Special report: ECB Decision: Preview and Insights
Next 24 hours: Stocks Try to Recover, USD Still Bid Against Euro, Pound
Today’s report: Euro and Pound Underperformance Explained
It’s interesting to see the kind of price action we’ve been seeing in recent sessions, in light of the ongoing deterioration in global sentiment, with the Euro and Pound hit the hardest over the past week against the US Dollar. So what’s going on out there that could reconcile the mysterious price action?
Wake-up call
- ECB decision
- Pressure mounting
- traditional flow
- tough situation
- China risk
- Upbeat BoC
- Kiwi deficit
- Fed model
- institutional demand
- wait-and-see mode
- risk liquidation
Peformance chart: Performance v. US dollar since weekly open
Suggested reading
- Markets Seek A Silver Lining That Isn’t There, R. Burgess, Bloomberg (October 23, 2018)
- How Will Brexit Impact Immigration, V. Kortekaas, Financial Times (October 24, 2018)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The Euro has struggled since breaking back above the Ichimoku cloud in September, with the latest round of setbacks compromising a bullish shift in the outlook. But if the market can establish a sustained break back above 1.1600, it will strengthen the prospect of a more meaningful higher low in August ahead of the next major upside extension back above the +3 year high from earlier this year up around 1.2550. Setbacks should not hold up ahead of 1.1433.
EURUSD – fundamental overview
Plenty of negative drivers weighed on the Euro in Wednesday trade, with the single currency dropping back towards the 2018 low from August at around 1.1300. Euro area growth momentum produced the lowest reading in more than 2 years, Germany’s private sector activity came in at the weakest levels since 2015, while German factory orders contracted for the first time in four years. On the Italian drama front, Deputy PM Salvini said the EU was attacking Italy’s economy and the Italian budget program would not be making any changes. All of this was going on ahead of today’s ECB decision, which is sure to inspire some more volatility in the major pair. Other calendar standouts on the day include German IFO readings, US initial jobless claims, durable goods and pending home sales.
EURUSD – Technical charts in detail
GBPUSD – technical overview
The correction off the 2018 low transformed into an uptrend following the September break above the daily Ichimoku cloud. It was the first time the market had traded above the cloud since trading around 1.4000 back in April. This encourages the possibility for a more meaningful recovery ahead, with a break back above 1.3300 to strengthen the outlook. Setbacks should now hold up ahead of the 1.2800.
GBPUSD – fundamental overview
There hasn’t been a whole lot of good news out of the UK these days. The Brexit bumps are right back front and centre and speculation of a leadership challenge to oust Theresa May has been on the rise. The UK PM has been having a difficult time getting her own party on board with her Brexit plans and will need to figure something out quickly to inspire confidence and give the market a sense of stability. Meanwhile EU Tusk has said the Brexiteers are fully responsible for the Irish border dispute and there’s no guarantee a hard Irish border can be avoided. Another cabinet meeting has reportedly been called for today and this will be a primary focus, with no first tier UK data on the docket. As far as the US docket goes, we get initial jobless claims, durable goods and pending home sales.
GBPUSD – Technical charts in detail
USDJPY – technical overview
Rallies continue to be very well capped on a medium-term basis, with the outlook still favouring lower tops and lower lows. The latest breakdown back below 113.00 strengthens the outlook, with the door open for a drop towards the next major support around 109.75. Ultimately, only a close back above a previous lower top from the Fall of 2017 at 114.74 would compromise the bearish structure.
USDJPY – fundamental overview
Overall, the major pair looks increasingly vulnerable given the state of US equities, which are threatening a major capitulation. We’re now living in a world where central bank and government stimulus is no longer there in the way it had been for a decade post 2008 crisis, which increases the probability for Yen demand, as negative shocks to the global economy surface, particularly in light of tension surrounding fallout from US protectionism. We remain skeptical that stimulus measures out of China will be enough to translate to sustainable rallies in the US equity market, which ultimately is going to be dictating direction. Looking at today’s calendar, we get an ECB decision and US releases that include initial jobless claims, durable goods and pending home sales.
EURCHF – technical overview
The market has been in the process of recovering out from a 2018 low coinciding with critical support in the 1.1200 area. However, at this stage, there is no clear directional bias, with the price action deferring to a neutral state. Back above 1.1560 would get some bullish momentum going for a push to 1.2000, while back below 1.1200 would be quite bearish.
EURCHF – fundamental overview
The SNB remains uncomfortable with Franc appreciation and continues to remind the market it will need to be careful about any attempts at trying to force an appreciation in the currency. But the SNB will also need to be careful right now, as its strategy to weaken the Franc is facing headwinds from a less certain global outlook. Any signs of sustained risk liquidation between now and year end, will likely invite a very large wave of demand for the Franc that will put the SNB in the more challenging position of needing to back up its talk with action, that ultimately, may not prove to be as effective as it once was, given where we’re at in the monetary policy cycle.
AUDUSD – technical overview
Technical studies are stretched on a medium term basis, and the market has been attempting to recover out from its lowest levels since February 2016. Still, it would take a break back above the September high at 0.7316 to alleviate immediate downside pressure and encourage the possibility for any possible shift in the trend.
AUDUSD – fundamental overview
The Australian Dollar is tracking along with bigger picture macro drivers that have mostly weighed on the currency, resulting in recent setbacks to its lowest levels against the US Dollar since February 2016. These drivers are highlighted by the Fed’s more hawkish policy outlook and downside risk associated with US trade policy. Attempts by the Chinese government to bolster sentiment have helped to give Aussie a little prop in recent days, though we remain skeptical that China will have the ability to inspire enough confidence that it will translate to a US equity market that looks like it could have a lot more to drop in the weeks and months ahead. Looking at today’s calendar, we get an ECB decision and US releases that include initial jobless claims, durable goods and pending home sales.
USDCAD – technical overview
The market has been under pressure since topping out in June, which could still invite a deeper decline before the next upside extension gets underway. Still, look for any weakness to be well supported ahead of 1.2500 with only a break back below this psychological barrier to negate the bigger picture constructive outlook.
USDCAD – fundamental overview
Recent setbacks in the price of OIL and a run of softer Canada data were not reflected in Wednesday’s Bank of Canada decision, with the central bank producing a hawkish, upbeat message. The BoC raised rates another 25 basis points as was widely expected, but went even further than the market was expecting, dropping references in the monetary policy statement to a ‘gradual approach,’ while adding ‘all monetary stimulus eventually needed to be withdrawn’ and ‘the policy interest rate would need to rise to a neutral stance to achieve the inflation target.’ BoC Wilkins threw in that it was ‘appropriate to now have flexibility to hike more quickly or more slowly,’ and Governor Poloz said the economy was running at capacity and was no longer in need of stimulus. Looking ahead, absence of first tier data in Canada will leave the market focused on fallout from the ECB decision and US data that features initial jobless claims, durable goods and pending home sales.
NZDUSD – technical overview
Kiwi setbacks have extended to another 2018 low, with the market also back to its lowest levels since January 2016. This leaves the door open for declines down towards massive support just ahead of 0.6100, in the form of the 2015 low. At the same time, technical studies are looking stretched on a medium term basis, which could warn of a meaningful low ahead of such a retest. Still, at this point, it would take a break back above the September high at 0.6700 to take the immediate pressure off the downside.
NZDUSD – fundamental overview
The New Zealand Dollar has come back under pressure in recent days, with risk off flow and broad based US Dollar demand factoring into the price action. Thursday’s wider than expected Kiwi trade deficit has been another negative for the currency, though setbacks from the data have been mild. Overall, it appears as though sustained moves to the topside could be a tough go for some time. While we did get a Kiwi supportive hotter CPI reading last week, and while the Chinese government has given its assurances it will continue to be there to support the New Zealand correlated Chinese economy, this doesn’t feel like it will be enough as there are too many unresolved issues on the macro front that easily offset any of these Kiwi supportive drivers. The combination of Fed policy normalisation and fallout from US trade policy are some of those big themes that would suggest Kiwi won’t be looking for any major rallies in the foreseeable future. Looking at today’s calendar, we get an ECB decision and US releases that include initial jobless claims, durable goods and pending home sales.
US SPX 500 – technical overview
A market that has been extended on the monthly chart is at risk for a major correction, with the possibility for a massive topping formation. Any rallies should now continue to be very well capped ahead of 3000, in favour of renewed weakness back below the 2530 area yearly low (neckline) and towards a retest of strong longer-term resistance turned support in the form of the 2015 high at 2140. Only a weekly close above 3000 would negate the outlook.
US SPX 500 – fundamental overview
Investor immunity to downside risk is not as strong these days. The combination of Fed policy normalisation, US protectionism, ongoing White House drama and geopolitical tension are all warning of capitulation ahead, despite this latest run to record highs. The Fed has also finally acknowledged inflation no longer running below target in 2018, something that could very well result in even less attractive equity market valuations given the implication on rates. We recommend keeping a much closer eye on the equities to ten year yield comparative going forward, as this could be something that inspires a more aggressive decline in the fourth quarter.
GOLD (SPOT) – technical overview
The market has been showing signs of wanting to turn back up after establishing back above the daily Ichimoku chart. There are also signs that we could be seeing the formation of a more significant medium to longer-term structural shift that would be confirmed if this latest recovery can extend back through big resistance in the form of the 2016 high at 1375. Look for setbacks to be well supported ahead of 1200, with only a close back below 1150 to compromise the constructive outlook.
GOLD (SPOT) – fundamental overview
The yellow metal continues to be well supported on dips with solid demand from medium and longer-term accounts. These players are more concerned about exhausted monetary policy, extended global equities, political uncertainty, systemic risk and trade war threats. All of this should 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.
BTCUSD – technical overview
Considering the intensity of declines already seen this year, if the market does break to the topside, it could be a bullish signal that gets the trend moving up again. But we would need to see a break above the July lower top at around 8,500 for confirmation. Until then, a bearish continuation back towards the September 2017 low around 2,975 can not be ruled out.
BTCUSD – fundamental overview
Overall, Bitcoin is doing its best to try and hold up above $6,000 in 2018 after undergoing a massive decline off the record high from December 2017. At the moment, the market has found some stability around the $6,000 barrier, with buyers stepping in on the view that the regulatory challenges will eventually work themselves out, leaving a very bullish picture for a technology with tremendous potential and increasing adoption. Still, there has been concern in the shorter-term on account of regulatory challenges in the space and downside pressure in global equities.
BTCUSD – Technical charts in detail
ETHUSD – technical overview
The market remains under pressure in 2018, extending its run of intense declines to fresh 2018 lows. The next level of major support comes in around $160, which goes back to the low from July 2017. Daily studies are however oversold, which could warn of a bigger corrective bounce before the next downside extension and bearish continuation. It would take a break back above $321 to officially take the pressure off the downside.
ETHUSD – fundamental overview
Overall, we’ve seen quite a bit of weakness in the price of Ether in 2018 and there’s still legitimate risk for deeper setbacks, given technical hurdles within the protocol, ongoing regulatory challenges and a global macro backdrop exposing risk correlated projects on the Ethereum blockchain. Monetary policy normalisations around the globe and an anticipated reduction in global risk appetite are placing a tremendous strain on ERC20 projects that have yet to even produce proper use cases and proof of concept.