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Euro’s Strong Start to October Comes as Attention Shifts to Brexit, US-China Trade War

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Euro Forecast Overview:

  • No news may be good news for the Euro over the coming days, given how generally disappointing economic data releases have been otherwise.
  • Overnight index swaps are currently pricing in an 87% chance of no change in rates at the October ECB meeting. Overall, there is a 34% chance of 10-bps of rate cuts by the end of the year.
  • Retail trader positioning, per the IG Client Sentiment Index, suggests that there may be more room for EURUSD gains.

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

Euro’s Strong Start to October and Q4’19

The Euro has had a strong start to the new month and new quarter. Only one EUR-cross is lower through month-to-date, EURJPY, down by -0.20%. Otherwise, gains have been plentiful and have continued to build: EURCAD is the top performer, adding 1.32% thus far, while EURAUD and EURUSD rates are close behind, having gained 0.92% and 0.86%, respectively. The Euro’s gains are coming at a time when traders’ collective attention has turned back to Brexit and the US-China trade war.

Eurozone Economic Data Remains Weak, However

The forex economic calendar is rather empty on the Eurozone side of things this week. In context of recent data performances, that may be a positive development for the Euro: no news may be goods news. Eurozone economic data has continued to produce disappointing results over the past several months, at least when trying to look at economic data from an objective point of view. The Citi Economic Surprise Index for the Eurozone, a gauge of economic data momentum, is down to -76.7 today from -34.1 one-month ago on September 9 and -13 on July 8.

Eurozone Inflation Expectations Hold Near Yearly Lows

Outgoing ECB President Mario Draghi’s preferred measure of inflation, the Eurozone 5y5y inflation swap forwards, currently are trading at 1.131%, lower than where they were one month earlier at 1.245%, a drop of -11.4-bps. Eurozone inflation expectations are barely above the yearly low set last week on October 3 at 1.115%.

Eurozone Inflation Expectations versus Brent Oil Prices: Daily Timeframe (October 2018 to October 2019) (Chart 1)

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The relationship between Eurozone 5y5y inflation swap forwards and Brent oil prices has tightened up over the past few weeks. The current 20-day correlation between Eurozone inflation expectations and Brent oil prices is 0.69; one month ago, on September 9, the 20-day correlation was a mere 0.14.

More ECB Easing is Coming – Waiting on Lagarde

ECB interest rate expectations have evolved in weeks to the runup to outgoing ECB President Draghi’s exit at the end of the month. At the start of August, there was a 53% chance for the ECB to lower its main deposit rate to -0.60% at the October ECB meeting; at the start of September, these odds were 48%. However, there is now 0% chance of a rate cut later this month.

European Central Bank Interest Rate Expectations (October 7, 2019) (Table 1)

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Instead, overnight index swaps are pricing in a 87% chance of no change in rates at the October ECB meeting – and a 13% chance of a 10-bps rate hike. There is a 39% chance of a 10-bps rate cut before the end of the year, although overnight index swaps suggest that the next rate cut is most likely to come in January 2020 (57%). Of course, with outgoing ECB President Draghi set to be replaced by Christine Lagarde in a few weeks, it’s very possible that ECB rate expectations recalibrate once the new Governing Council takes shape.

EURUSD Rate versus COT Net Non-Commercial Positioning: Daily Timeframe (October 2018 to October 2019) (Chart 2)

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Looking at positioning, according to the CFTC’s COT report for the week ended October 1, speculators increased their net-short Euro positions from 60.7K to 66K contracts. But the period closed before the rebound by the Euro at the end of the week; it is likely that there is a reduction in net-short futures positioning in the next COT report update on October 11.

IG Client Sentiment Index: EURUSD Rate Forecast (October 7, 2019) (Chart 3)

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EURUSD: Retail trader data shows 56.0% of traders are net-long with the ratio of traders long to short at 1.27 to 1. In fact, traders have remained net-long since July 1 when EURUSD traded near 1.1221; price has moved 2.0% lower since then. The percentage of traders net-long is now its lowest since Sep 18 when EURUSD traded near 1.10307. The number of traders net-long is 4.2% lower than yesterday and 23.9% lower from last week, while the number of traders net-short is 27.3% higher than yesterday and 51.7% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EURUSD price trend may soon reverse higher despite the fact traders remain net-long.

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 Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX



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Forex

USD/CAD Continues to Eye March Price Gap Ahead of Canada Employment

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Canadian Dollar Talking Points

USD/CAD holds near the monthly low (1.3468) as the Bank of Canada (BoC) keeps the benchmark interest rate at the “effective lower bound of ¼ percent” in June, but the update to Canada’s Employment report may influence the exchange rate as the economy is expected to shed 500K jobs in May.

USD/CAD Continues to Eye March Price Gap Ahead of Canada Employment

USD/CAD extends the series of lower highs and lows from the start of the month as the BoC announces that the “Bank is reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations.”

Image of BoC interest rate

The decision suggests the BoC led by Tiff Macklem will scale back the dovish forward guidance as the central bank emphasizes that “any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target.

Image of DailyFX economic calendar for Canada

It remains to be seen if the update to Canada’s Employment report will influence the monetary policy outlook as the economy is expected to shed 500K jobs in May, while the jobless rate is projected to hit 15%, which would mark the highest reading since the data series began in 1976.

The ongoing deterioration in the labor market may put pressure on the BoC to further support the economy as “the level of real GDP in the second quarter will likely show a further decline of 10-20 percent,” but Governor Macklem and Co. may carry out a wait-and-see approach over the coming months as “the Bank expects the economy to resume growth in the third quarter.

In turn, the BoC may continue to rule out a negative interest rate policy as “the Bank’s programs to improve market function are having their intended effect,” and the central bank may alter the forward guidance at the next meeting on July 15 as the “decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown.”

With that said, the Canadian Dollar may continue to outperform its US counterpart as the Federal Reserveprepares to have the Municipal Liquidity Facility along with the Main Street Lending Program up and running in June, and the pullback from the yearly high (1.4667) may continue to evolve as USD/CAD snaps the range bound price action from April.

The Relative Strength Index (RSI) highlights a similar dynamic as the indicator tracks the downward trend from May, but the bearish momentum may abate over the coming days as the oscillator struggles to push into oversold territory.

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USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, the near-term rally in USD/CAD emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the yearly opening range highlighting a similar dynamic as the exchange rate failed to test the 2019 low (1.2952) during the first full week of January.
  • The shift in USD/CAD behavior may persist in 2020 as the exchange rate breaks out of the range bound price action from the fourth quarter of 2019 and clears the October high (1.3383).
  • However, recent price action suggests the pullback from the yearly high (1.4667) will continue to evolve as USD/CAD takes out the April low (1.3850),and the exchange rate may continue to exhibit a bearish behavior in June as the Relative Strength Index (RSI) extends the downward trend from the previous month.
  • Will keep a close eye on the RSI as it flirts with oversold territory, but the bearish momentum may abate over the coming days if the oscillator fails to hold below 30.
  • Need a break/close below the Fibonacci overlap around 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) to fill the price gap from March, with the next area of interest coming in around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement).

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— Written by David Song, Currency Strategist

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What is Fueling the Rally?

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Dow Jones, Nasdaq 100, S&P 500 Price Outlook:

  • The S&P 500 reclaimed the psychologically significant 3,000 mark last week
  • Meanwhile, the Nasdaq 100 continues to edge closer to the all-time highs it saw in February
  • The Dow Jones remains a laggard but has posted gains of its own in recent weeks

Dow Jones, Nasdaq 100, S&P 500 Forecasts: What is Fueling the Rally?

The Dow Jones, Nasdaq and S&P 500 have continued to melt higher in recent days even as bullish catalysts seem to sputter out. Following the initial crash in February and early March, gains were quickly established in what many believed to be a “bear market rally” as governments and central banks offered aid in many shapes and sizes.

Nasdaq 100 Price Chart: 4 – Hour Time Frame (February – June)

Nasdaq 100 price chart

In the weeks that followed, market pundits attributed the continuation rally to slowing coronavirus cases and the efficacy of quarantine procedures. Now the three equity indices are approaching prior levels, but more than 40 million Americans are unemployed, bankruptcies have been declared, supply chains have been disrupted and other fundamental concerns have been ignited. Still, the Dow Jones, Nasdaq and S&P climb. So what exactly is fueling this recovery rally?

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Well, to be sure, not every market move has to have a single and easily identifiable catalyst. Similarly, markets can stay irrational for extended periods of time, so gains can be built even when the underlying fundamental landscape may suggest otherwise. This phenomenon could be seen, at least to some degree, in late January and early February when it was becoming more apparent the coronavirus would become a global ordeal.

S&P 500, Crude Oil and Copper Daily Price Chart (August 2019 – January 2020)

Dow Jones, Nasdaq 100, S&P 500 Forecasts: What is Fueling the Rally?

Chart created with TradingView. Taken from Twitter.

While other equity markets, risk-sensitive currencies and commodities like crude oil plummeted, the three US indices trudged higher still. At the time, I noted the relationship between crude oil and the S&P 500, highlighting the infrequency of such a divergence.

At present, the catalysts for a continuation rally beyond all-time highs seem few and far between. Further still, domestic unrest will likely dent coronavirus recovery efforts and US-China tensions have soared. When taken together, it seems unlikely the Dow Jones, Nasdaq and S&P 500 will reach new heights, but other risk sensitive assets like the Australian, Canadian and New Zealand Dollars have rallied, exhibiting widespread risk appetite.

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Thus, it can be argued US equity prices have become detached from their underlying fundamentals, but shorter-term trading involves price, not necessarily economic principles, and weeks of gains would suggest the current trend is higher still, however unfounded it may seem.

While I am of the opinion that some of these gains will have to be forfeited eventually, attempting to call the top at each leg higher is presumptuous. With that in mind, it may be prudent to wait on the sidelines until a catalyst can spark selling that is met with conviction if you possess a bearish bias, because it seems that none of the current threats have sparked such a move yet. In the meantime, follow @PeterHanksFX on Twitter for updates and keep close tabs on the price action in the days to come.

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–Written by Peter Hanks, Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX



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Index Surges Through Price Gap, Can it Continue?

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FTSE 100 Price Outlook:

FTSE 100 Forecast: Index Surges Through Price Gap, Can it Continue?

The FTSE 100 surged to its highest level since early June on Wednesday after the equity index pierced a longstanding technical barrier around 6,200. The zone marked confluent Fibonacci levels and had worked to stall bullish attempts higher in the past, notably coinciding with the swing-high in late April. All in all, the ascending channel with which the FTSE 100 trades remains intact and passing through resistance allowed for bulls to capitalize on open air above.

FTSE 100 Price Chart: 4 – Hour Time Frame (March – June)

FTSE 100 price chart

With a price gap ranging from roughly 6,200 to 6,400, the bullish break above resistance at 6,200 opened the door to a quick continuation – due to the nature of price gaps – and the FTSE must now negotiate secondary resistance around 6,400. 6,400 aligns not only with the top of the gap, but also another Fibonacci level. With that said, the spot is likely to influence price, at least to some degree, in the days ahead.

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If sentiment shifts and risk appetite diminishes, the FTSE 100 may retreat from resistance at 6,400 and fall back into the 6,400 to 6,200 range. Since the gap was filled, price movement should be met with more resistance – regardless of direction. Either way, the FTSE 100 should now enjoy support from prior resistance at 6,200, and due to the level’s influence in the past, it may prove to be a vital staging ground for bullish attempts down the road.

FTSE 100
BEARISH

Data provided by



of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily 7% -1% 3%
Weekly 14% -5% 3%

With the ascending channel intact and a series of higher-highs and higher-lows, FTSE 100 price action suggests further strength may be on the horizon. Coupled with IG Client Sentiment Data which reveals retail clients are net-short, it seems as though the shorter-term trend is leaning toward a continuation higher.

That being said, I have my reservations about current stock market activity and suspect the risk-reward relationship for many indices is currently skewed to the downside – a topic discussed at length in my webinar. Nevertheless, price is unemotional and unfeeling and recent price action is hardly a harbinger of bearish reversals so price may continue higher in the shorter-term regardless of the underlying fundamentals. In the meantime, follow @PeterHanksFX on Twitter for updates.

–Written by Peter Hanks, Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX



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