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US Dollar Rally Resumes as S&P 500 Looks More at Risk to Reversal

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Asia Pacific Market Open Talking Points

  • US Dollar resumes rally as better-than-expected inflation report ebbs dovish Fed bets
  • EUR/USD declines as Eurozone industrial production contracts by the most since 2009
  • Asia Pacific stocks may trade little lower after S&P 500 shows multiple reversal signs

Find out what retail traders’ equities buy and sell decisions say about the coming price trend!

3 Things to Know Before Trading APAC Markets

1) US Dollar Resumes Rallying on Inflation Data

After a pause yesterday, the US Dollar resumed its uptrend from the beginning of February as it clocked in its best rise in a day since January 2 (+0.52%). A better-than-expected US headline inflation report helped contribute to this. Domestic government bond yields rallied, signaling a reduction in dovish Fed monetary policy expectations.

This may have weighed against equities to a certain extent, preventing a liftoff in the S&P 500 as it trimmed most of its gains and closed just 0.3% to the upside. This followed a rosy session in Europe where most benchmark stock indexes rallied. However, these were largely because of gaps to the upside. The Euro Stoxx 50 then proceeded to range.

2) Dismal Eurozone Industrial Production

Gains in the greenback weighed against the Euro which also had to contend with dismal Eurozone industrial production as expected. Output contracted by 4.2% y/y which was by the most since 2009. Economic weakness from Europe, with Italy in a technical recession and fears of a no-deal Brexit, leaves EUR/USD increasingly at risk to declines down the road.

3) Asia Pacific Market Open

As we head into Thursday’s Asia Pacific trading session, S&P 500 futures are aiming narrowly lower. This may precede a mixed to slightly underwhelming day for regional bourses. Especially if markets start feeling more concerned about Fed rate hike bets. The anti-risk Japanese Yen could thus be offered a chance to recover on some losses while the pro-risk Australian and New Zealand Dollars fall.

JPY showed a minimal reaction to the preliminary Q4 GDP report (see calendar below) given that economic data out of the country tends to have a minimal impact on BoJ policy bets. Meanwhile, at an unspecified time today, China is expected to release January’s trade data. Fears of growth slowing there and data tending to underperform relative to economists’ expectations may result in a soft outcome.

S&P 500 Technical Analysis

The pullback in the S&P 500 on Wednesday as it trimmed most of its gains resulted in the formation of a shooting star candlestick. This is typically seen as a sign of indecision. Closes to the downside thereafter may lead to a bearish reversal. On top of this, negative RSI divergence warns that upside momentum is fading. Fundamentally, the index seems to be running out of reasons to rally.

S&P 500 Daily Chart

US Dollar Rally Resumes as S&P 500 Looks More at Risk to Reversal

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US Trading Session Economic Events

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Asia Pacific Trading Session Economic Events

US Dollar Rally Resumes as S&P 500 Looks More at Risk to Reversal

** All times listed in GMT. See the full economic calendar here

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— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter



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Forex

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

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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

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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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Euro Braces for Volatility Ahead of EU Elections, ECB Minutes

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EURO FUNDAMENTAL FORECAST: BEARISH

  • Europe and the Euro brace for European parliamentary elections
  • The ECB and Fed meeting minutes may mean additional volatility
  • European economic data, OECD outlook publication add to risks

See our free guide to learn how to use economic news in your trading strategy!

The Euro may be in for its most tumultuous week year-to-date as the Fed and ECB prepare to release their respective meeting minutes right before the EU holds the most consequential European-wide vote in its history. Volatility may be further enhanced after the OECD publishes its latest projections for growth and as key Eurozone economic data is released throughout the week.

On May 21, the multinational organization will publish its economic growth forecasts with expectations that the report will highlight weakness in global demand. The US-China trade war has disrupted financial markets and destabilized global growth prospects. EU-US relations are also not particularly comforting after the two global players waged an economic war against each other with a possible continuation this year.

Euro area economic data will also be released throughout the week. German GDP and Eurozone CPI will likely be the most heavily eyed pieces of data, though their impact may be overshadowed by higher-level event risk. Broadly speaking, economic data out of Europe has been tending to underperform relative to expectations and has forced the ECB to implement new liquidity provisions as a way to boost local growth.

EUR

The following day, the Fed will be releasing its FOMC meeting minutes from the most recent policy meeting. Fed monetary policy has not only impacted the US Dollar but has also roiled global financial markets because of the implication a higher-priced USD has on international economic activity. According to the Bank of International Settlements, 80 percent of all global transactions are conducted in the US Dollar.

And finally, on May 23, Europeans will cast their ballot and express their joy – or more likely, discontent –with the European Union. Preliminary polls are showing eurosceptic parties may gain as much as one-third of all seats in the European parliament. This in itself could have devastating consequences for the Euro and could undermine the stability in European sovereign bond markets.

Spanish, Italian, Greek, Portuguese 10-Year Bond Yields Spike on Italy’s Political Turmoil

EUR

On the same day, the European central bank will be publishing its minutes from the last policy meeting. Market participants are likely expecting dovish undertones as the continent continues to struggle in bringing about sustained growth and inflation. Brexit and the European elections may only add greater political risk and cloud an already-uncertain outlook as monetary authorities attempt to steer in unchartered territory.

FX TRADING RESOURCES

— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

Looking for a technical perspective on the Euro? Check out the Weekly EUR Technical Forecast



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