EURUSD Talking Points:
- The US Dollar opened the week with its third, large bullish gap in a month, but the previous charges will prove difficult to replicate
- A run of growth-related data and mix of trade war headlines wouldn’t tear investors’ anticipation away from Thursday’s ECB rate decision
- Reversals from the Pound, EURCHF and Gold all tap systemic interests, but their progress will prove just as unreliable as the Dollar’s
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You are Now Entering the Loaded-Calm Before the ECB Decision
Of the top three themes that I am currently affording the greatest weight for fundamental influence – and thereby market activity – monetary policy is clearly the most pressing for global markets. The European Central Bank (ECB) rate decision Thursday is now just a day away, and the implications of this important policy gathering are drawing closer scrutiny owing to its proximity. The probabilities of further accommodation priced in by the market are reflecting certainty that at least a rate cut is on tap. However, the buoyancy in European indices and other capital markets as well as the further dive from EURUSD would suggest that much more is discounted. That can prove difficult to live up to – and perhaps they won’t even attempt to best those aggressive expectations and sacrifice their credibility in the meantime. This past session there were reports from ‘sources’ that the group may hold back from QE, merely keeping it open as an option in a bid of plying leverage from its more traditional tool of benchmark rates.
It isn’t clear how shocked the markets would be should the central bank’s efforts come up short of the lofty expectations. The DAX, FTSE MIB, CAC 40 and other local capital market benchmarks have rallied lately, but that is inline with most other regions’ speculative performance – and it still significantly lags the climb in the US markets. The Euro has slide further these past weeks, but it doesn’t seem to have spurred the same preemptive view of impending policy doom that we saw in 2014 from EURUSD when the pair collapsed in anticipation of the eventual negative rate and stimulus policies that are now in place. While the exchange rate is not collapsing at the same clip in the current lead up, these markets are still very likely pricing extreme expectations. That makes it difficult to live up to the dovish anticipation, which holds clear implications for EURUSD along with general market performance itself.
Chart of EURUSD and 20-Week Average True Range (Weekly)
Chart Created on Tradingview Platform
Risk Trends Have Far Too Much Vested into Monetary Policy to Avoid Blowback
In assessing what kind of impact we should expect from the ECB rate decision tomorrow, it is important to understand that this is not just a Euro or European event. There is a broad currency market consideration that could generate considerable volatility through most major (and perhaps even emerging market) FX. This central bank is vying for the title of the most dovish of the principle policy authorities. While the Bank of Japan has never wavered from its open-ended stimulus effort, its European counterpart has dropped its key rate into negative territory while amassing a sizable balance sheet of its own. At the opposite end of the spectrum, we find the Fed who has only raised its benchmark range by just over 200 basis points from its post-recession low – less than half of what it was in 2007 before cuts began. That does not translate into meaningful contrast which would translate into meaningful returns. That is a mix suited for speculative appetite in complacency rather than genuine optimism.
What the ECB decides as its next policy move will inform investor sentiment that has drawn heavily from external support. In the absence of accelerated growth (a shortfall of monetary policy) unorthodox and temporary measures have compensated. Yet, those short-term accelerants proved to be unintended foundation with all the trappings of dependency and the inevitable diminishing effectiveness. A complete loss in conviction around the capacity of central bank influence could prove catastrophic given its role in market performance the past decade, but when does that belief falter? It would be far more troubling should one of the most dovish central banks lose control of market lift in the middle of full capitulation rather than a group like the Fed underwhelming with a policy decision given it has far more room to maneuver.
Chart of S&P 500 and Major Central Banks Balance Sheets (Monthly)
Keeping Tabs on Growth and Trade War Interests
Over the next 24 hours, it will be very difficult to wrest traders eyes away from the implications of monetary policy on economic and financial performance. And, more likely, the theme will keep its influence through the subsequent week with further policy decisions anchored by none other than the Federal Reserve next Wednesday. Yet, that does not mean that the other high-level fundamental themes are simply due to be frozen against fundamental developments. Trade wars continue to register data with a fairly uniform reflection of the pain that continues to build in the backdrop. This past session, SCMP reported Chinese officials were ready to increase US agricultural goods purchases to encourage compromise while credit rating agency Fitch issued a fresh warning over the outlook with the deterioration of trade as a key concern.
An equally relentless concern on the grand scale is the deterioration in the outlook for economic activity. We registered a few indicators this past session that carried growth credits: Japanese tool orders dropped 37 percent and the NFIB US small business sentiment survey dropped more quickly than expected with a 103.5 reading. These are not enough apparently to move the needle however, nor will the Japanese 3Q business sentiment survey or Chinese foreign direct investment figure ahead. That said, we have seen interest/fear over a recession balloon over the past weeks. This is evident in sentiment surveys across the global and economic spectrum, but what has struck me most lately is the search volume on ‘recession’ via Google, the world’s most heavily used browser. We haven’t seen this much traffic on this troubling outlook since the Great Recession.
Pound’s Recovery Is Falling Apart While Oil Weighs Supply and Demand Shocks
As we await next catalysts, it is difficult to muster enough conviction to drive assets directly in the radius of the ECB’s or Fed’s influence – and that is admittedly the bulk of the global markets. Yet there are still alternative fundamental means to follow to volatility. One of the more persistent and frustrating sparks lately has been Brexit. With Parliament prorogued (suspended) for five weeks, we could have seen an extended period without in-fighting leveraging uncertainty behind the Sterling which could have led to a complacent bid. Instead, tension will remain high throughout this unusual break thanks to Prime Minister Boris Johnson vowing to push forward with a possible no-deal outcome should his demands not be met at the EU negotiation table – regardless of Parliament’s recent law requiring him to request an extension if an alternative deal is not struck mid next month.
Chart of GBPUSD (Daily)
Chart Created on Tradingview Platform
Another market that has seen volatility work its way into a mature congestion pattern is crude oil. It is proving difficult to meaningful charge this commodity these past months as the traditional supply-side OPEC updates have garnered less and less response from the energy market. Nevertheless, an unorthodox curb on output seemed to have been alleviated this past session when US President Donald Trump tweeted that he had fired his National Security Adviser John Bolton. Bolton was a well-known hawk on policing perceived global malfeasance, particularly with the likes of Iran, which offered some relief. Yet, what enthusiasm that may have mustered was checked by the EIA downgrading its outlook for world demand by a hefty 110,000 barrels per day in 2019 – though the 2020 reduction was more modest. Overall, I a keeping closer tabs on global activity and demand as a trend measure for oil.
Chart of US Crude Oil and 50-day Historical Range (Daily)
Chart Created on Tradingview Platform
If you want to download my Manic-Crisis calendar, you can find the updated file here.
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UK Markets Wait For Supreme Court Ruling, Brexit Update
Sterling (GBP) News, Charts and Analysis – Webinar
- UK Supreme Court ruling due shortly
- UK PM Johnson to meet EU leaders on the sidelines at the United Nations
Q3 2019 GBP Forecasts and Top Trading Opportunities
UK asset markets are flat to slightly lower at the start of the week with traders waiting for the UK Supreme Courts ruling on whether PM Johnson’s recent shuttering of Parliament was legal or not. The judgement is expected early this week and will have a direct influence on UK assets one way or another.
This week PM Johnson will meet with European leaders at the United Nations General Assembly meeting to discuss the latest Irish backstop developments. Recent positive commentary has boosted the value of the British Pound until a report this weekend that European Commission President Jean-Claude Juncker sees a return to a hard border in Ireland pushed GBP lower.
There is a lack of front-line UK economic data this week to influence trading but speaches from BoE governor Mark Carney and other UK central bank officials should be followed closely.
GBPUSD has drifted lower through the session but has not threatened the recent 1.1959 low made earlier this month.
GBPUSD Price Daily Chart (January – September 23, 2019)
The IG Client Sentiment Indicator shows retail traders are 65.0% net-long, a bearish contrarian bias.
EUR/USD Price Slumps as Germany PMI Data Points to Recession
EURUSD Price Charts and Analysis:
- EURUSD may sink further as 1.1000 gives way again.
- Germany is expected to be in recession in Q3.
EURUSD Sinks as German Economic Woes Continue
The German economy is likely to fall into recession in the third-quarter of 2019, ‘as the downturn in manufacturing deepened and service sector growth lost momentum’, according to data provider IHS Markit. The composite index hit its lowest level since October 2012, while the manufacturing numbers are ‘simply awful’ according to the data provider. Germany is expected to enter an official recession in Q3 and may not see any growth this year.
According to Phil Smith, principal economist at IHS Markit, “The manufacturing numbers are simply awful. All the uncertainty around trade wars, the outlook for the car industry and Brexit are paralyzing order books, with September seeing the worst performance from the sector since the depths of the financial crisis in 2009. “With job creation across Germany stalling, the domestic-oriented service sector has lost one of its main pillars of growth. A first fall in services new business for over four-and-a-half years provides evidence that demand across Germany is already starting to deteriorate.”
EURUSD continues to point lower and may re-test the two recent low prints around 1.0925 made earlier this month. Below here there is very little in the way of strong support. There is a gap in April 2017 on the weekly chart between 1.0777 and 1.0821 which is likely to be filled in the short-term, before the January 2017 low at 1.0340 comes into play. In the current environment is looks very unlikely that EURUSD will break back above the cluster of lows/highs around 1.1100 and 1.1120.
EURSUD Price Daily Chart (January – September 23, 2019)
The IG Client Sentiment Indicator shows retail traders are 65.0% net-long of EURUSD, a bearish contrarian bias.
US Dollar ASEAN Outlook Bullish, Trade Deal Hopes Fade, PHP at Risk
ASEAN Fundamental Outlook
- US Dollar remained in persistent consolidation mode against ASEAN FX
- Drop in US-China trade deal hopes to fuel USD gains on haven demand
- Philippine Peso also eyeing central bank rate decision, SGD to CPI data
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US Dollar and ASEAN FX Weekly Recap
At first glance, the US Dollar seemed to outperform against its major counterparts when using an equally-weighted index this past week. But the reality is that from a technical standpoint, the Greenback is still in a persistent consolidative mode since the end of July. Its lack of commitment also spread into against some of its ASEAN and Southeast-Asia fiat counterparts.
A couple of notable exclusions this past week were the Singapore Dollar and Indonesian Rupiah – see chart below. The former tends to closely trace the Greenback. The IDR saw most of its decline during the front-half of the week, when an attack on Saudi Arabian energy infrastructure caused an oil shock that triggered risk aversion. The commodity has since partially subsided as markets turned to the Fed and US-China trade talks.
The US central bank delivered its second interest rate cut, keeping the door open to “extensive cuts” should they be needed. Meanwhile, the Bank of Indonesia delivered a third reduction in benchmark lending rates this year. But the Rupiah was left unchanged as the central bank reiterated efforts to guard their currency. Prior to Friday’s close, ASEAN currencies suffered as Chinese delegation teams canceled trips to US farms.
Check out my Singapore Dollar currency profile to get acquainted with its unique character in markets!
US-China Trade Deal Hopes Once Again Diminish
Once top-tier economic event risk passed last week, it was clear how important US-China trade talks were to financial markets. As mentioned earlier, once reports crossed the wires that Chinese officials canceled trips to farms in Montana and Nebraska, aggressive risk aversion kicked in. The MSCI Emerging Market index covered its upside gap from the onset of Friday’s session as US government bond yields tumbled.
The actions from Chinese officials were in response to comments from US President Donald Trump, who mentioned that he would not accept a partial deal, adding that ending the trade war by 2020 is not his priority. Taking a look at the next chart below, prospects of the two nations agreeing to an outcome has helped to drive capital flowing back into emerging markets since late August.
His lack of interest in wanting an interim deal diminished prospects of an agreement, which can be viewed by the reaction in financial markets on Friday. Talks between the two nations restarted this past week ahead of a high-level meeting anticipated between the economic powerhouses in the middle of October. This is why the US delayed imposing additional $250b in tariffs on China by two weeks to around the same time.
With trade wars still are a persistent threat to global economic health, this bodes ill for risk capital and will likely adversely impact currencies such as the Philippine Peso, Malaysian Ringgit, Singapore Dollar and Indian Rupee. Meanwhile, the highly-liquid US Dollar – still increasing its dominance as the world’s most widely-traded currency – is likely to benefit against them.
ASEAN Economic Event Risk
Focusing on ASEAN regional economic event risk in the week ahead, a top-tier item will be the Philippine central bank interest rate announcement. Much like the easing that we have seen from central banks in the world, the BSP is anticipated to continue the trend. The benchmark lending rate is widely expected to be lowered from 4.25 percent to 4.00 on Thursday.
As such, its surprise factor is diminished, with the central bank governor also hinting at further reductions in reserve requirement ratios. This does mean however that the Philippine Peso will continue to lose its yield advantage (alongside MYR, IDR) which is a long run threat for the currency. Inflation data will also be eyed out of Singapore and Malaysia.
For timely updates on ASEAN and Southeast Asia currencies, make sure to follow me on Twitter here @ddubrovskyFX
FX Trading Resources
— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
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