– EUR/USD’s sixth gain in seven days continues to lead to ongoing weakness in the DXY Index.
– A confrontational tone by the US at the G7 meetings may rekindle fears of trade wars developing over the coming months.
– Retail traders remain net-short the US Dollar, but have trimmed their positions substantially over the past week.
Looking to learn more about how central banks impact FX markets? Check out the DailyFX Trading Guides.
US Dollar on Pace for Fourth Day of Losses
The US Dollar (via DXY Index) is on pace for its fourth consecutive day of losses (and six out of seven overall) as traders have turned their attention to the upcoming G7 meeting in Canada.
The pullback in the US Dollar has little to do with risk appetite, which has been bolstered in recent days after sharp rebounds by US stocks and US Treasury yields. Concurrently, little attention is being paid to Fed rate expectations, where the odds of a December rate hike (tallying four total for 2018) have risen back to near 50%.
DXY Index Price: Daily Timeframe (August 2017 to June 2018) (Chart 1)
Reports have emerged that key US trading partners are ready to strike a confrontational tone with the Trump administration over its stance on trade, leaving the US Dollar to the whims of speculation around potential trade wars developing (which, historically, are bad for the greenback).
Now that the DXY Index has broken its uptrend from the mid-April and May swing lows, further losses look likely in the near-term as the momentum profile turns more negative: price is below the daily 8-, 13-, 21-EMA envelope; and both MACD and Slow Stochastics have started to turn lower (albeit in bullish territory). The current target for the sell off is down near 92.50/65, the November and December 2017 swing lows and the January 2018 swing higher.
Euro Rallies for Sixth Day in Last Seven as Italian Yields Drop
Much of the attention paid to the Euro over the past week has been revolving around the new Italian government and its exorbitant fiscal spending plans. However, with new Italian Prime Minister Giuseppe Conte promising to reduce Italy’s debt burden alongside new spending efforts, Italian bond yields and CDS spreads have come down today, providing more room for the Euro to recover.
Italy is likely to take a backseat even more in the coming days as attention shifts to the European Central Bank’s June policy meeting next week. We’ve already seen how speculation over the ending of the ECB’s QE program has moved markets this week, and although we’re in the quiet period in the run-up to the meeting, traders will likely continue to speculate in the absence of meaningful commentary by policymakers.
EUR/USD Price: Daily Timeframe (August 2017 to May 2018) (Chart 2)
Given that the Euro is 57.6% of the DXY Index, it’s of little surprise that price action in EUR/USD is essentially a mirror image of what’s happening to the broad gauge of greenback strength. Price has started to move back through 1.1823, the low established on May 5 (and has subsequently served as resistance on a closing basis since the break on May 16), signaling the potential for further gains in the days ahead.
Commensurate with the DXY Index eying a return back to 92.50/65, EUR/USD’s near-term target also aligns with swing levels in November and December 2017 and January 2018 around 1.1945. Ongoing volatility over the coming week should be expected with the G7 over the next two days, the Fed meeting next Wednesday, the ECB meeting next Thursday, and finally the BOJ meeting next Friday.
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 Vecchio, e-mail email@example.com
Follow him on Twitter at @CVecchioFX
US Sanctions Against Iran May Spark 1970s-Style Oil Crisis Fears
TALKING POINTS – Iran, Sanctions, CRUDE Oil, Trump, Emerging markets
- US oil export sanctions against Iran will be enforced on November 4th
- Net-importers in emerging markets likely to suffer from higher prices
- 1970’s oil crisis, embargo may haunt markets as Trump buckles down
The Trump administration’s trade wars and economic nationalism have caused severe volatility for most of 2018. The White House also withdrew from the 2015 multilateral Iran nuclear deal – known as the Joint Comprehensive Plan of Action – in May, and has re-imposed sanctions. The most devastating will be an oil embargo that is scheduled to be take effect on November 4th.
In the 1970’s, the US imposed an oil embargo against Iran that led to a surge in prices. The jump in energy costs radically affected markets. The US – which at the time was coming on the heels of massive public spending programs– had its inflationary pressure skyrocket.
The administration’s public spending agenda, coupled with the sanctions against Iran, echo a dangerously similar narrative the world saw 39 years ago.
1979 OIL CRISIS
In 1979 – amid the turmoil of the Iranian Revolution – political radicals stormed the US Embassy and took 52 Americans hostage. In response, US President Jimmy Carter froze billions of dollars’ worth of Iranian assets in the United States and enforced an oil embargo.
The decrease in oil exports – adding to growing fears of further disruptions – caused prices to climb. Adjusted for inflation, the price per barrel stood at around $55 in 1978. In 1979, the cost skyrocketed to $97 and peaked at $122 in 1980. In 1981, the hostages were released and the price began to fall.
See our full interactive history of trade wars here.
Some economists and historians argue that “precautionary demand” was an influential contributing factor to the increased cost of oil. This same fear may be rearing its ugly ahead again today.
2018 OIL EMBARGO ON IRAN
After unilaterally pulling out of the nuclear deal – due to allegations that Iran was not cooperating with the International Atomic Agency – the Trump administration hit Tehran with two waves of sanctions. The first included a ban on any transactions involving the US Dollar, gold, precious metals, aluminum, steel, commercial passenger aircraft and coal. The White House has also banned imports of Iranian carpets and foodstuffs.
The second wave will be the oil embargo. Trump warned that anybody who conducted business in the Iranian market would face “severe consequences”. The ban requires that all importers have to immediately cut off their supply from Iran by November 4th. Any countries that violate the ban face the possibility of sanctions. The EU responded by pledging to protect European firms by activating a blocking statute established in 1996. It allows European businesses to operate under US sanctions without incurring any penalties.
The EU’s defiance to the US adds to the growing tension between allies amid the escalating trade wars. The sanctions also empower hardliners in the Iranian government. This makes the possibility of repairing relations and easing international tension much more difficult.
EFFECT ON MARKETS
If the US imposes sanctions or tariffs against the EU for conducting business with Iran, they will almost certainly retaliate. In that event, sentiment-linked assets are likely to suffer and anti-risk currencies like the Japanese Yen or Swiss Franc will probably rise.
Euro Falling on Trump’s Iran Sanctions Announcement
Crude oil has reached a four-year high, with the Brent benchmark trading at around $84/barrel. Rising prices are damaging for net importers in emerging markets. If Trump digs his heels in and commits to limiting Iran’s oil exports, emerging markets are likely to suffer.
Indonesian Rupiah and South African Rand vs the Dollar and Rising Oil Prices
— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter
GBP/USD Gaps Lower on Brexit Stall, Eyes CPI and Carney Speech
- GBP gapped lower versus USD, responding to Theresa May’s rejecting of an exit deal
- GBP/USD’s downside momentum continues dominant downtrend for majority of 2018
- Key economic data and BOE Gov. Carney’s speech may further influence the British Pound
Find out what retail traders’ British Pound buy and sell decisions say about the coming price trend!
The British Pound fell against the US Dollar during weekend trading as Brexit negotiations between the United Kingdom and the European Union hit an impasse. UK Prime Minister Theresa May’s Brexit Secretary Dominic Raab and EU Chief Negotiation Michael Barnier were unable to reach an agreement on a draft treaty, leading PM May to label the deal a “non-starter”. Barnier later mentioned that some key issues remain open, including the Irish backstop.
GBP/USD 1-Hour Chart
This is the latest in ongoing Brexit turmoil, and could possibly bode ill for the Sterling’s recent upside momentum. If a deal is not reached, the United Kingdom would exit the EU and be subject to World Trade Organization rules, potentially causing declines in GBP. Furthermore, longstanding political uncertainty and tensions regarding Brexit have caused the GBP to weaken for the majority of this year. Furthermore, an increasingly hawkish Federal Reserve and haven demand amidst EM contagion fears and trade wars have caused the greenback to strengthen, intensifying the currency pair’s bearish action since April 2018.
GBP/USD Daily Chart
Looking ahead, this is a week of high economic activity for the British Pound. On Wednesday, the UK Statistics Office will release consumer inflation data for the month of September. In addition, Bank of England Governor Mark Carney is set to give a speech on Thursday, with forward guidance possibly dictating next moves for the Pound. However, ongoing Brexit negotiations will continue to take center stage and overshadow economic data’s influence on the Sterling. Developments upcoming summit of European Union leaders focusing on Brexit could cause volatility shocks to the currency pair.
GBP/USD Trading Resources
— Written by Megha Torpunuri, DailyFX Research Team
Unsteady Risk Trends Increase Scrutiny on China, Italy and Brexit
Market participants will return with caution this week. Following the rout in speculative assets from shares to emerging markets to Yen crosses, there is an understandable tension amongst investors. In this environment troubling news in trade wars, Chinese growth, Euro-area stability or any number of key themes can readily find traction.
Fresh developments coming out of the U.S. economy may curb the recent selloff in USD/JPY as Federal Reserve officials see a risk for above-neutral interest rates.
After trading to four year highs to open the month, Crude has come off the highs along with risk sentiment, but you crude appears to have fundamental support that could keep bulls confident.
It may be uncomfortable but sitting on the fence is the best place to be ahead of next week’s Brexit updates and EU Summit
Gold was the beneficiary of safe haven demand this week after the Dow lost over 1,300 points in just two days.
The Australian Dollar held up quite well to the intensification of one or two factors which have stymied it this year. Don’t rely on that continuing
China’s weak economic growth could add more bearish momentum to the Yuan; at the same time, Chinese regulators may try to avoid extreme volatility.
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
See how retail traders are positioning in the majors using the IG Client Sentiment readings on the sentiment page.
Latest News6 days ago
JP Morgan is tops in Institutional Investor’s 2018 stock research ranking
Latest News5 days ago
Mnuchin warns China against weakening its currency
Latest News3 days ago
Stock starts trading on NYSE
Latest News3 days ago
Stephen Roach warns of inflation risk, Federal Reserve’s glacial pace
Stocks5 days ago
Climate change will get worse… These investors are betting on it
Strategies & Ideas7 days ago
Tom Basso Interview with Michael Covel on Trend Following Radio
Latest News6 days ago
Stocks making big moves after hours Tesla, Edwards Lifesciences & more
Latest News3 days ago
Wells Fargo earnings Q3 2018 beat expectations