with the Yen in position to take in more risk off flow as a consequence, at least for some period of time. Looking ahead, US ISM non-manufacturing and the performance in stocks will be the major focus.
EURCHF – technical overview
The market continues to trend higher, extending gains to a fresh multi-month high. The bullish price action has the market thinking about a retest of that major barrier at 1.2000 further up. In the interim, look for the current round setbacks to be very well supported ahead of 1.1400, while only back below 1.1260 would delay the overall constructive tone.
EURCHF – fundamental overview
The SNB will need to be careful right now, as its strategy to weaken the Franc could face headwinds from the US equity market in 2018. The record run in the US stock market has been a big boost to the SNB’s strategy with elevated sentiment encouraging Franc weakness. Of course, the SNB is no stranger to this risk, given a balance sheet with massive exposure to US equities. But any signs of capitulation on that front into this new year, will likely invite a very large wave of demand for the Franc, which will put the SNB in a more challenging position to weaken the Franc.  And so, we speculate the SNB continues to be active buying EURCHF in an attempt to build some cushion ahead of what could be a period of intense Franc demand ahead. Recent outperformance in the Swiss Franc despite flows which should have otherwise been supportive of a higher EURCHF, could already be offering up a red flag.
AUDUSD – technical overview
An impressive recovery out from the December low has finally stalled out, with the market rolling over after clearing the 2017 high. This latest daily close back below 0.7957 strengthens this outlook and opens the door for a renewed wave of declines. At this point, only a daily close back above 0.8045 would negate.
AUDUSD – fundamental overview
The pullback in commodities and equities, along with a concurrent rally in the US Dollar this past Friday, was enough to hit an already stumbling Australian Dollar. Aussie had been underperforming ahead of Friday on some softer local data and sunk like a stone after the US jobs report was healthy and showed a surprise jump in hourly earnings. Setbacks have been supported on Monday, though the market may just be consolidating ahead of the next big drop, especially if the risk off flow persists. As far as the calendar goes, we get an important RBA decision on Tuesday and ahead of this even risk, we get US ISM non manufacturing.
USDCAD – technical overview
Despite the latest round of setbacks, there are signs of basing in this pair, after the recovery from plus two year lows back in September extended through an important resistance point in the form of the August peak. This sets the stage for additional upside, with the next focus on a retest of the psychological barrier at 1.3000. In the interim, any setbacks should now be well supported above a critical 78.6% fib retrace at 1.2240 on a daily close basis. Back above 1.2591 will strengthen the outlook.
USDCAD – fundamental overview
The Canadian Dollar hasn’t been able to do anything with a recent run of solid data, with USDCAD well supported on dips. Certainly the more hawkish read of last week’s otherwise as expected FOMC decision, and a rise in US hourly earnings was also a contributor to the Loonie selling. Overall, Canada’s recovery is still somewhat fragile, and this coupled with an unstable macro picture and plenty of uncertainty around the fate of NAFTA, should be keeping the Canadian Dollar from wanting to run much higher, especially after the Bank of Canada opted to go ahead with another rate hike last month, which will only add to the strain if the global sentiment picture deteriorates. Looking ahead, US ISM non-manufacturing data is the only notable standout.
NZDUSD – technical overview
An impressive run has finally stalled out into formidable internal resistance. Overall, the risk is tilted to the downside and it will take a clear establishment back above 0.7400 to delay the bearish outlook and risk for another reversal. A daily close below 0.7280 will strengthen the bearish outlook.
NZDUSD – fundamental overview
Most of the Kiwi strength over the past several weeks has been driven off broad based US Dollar weakness, record stocks and recovering commodities prices. But with US equities showing signs of rolling over, sentiment at risk of deteriorating, and the US Dollar recovering in the aftermath of this more hawkish Fed read and tick up in hourly earnings, it all could be warning of the start to renewed weakness. Looking ahead, the focus here will be on US ISM non-manufacturing. Later this week, we get an RBNZ decision.
US SPX 500 – technical overview
A severely overbought market has finally at long last relented, allowing for stretched readings to unwind. There’s plenty of room for these setbacks to extend following the break back below 2772 support, with the market at risk for an acceleration below 2700. A close back above 2800 will now be required to take the immediate pressure off the downside.
US SPX 500 – fundamental overview
Investor immunity to downside risk is not looking as strong these days and there’s a clear tension out there as the VIX starts to rise from unnervingly depressed levels. The fact that Fed policy is normalising, however slow, could start to resonate a little more, with stimulus efforts exhausted, balance sheet reduction coming into play and the Fed finally following through with forward guidance. Certainly, the more hawkish tone from last week’s otherwise uneventful Fed meeting and subsequent jump in hourly earnings, are the types of things that could weigh more heavily on sentiment in the sessions ahead.
GOLD (SPOT) – technical overview
Setbacks have been well supported over the past several months, with the market continuing to put in higher lows and higher highs. Look for the current run to break through and establish above massive resistance in the form of the 2016 high at 1375, with the push to suggest a major bottom has formed, opening the door for a much larger recovery in the months ahead. Any setbacks should now be well supported ahead of 1300.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players persists, with these players more concerned about exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity well supported, with many market participants also fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Certainly the US Dollar under pressure has added to the metal’s bid tone as well, but there is a growing sense that even in a scenario where the US Dollar is bid for an extended period, GOLD will hold up on risk off macro implications. The 2016 high at 1375 is a massive level that if broken and closed above, could be something that triggers a widespread panic and rush to accumulate more of the hard asset.
Feature – technical overview
Bitcoin has come under intense pressure since topping out at a record high just shy of 20,000 in December. The market had been in a period of consolidation in the aftermath of the record run, with most of that consolidation playing out between 12,000 and 17,000. The recent break below the consolidation low opens the door for an accelerated decline towards the next measured move extension target around November levels, in the 7,000 area.
Feature – fundamental overview
The crypto asset has come under intense pressure in early 2018, with ramped up regulatory oversight and potential government crackdowns forcing many holders to exit positions. The market has also been on a euphoric ride, with the run gaining too much momentum as latecomers look to get in on the action, often a sign of a bubbling asset. Bitcoin has struggled on the transaction side as well, with transactions per second a major drawback, along with a mining community that has been less willing to process transactions due to the lower fees. The Lightning network is expected to ramp up transaction speed as it is integrated, which could be a big help to Bitcoin, though it seems the combination of a massive bubble, more regulatory oversight and a market that is still trying to convince of its proof of concept, could be at risk for deeper setbacks. Throw in an extended global equities market at risk for its own capitulation and the picture looks even gloomier.