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Dow Turns an 8-Day Advance, Dollar Ratchets Up the Bullish Pressure

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Talking Points:

  • US equity indices turned pause into decline Tuesday, but this didn’t seem a wide risk move on events like North Korea fears
  • Dollar posted a strong rally alongside the charge in 10-year Treasury yields to 7-year highs but key levels are still ahead
  • Pound and Euro face Brexit and Italian dissent, but it is the Kiwi and Swiss franc that still present the appealing setups

See how retail traders are positioning in the FX majors, indices, gold and oil intraday using the DailyFX speculative positioning data on the sentiment page.

Risk Trends Sour but it is US Equities Leading the Way

Speculative sentiment started off the week on shakey ground, but it started to genuinely slip through Tuesday’s session. Taking their position as symbolic leader of risk trends seriously once again, the US equity indices were opened this past session with sizable gaps down on the the open. The selling pressure gained a little more traction through the active trading hours without tipping into a full-tilt bear trend. The S&P 500 curbed its bullish breakout bid, the Nasdaq 100 is starting to form a right shoulder through a head-and-shoulders pattern, and the Dow broke its longest streak of daily gains (8) in 12 months. The damage done in altitude loss may be modest, but the impact on already flimsy conviction can prove more crippling than many appreciate. Looking further afield on the risk spectrum, there isn’t evidence of a full buy-in. Europen equities were steady, Yen crosses didn’t commit but emerging markets certainly felt the pain. Currencies like the Brazilian real, Turkish lira and Indian rupee suffered mightily to the US dollar.

Dow Turns an 8-Day Advance, Dollar Ratchets Up the Bullish Pressure

Dollar: Not Ready to Capitulate Just Yet

The fundamental drive behind the Greenback may be an uneven mix of half stabile drivers, but it is nevertheless keeping the currency buoyant. Facing a recent slip, the DXY Index staged an impressive rebound Tuesday to plug the hole it had sprung following a month-long recovery effort. The currency’s rally earned a noteable break for USD/JPY above 110 with a long-term trend break for the battered NZD/USD, but the progress was far less ‘critical’ elsewhere. For EUR/USD, a return to the 2018 low was as good as it would get. The jump for GBP/USD, USD/CHF and AUD/USD would simply build a little favorable pressure in recently established ranges. If you were looking for the signal for Dollar bidding in the docket or headlines, you wouldn’t find much. Aside from housing data that offers little regular market moving, the Fed speak on tap struke familiar chords. The testimony of two Fed candidates – Clarida and Bowman – raises the potential of a heavier hawkish skew in the Board, but that hardly seems a relaible ladder rung. A moderate risk appetite, monetary policy advantage, speculative bid and counterpart pain can combine to gains moving forward; but it is not an easy mix to keep.

Dow Turns an 8-Day Advance, Dollar Ratchets Up the Bullish Pressure

Key Fundamentals without Key Move: Pound, Euro and Yuan

We have registered some remarkable fundamental developments for key currencies this past session that resulted in very unimpressive market moves. A run of Chinese data offering a miss on Chinese retail sales and industrial production along with the new offer of the country’s jobless rate resulted in little tangible USD/CNH response as we would expect from a managed exchange rate. A little more surprising was the limited response from the Sterling to the UK data. The jobless claims change jumped more than three times the forecast with an uptick in the claimant count rate. Add to that the Scottish Parliament offering more trouble for Britains withdrawal proposal and news that a Brexit white paper will come out next month, and it is impressive that GBP/USD would take out its range low with the Dollar’s performance. From the Euro, a concerning headline of demands from Italy’s Five Star and League didn’t gain much rotation amid updates like North Korea’s threat to cancel the summit with President Trump. Demands that 250 billion euros in ECB purchased Italian debt be forgiven, reform of European treaties and making easier to exit the EU are troubling. Yet, the Euro didn’t seem too troubled looking around at the broad performance beyond EUR/USD.

Dow Turns an 8-Day Advance, Dollar Ratchets Up the Bullish Pressure

Impressive Moves with Less Fundamental Source

In contrast to the heavy-news-light-action mix above; the Kiwi dollar, Swiss franc and gold were doing much more with less. The docket was essentially open for the New Zealand currency, and yet the pain continued with a critical extension on NZD/USD. This is not a free to roam bear run however as GBP/NZD, EUR/NZD and NZD/JPY are near the boarders of critical technical levels. If the pain continues, these are pairs that should be watched closely – but even if it makes a bid for recovery, these are still strong opportunities. From the Swiss franc, we don’t expect a traditional fundamental response; but it is clear that EUR/CHF exerts particular influence. The pair made a more threatening correction this past session and pairs like CAD/CHF pose impressive opportunity. Even gold put in for an impressive day. Certainly the strength for the Dollar and 10-year Treasury yield contributed to the metal’s problems, but the break from a month’s-long range was still a surprise. Looking to retail speculative interest, traders are confident range conditions will kick back in with extreme net long interest on virtually no short exposure. Beware extreme conviction as it can prove to be delusion. We discuss all of this and more in today’s Trading Video.

Dow Turns an 8-Day Advance, Dollar Ratchets Up the Bullish Pressure



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Forex

A Complete Lack of a Cohesive Government Blights Sterling

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GBP Forecast: A Complete Lack of a Cohesive Government Blights Sterling

Fundamental Forecast for GBP: Neutral

Sterling (GBP) Talking Points:

  • No Meaningful Vote. No Leadership. No EU Concessions. No Brexit.
  • Year-end market conditions make Sterling positions foolhardy.

The DailyFX Q4GBP Forecast is available to download.

In current market conditions, and with the total lack of a cohesive Brexit plan, trading Sterling is nigh on impossible to recommend from a risk- reward stance, leaving our outlook neutral even though the path of least resistance for the British Pound is pointing lower.

Over the past week, the meaningful vote in Parliament for PM May’s Brexit plan was cancelled, the Prime Minister won a vote of confidence – although 117 of her party voted against her – and her visit to Brussels to ask for more concessions to help solve the Irish backstop impasse were roundly rejected by the EU.

As we stand there are a few scenarios that may play out in the short-term, nearly all damaging for the British Pound. The calls for the PM to resign may be listened to by Theresa May, unlikely but still a possibility – the opposition may call for her to step-down, more likely but the Labour Party is currently divided on its Brexit stance – the EU offers some meaningful concessions to help the bill get through Parliament, again highly unlikely – no agreement and the UK goes to WTO rules, looking possible – and finally another Brexit Referendum, a view now gaining traction and a real possibility. While a second Brexit Referendum, and a likely win for Remain, would boost Sterling, the run-up to this break with democracy will weigh heavily on the British Pound.

In a nutshell – if a Government is unable to lead and inspire confidence, putting a value on its currency is impossible.

GBPUSD Four-Hour Price Chart (October – December 14, 2018)

GBPUSD Four-Hour Price Chart

IG Client Sentiment data show 62.8% of traders are net-long GBPUSD. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests that GBPUSD prices may continue to fall. However, the combination of recent daily and weekly positional changes give us a mixed trading bias.

— Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1

Other Weekly Fundamental Forecasts:

Japanese Yen Forecast – USD/JPY Rate Fails to Test Monthly-High Ahead of Fed Rate Decision

Oil Forecast – Crude Oil Prices Swamped by OPEC Cuts, Global Growth Fears, Fed



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Is Gold Posed to Lose its Luster?

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Is Gold Posed to Lose its Luster?

GOLD PRICE FUNDAMENTAL FORECAST: NEUTRAL

Talking Points:

  • Gold’s recent bullish breakout may come under pressure despite strong safe-haven demand
  • A strong US Dollar notching year-to-date highs to limit further advances in gold
  • Prospect of a Federal Reserve rate hike pause could shoot the precious metal higher

GOLD PRICE FUNDAMENTAL FORECAST: NEUTRAL

Over the last 5 days of trading, XAUUSD declined 0.72% as investors anxious over slowing global growth sent the US Dollar higher. Although risk-off sentiment should send the precious metal higher, gains in the Greenback overpowered bullish bids for gold. A higher US Dollar makes purchasing gold denominated in America’s currency relatively more expensive thus limiting upside.

Looking to next week, focus will shift to the Federal Reserve as markets await the highly anticipated decision by the central bank’s Federal Open Markets Committee on monetary policy. Markets are currently pricing a 77 percent chance that the Fed will raise its benchmark policy interest rate for the fourth time this year according to the futures market implied probability.

In general, Gold has an inverse relationship with interest rates due to the precious metal not yielding any cash flows like debt instruments. Higher rates result in weakened demand for the commodity as alternative assets such as US Treasuries provide a higher rate of return. If the Fed surprises markets and pauses next week or makes any material downward change to the Fed’s dot-plot, gold could ascend quickly on back of lower future interest rate expectations.

Eyes will also closely watch for the release of several key economic indicators out of America next week. If actual results miss expectations, risk-off sentiment should continue and further boost demand for gold. However, fears over a slowing global economy will incite further rotation of capital from stocks to bonds with investors flocking to the safety of US Treasuries.

For a list of global economic events and data releases, check out our real-time Economic Calendar.

As international buying of Uncle Sam’s bonds increases, foreigners must convert their currency into US Dollars. This drives up demand for the Greenback which becomes a headwind for gains in gold due to the inverse relationship between the two assets.

A third key driver to take note of that will determine gold’s next move higher or lower will be the performance of the Chinese Yuan. As the damaged Asian economy continues to experience downward pressure amid worsening economic data due to the ongoing trade war with the United States, the Dollar may appreciate further against its Chinese counterpart.

The importance of USDCNY to gold is seen in their strong negative correlation. Trade talks between the world’s largest economic powerhouses will largely drive returns for the currencies with the CNY benefiting from any progress President Xi can make with President Trump towards de-escalation tension or reaching a deal.

Is Gold Posed to Lose its Luster?

Due to the mixed event risks and waning bullish technical indicators, the forecast for XAU will be neutral over the week of December 17. Take a look at client sentiment for insight on client positioning and trader bearish or bullish biases.

–Written by Rich Dvorak, Junior Analyst for DailyFX

–Follow Rich on Twitter for real time market updates @RichDvorakFX

Other Weekly Fundamental Forecasts:

Japanese Yen Forecast – USD/JPY Rate Fails to Test Monthly-High Ahead of Fed Rate Decision

Oil Forecast – Crude Oil Prices Swamped by OPEC Cuts, Global Growth Fears, Fed

British Pound Forecast – A Complete Lack of a Cohesive Government Blights Sterling

US Dollar Forecast –US Dollar May Rise as the Fed Checks Slide in 2019 Rate Hike Bets



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Euro Shorts in Charge on Tri-break

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EUR/USD Technical Highlights:

  • Triangle finally broke, has Euro rolling downhill
  • November low, Nov ’17 t-line initially targeted
  • Must be cautious once at support, may put in floor

Let us help you. DailyFX has guides ranging from forecasts to trade ideas to education all in one location – DailyFX Trading Guides.

Triangle finally breaks, has Euro rolling downhill

Friday’s breakdown finally put the Euro outside of the triangle it had been forming over the course of the past month. It’s been an anticipated event, but confirmation was needed first before running with a more aggressive short bias.

Looking lower there is support not too far away. First up is the November low at 11215, followed by the lower trend-line extending over from November of last year; resides around roughly 11180. The way EUR/USD has been trading we’ll want to pay close attention to how it reacts once support is met.

The moves over the past few months haven’t been sustained for very long and this could be another unsustainable drive lower. With that in mind, from a tactical standpoint if the Euro starts to turn up from one of the aforementioned levels then it may be best to call it a wrap as a quick counter-trend bounce could develop.

If, however, selling pressure increases and a break below support unfolds, then perhaps a little momentum may kick in towards near 11100 or worse. It seems unlikely we will see too much power given not only the Euro’s behavior in past months but also because there is only about a week left in the year of full market participation before we go into ‘holiday’ mode. However, even as such, watch and follow the price action first.

Traders are generally long EUR/USD, see the IG Client Sentiment page to see how this acts as a contrarian indicator and is supportive of lower prices.

EUR/USD Daily Chart (Levels, lines to watch)

EUR/USD

EUR/USD 4-hr Chart (Triangle broke Friday morning)

EUR/USD

—Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at@PaulRobinsonFX

Other Weekly Fundamental Forecast:

Australian Dollar Forecast – AUD Prices May Fall Into 2019, AUD/CAD at Risk to Reversal Pattern

British Pound Forecast – Seven Weekly Bear Candles Dominate

US Dollar Forecast – Dollar Hits an 18-Month High as Anti-Currency Demand Fights Liquidity

Equity Forecast – Technical Forecast for Dow, S&P 500, FTSE 100, DAX and Nikkei

Oil Forecast –Crude oil may See Light in Tunnel As Oncoming Train

Gold Forecast – Price Rally Pulls Back ahead of FOMC



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