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Charts and Themes to Watch

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Talking Points:

US midterm elections’ results are due out over the next several hours, starting at 18 EST/23 GMT on Tuesday, November 6 and running through at least 1 EST/6 GMT on Wednesday, November 7.

– Expectations for an immediate reaction across markets may be low due to the forecast of impending fiscal gridlock returning to Washington, DC.

– The US Dollar remains on mixed but slightly favorable footing, according to the IG Client Sentiment Index.

See our long-term forecasts the US Dollar and other major currencies with the DailyFX Trading Guides.

The 2018 US midterm election cycle is winding down. Election results will start to trickle out starting at 18 EST/23 GMT on Tuesday, November 6 and will continue well through the evening, until at least 1 EST/6 GMT on Wednesday, November 7. Even then, due to widespread expectations of close races in key House and Senate races, it’s very possible that when European or even North American traders get to their desks on Wednesday, the composition of the US Congress still won’t be fully known.

We’ve already covered expectations for what to expect out of the US midterm elections. While the prospect of fiscal gridlock portends to a limited market reaction initially – not just in FX, but in bonds, commodities, and equities as well – it’s important for traders to focus on ‘big picture’ issues: forecasts for key currencies beyond the midterm elections, as well as key themes that have been and will continue to influence trading decisions. Here’s what we’re watching for on the other side of Tuesday.

How Will the Election Change the Course of the US-China Trade War?

While the elections will stir deep emotions in both the United States and globally, the material impact the event has on systemic economic and financial themes is far less distinct. One of the greatest ongoing threats to global growth remains the world’s protectionist shift, steered in particular by the United States-led trade war. While the metals tariffs the country placed on many trade partners and the lingering threat of a fracture in relations with the European Union and Japan are serious concern, the relentless escalation in the economic war between the US and China stands as the most overt cinch on the growth and financial health.

Looking through the various possible outcomes for the mid-term elections, there can certainly be a measure of course correction on the degree of combativeness the US government may be willing to ply against their counterparts. For example, a Democrat held Congress could work against the President’s efforts to apply pressure to closer economic allies in Europe or Japan. However, they will not be able to completely scuttle the effort; the president retains significant powers to negotiate on trade, regardless of the composition of Congress thanks to the 1934 Reciprocal Trade Act.

USD/CNH Price Chart: Weekly Timeframe (January 2015 to November 2018) (Chart 1)

Markets After the US Midterms: Charts and Themes to Watch

As for the campaign to keep the pressure on China, there will be less political will to fight from either party to curb the President’s aggression as it could be seen as favorable optics to either support domestic employment or prevent a superpower from leapfrogging the rest of the world using questionable trade practices. That said, the threat that this path poses is extreme. Should a crisis develop in China owing to the trade war, it will readily turn contagious and sweep the world. Even if the world’s two largest economies are able to beat back the bigger threats, there are third parties that can still find themselves slipping into financial instability – such as emerging markets.

Keep an eye on the 7.0000 level of USD/CNH. This is the supposed ‘red line’ for which Chinese officials have defended further depreciation in their currency. If the market continues through that symbolic figure, it is either indication that China is willing to risk the perspective of capital flight in order to use an unorthodox policy tool to fight back against a tariff scale it can’t keep pace with. Or it could be an indication that they simply cannot contain the market. Neither would be an encouraging sign. – John Kicklighter, Chief Strategist

Where Does the Euro Go From Here as Italian Concerns Linger?

Last week, EUR/USD found itself rejected from an area of resistance near the 1.1450 level, where a confluence of levels and lines lie. The rejection has so far been short-lived with EUR/USD holding and rebounding a bit yesterday. This has in focus the potential for an inverse head-and-shoulders pattern.

EUR/USD Price Chart: 4-hour Timeframe (September to November 2018) (Chart 2)

Markets After the US Midterms: Charts and Themes to Watch

On the flip-side, the trend since September has been decisively negative, and with resistance thus far keeping a lid on the Euro price action could merely be corrective in an ongoing downtrend. With a catalyst upon us we should know real soon which way this situation wants to resolve.

EUR/USD Price Chart: Daily Timeframe (January to November 2018) (Chart 3)

Markets After the US Midterms: Charts and Themes to Watch

A sustained move above 1.1456 will confirm the inverse H&S scenario, but will quickly bring into play a familiar barrier in the low-1.1500s. Whether that can be crossed or not is to be seen. A breakdown under 1.1355 will give the upper hand to the correction scenario and likely bring into play the important 11300 level, which interestingly enough, was first forged as an important level following the results of the U.S. Presidential election in 2016. A break below could trigger sell orders and send the Euro down rather quickly from there. – Paul Robinson, Analyst

How Quickly Do Traders Spot Shifting Fed Narrative?

One of the accepted facts in the financial media zeitgeist is that rising interest rates at the start of October triggered the global equity market selloff. The Federal Reserve itself has been fingered as the main culprit, given Fed Chair Jerome Powell’s stated belief that the neutral policy rate was higher than previously anticipated – in effect, saying that the economy could withstand more rate hikes than priced-in.

But as the US midterm elections have come into focus, the Fed has shifted out of the frame and machinations around their policy expectations have likewise faded from view. Yet even as it is widely believed that the Fed will continue hiking rates by 25-bps every three months – March, June, September, and December – it now appears that rates markets are starting to price in the end of the Fed hike cycle around the corner.

Eurodollar 2019/2020 Spread: Daily Timeframe (January to November 2018) (Chart 4)

Markets After the US Midterms: Charts and Themes to Watch

The spread between the Eurodollar 2019 and 2020 contracts recently fell to zero, in effect saying that there would be no difference between the Fed’s main rate at the end of 2019 and its main rate at the end of 2020. For some time earlier in October, the Eurodollar 2019/2020 spread dipped into negative territory, which was a sign that rates markets were signaling the end of the Fed hike cycle in December 2019 and a rate cut coming in 2020.

One of the main narratives for market volatility has been rising interest rates. But once attention shifts away from politics and back to economics, the Fed will quickly return to the forefront. Traders shouldn’t dismiss the impact that the perception the end of the Fed hike cycle coming into view will have on risk appetite, particularly as the calendar turns to the new year and the conversation shifts from “a rate cut in 2020 is possible” to “a rate cut next year is possible” – an entirely different psychological framework than what we’ve been hearing for the past few years. – Christopher Vecchio, CFA, Senior Currency Strategist

Options Markets Like USD/JPY’s Potential, Even if Volatility Expectations are Low

Across FX markets, a currency pair to place close attention to is USD/JPY with option markets suggesting that most activity could be seen in the pair as overnight expiry option vols attach a break-even of 78pips. However, relative to the 2016 election, event risk premiums for the midterm election through overnight expiry options are notably lower. Consequently, this suggests that option markets are not pricing in a large FX reaction. Potentially this could be on the basis that dealers are either assured of the outcome or underpricing the risk of the event.

USD/JPY Overnight Volatility: Daily Timeframe (February 2015 to November 2018) (Chart 5)

Markets After the US Midterms: Charts and Themes to Watch

As it stands, polling data suggests that the midterm election may lead to a split Congress with the Republican party keeping the Senate, however, losing the House of Representatives to the Democratic party. If indeed this is the case, this could see the Japanese Yen benefit against the US Dollar as a split Congress would not only increase the political uncertainty in the US but also provide more hurdles for President Trump to pass through his domestic agenda (further tax cuts, although there may be some common ground on infrastructure), which in turn may weigh on the US Dollar and US equity markets. – Justin McQueen, Analyst

Will the German-US Yield Spread Reverse its Momentous Climb?

One chart to watch will be the spread – or difference in yield – between the US Treasury 10-year yield and the German Bund 10-year yield, which is regarded as the benchmark for Eurozone government bonds in general. The yield spread has been rising throughout this year against a background of a rising federal funds rate at a time when Eurozone monetary policy is expected to be on hold through the summer of next year.

US-German 10-year Yield Spread: Daily Timeframe (January to November 2018) (Chart 6)

Markets After the US Midterms: Charts and Themes to Watch

If the polls are right and the Democrats win the House but fail to win the Senate, or if the Republicans hold on to both, a further easing of US fiscal policy is likely. That, in turn, would likely keep intact expectations of further increases in the federal funds rate and potentially widen the spread still further.

After a period of stability over the summer months, the spread has climbed again so far this Fall and a three percentage point gap is now possible unless the Democrats win both houses of Congress and put a break on Trump’s tax cuts. In that case a drop back towards the summer levels around 2.500% (seen from May through September this year) could be back in the cards – a scenario that would make it easier for EUR/USD to rally into the end of the year. – Martin Essex, MSTA, Analyst & Editor

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

— Written by John Kicklighter, Chief Strategist, Christopher Vecchio, CFA, Senior Currency Strategist, Martin Robinson, MSTA, Analyst & Editor, Paul Robinson, Market Analyst, and Justin McQueen, Analyst



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Forex

Dow Jones, DAX 30 and FTSE 100 Technical Forecast

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Dow Jones, DAX 30 and FTSE 100 Technical Forecast:

  • The Dow Jones faces considerable nearby resistance
  • The DAX 30 enjoys nearby trendline support, but must surmount a Fib level to press higher
  • To the delight of technical traders, the FTSE 100 will have to unravel two conflicting candlestick patterns

Dow Jones, DAX 30 and FTSE 100 Technical Forecast

Amid a whirlwind of trade war developments, equity markets across the globe had to negotiate significant volatility. After the S&P 500 posted its largest gap lower since 2009 on Monday, US equities had their work cut out for them – but were able to recoup most losses. In the days to come, equity markets will continue to struggle with the same themes. Expect technical levels to be strained, especially if volatility persists.

Dow Jones Technical Forecast: Bearish

The Dow Jones ended the week marginally lower than it closed the Friday prior. More importantly however, the Index resides beneath two nearby Fib levels – the 61.8% retracement from March to May at 25,775 and the 78.6% at 23,823. Each level will look to provide resistance early next week. If those levels are surpassed, the 50% level at 25,952 will come into play. The area rebuked prices multiple times last week and should play a similar role next week.

Dow Jones Price Chart: 4 – Hour Time Frame (February – May) (Chart 1)

DJI

How to Day Trade the Dow Jones

With considerable topside resistance, the Industrial Average will once again have its work cut out for it. If attempted rallies are curtailed, the 78.6% level around 25,523 may fortify prices. Beyond that, the 25,400 area should provide further buoyance, despite a break lower on Monday. The area marks March’s lows and provided moderate support last week.

DAX 30 Technical Forecast: Bullish

After a considerable surge last week, the German DAX seems to have its sights set on a continuation rally. Luckily for bulls, the 23.6% Fib level at 12,169 and an ascending trendline from December’s low will look to provide nearby support. The trendline previously marked the lower bound of the ascending channel the Index found itself in during the first-quarter rebound. Should the support hold, the channel may become pertinent once more.

DAX Price Chart: 4 – Hour Time Frame (April – May) (Chart 2)

DAX

Should the index continue higher, highs from last week – around 12,300, should pose initial resistance. Secondarily, the 61.8% Fib level at 12,331 will come into play. If both those levels are surmounted, subsequent resistance will be offered by the upper-bound of the channel and at 12,437 – the full extension of the Fib level from March’s lows to May’s highs.

FTSE 100 Technical Forecast: Bullish

The FTSE 100 closed Friday’s session to leave a perfect hanging-man candlestick on the daily chart. Although shorter time frames are typically better suited for weekly forecasts, the candlestick patterns are too clear to ignore. A hanging man candlestick at the top of an uptrend generally precedes a trend reversal, but what precedes the Friday candle may carry more weight.

FTSE 100 Price Chart: Daily Time Frame (February – May) (Chart 3)

UKX

Prior to the hanging man, the candlesticks from the Tuesday through Thursday sessions form three white soldiers – in this case green soldiers. This candlestick pattern offers a bullish signal, usually preceding further gains. With the conflicting candlestick signals, technical traders will have a lot to look for next week.

That said, the most likely outcome – in my opinion – is a brief retracement early in the week to fulfil the hanging man prophecy and to consolidate. In this scenario, the 23.6% Fib level at 7,296 would pose as critical support. Once the consolidation is underway, the three white soldiers may drive the FTSE 100 higher as the week progresses. For follow up on these technical patterns, or to ask any questions, follow @PeterHanksFX on Twitter.

–Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more: Gold Price Plummets, Seeks Technical Support Near May Lows

DailyFX forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Looking for a fundamental perspective on Equities? Check out the Weekly Equity Fundamental Forecast



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S&P 500, DAX Fundamental Forecast

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Equity Analysis and News

  • S&P 500 | Trade War Tensions Dictating Price Action
  • DAX | EU/US Trade Dispute is Delayed, Not Resolved

FTSE

Source: Thomson Reuters, DailyFX

S&P 500 | Trade War Tensions Dictating Price Action

The S&P 500 is on course to drop over 0.5% for the week as investor angst over US/China trade wars continues to weigh on risk appetite, most notably in the US benchmarks. However, while a mid-week bounce has seen losses pared slightly since the escalation with the S&P 500 now down 3% (Prev. -5.4%), the trade sensitive sectors have maintained their losses with the US Semiconductor Index down 10% (Prev. -11%). Consequently, focus will continue to remain trade wars.

SPX

Markets Pricing in Fed Rate Cuts

The Federal Reserve have continued to maintain the mantra that they will be on hold for the foreseeable future and that there is little reason to provide a cut. However, bonds markets have continued to price in Fed easing, with money markets fully priced for a rate reduction in December. Alongside this, the 3M/10yr US yield curve has continued to dip into inversion amid the rising trade war tensions. The upcoming week will see commentary from Fed Chair Powell, however, with markets pricing in a dovish Fed, the bar is high for Powell to match those dovish expectations as was evidenced in the post monetary policy decision speech on April 24th, in which the Chair noted that soft inflation was “transitory”.

FED

Source: DailyFX, Thomson Reuters

DAX | EU/US Trade Dispute is Delayed, Not Resolved

A firm week for the DAX, which recorded gains of over 1%, among the major factors behind this had stemmed from source reports stating that the Trump Administration were to delay imposing auto-tariffs on EU imports for an additional 6-months (full story), which in turn saw the European auto names surge. The decision to delay could largely be attributed to the fact that US/China tensions have escalated. However, this is merely a delay and not a resolution. Noteworthy calendar events: ECB Draghi & Praet (Thurs), Eurozone PMIs (Thur).

DAX Price Chart: Daily Time Frame (Jan 2019May 2019)

DAX

RESOURCES FOR FOREX & CFD TRADERS

Whether you are a new or experienced trader, we have several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.

— Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

Looking for a technical perspective on Equities? Check out the Weekly Equity Technical Forecast



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Euro Weakness to Remain the Theme

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EURUSD Technical Highlights:

  • Euro looks headed towards the April low or worse
  • 4-hr chart has a developing structure to pay attention to

Check out the DailyFX Trading Guides page for intermediate-term forecasts, educational content aimed all experience levels, and more.

Euro looks headed towards the April low or worse

To be clear, trading EURUSD lately hasn’t been an easy endeavor as low volatility conditions continue to be a headwind for traders. We’ve seen some movement in other majors (GBPUSD in particular) but not in the most widely traded pair. That will eventually change, but until it does we have to continue to take what is presented to us and be patient with set-ups.

With that said, the general trading bias remains the same as it has for months – lower. Trend and price action continue to be supportive of this bias. A run on the April low at 11109 or worse looks to be in store sometime in the coming sessions, but the path could be a little shaky.

Dialing in a bit closer to the 4-hr time-frame, a channel is becoming visible even if it isn’t perfect, with candlestick wicks clouding the picture. A small bounce from the lower parallel may make for the best scenario, as the lower parallel’s importance is further cemented and a nearby low is created in the process.

A bounce and subsequent breakdown could offer a solid structure (see 4-hr chart) for would-be shorts from both a probability and risk/reward standpoint. Selling right here at support puts one at risk of a bounce with good stop placement difficult to determine.

A bounce that carries the euro beyond 11225 will give pause to sellers and bring into play the area around 12265 (recent highs/trend-lines) and possibly become an even more attractive spot to short. The bottom line is that the Euro looks headed lower, but it may pay to sit tight and wait for a better look before entering new positions. If currently in a short from higher levels, then one could use the aforementioned highs and trend-lines to manage risk accordingly.

Check out the IG Client Sentiment page to find out how changes in positioning in major markets could signal the next price move.

EURUSD Daily Chart (April low, 11000s could be soon)

EURUSD

EURUSD 4-hr Chart (Channel/Bear-flag)

EURUSD

Helpful Resources for Forex Traders

Whether you are a new or experienced trader, we have several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.

—Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at@PaulRobinsonFX

Looking for a fundamental perspective on The Euro ? Check out the Weekly EUR Fundamental Forecast



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