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by Darius Anucauskas

Brexit Headlines Again; ECB And Its Inflation Target; Markets Rebound A Bit

During the early hours of the European morning yesterday, there was news regarding Brexit, and specifically the Irish backstop again. Yesterday, we saw the euro taking a hit against its major counterparts, due to a report from Bloomberg that the staff at ECB started considering a possible change in the Bank’s current inflation target of “below, but close to +2.0%”. During the Asian morning today, we saw the Asian stock indices rebounding strongly and making their way up again, after e few days of selling.

Brexit Saga Continues

During the early hours of the European morning yesterday, there was news regarding Brexit, and specifically the Irish backstop again. The chief negotiator from the EU side, Michel Barnier, came out with a statement that they are ready to work and discuss the border issue. He said that they are open for negotiations, in order to smoothen the transition period of UK leaving the EU. In addition to that, he also stated that there would still be a lot of negotiations to go through, as each side has their own demands. A few hours later, the Irish prime minister, Leo Varadkar, said that he would support the talks over the Irish backstop, but only if the proposals are satisfying all the sides. If not, then the backstop will still be on the table. Nevertheless, it seems that there is some positive news in relation to the Brexit talks and the leaders are showing willingness to discuss everything again. The UK lawmakers came out with the news that they have approved certain proposals, which could make it more difficult for the next prime minister to have a no-deal Brexit. Certainly, all this sounds good, but the reality still remains the same. The leaders can continue discussing the Irish boarder issue as much as they want, but because everyone feels very strong of holding on to their requirements in regards to this issue, there is little chance that there could be a decent outcome from all these talks. Otherwise, Theresa May and Michel Barnier would have already negotiated this matter previously.  

But for the UK, the more important issue right now is exactly who will be that person, who will lead the country towards October 31st. Next week we should find that out, as we will be getting a new British prime minister.

Yesterday’s positivity helped the British pound to recover some of its previous losses. Also, much better than expected retail sales numbers helped the pound to move further in the northern direction. That said, traders should still remain cautious, as yesterday’s political positivity might eventually fade away sooner than later.

ECB And Its Inflation Target

Yesterday, we saw the euro taking a hit against its major counterparts, due to a report from Bloomberg that the staff at ECB started considering a possible change in the Bank’s current inflation target of “below, but close to +2.0%”. This plan of keeping price stability just slightly under +2.0% has been in play from around 2003. The informal gathering was to understand if the current inflation target is actually the right one for today’s state of the economy. Of course, all this is still just talks, but if something like this would go further, it might force other central banks to re-think their strategies. For now, we can class yesterday’s news as rumours. But these rumours had their negative effect on the euro yesterday. The common currency sold off against most its major counterparts yesterday, after the news broke out. But recovered all the losses made against the US dollar later on, when the NY Fed President came out saying that it is most likely the Fed will cut rates this month.

EUR/GBP – Technical Outlook

After yesterday’s rally in the British pound, EUR/GBP took a hit, as the euro remained slightly pressured by the rumours that the ECB is looking into re-evaluating their inflation target. The pair made its way back below the psychological 0.9000 level but stayed above its short-term tentative upside line taken from the low of July 2nd. On one hand, the rate was not able to break below that line, so we could see a rebound again, but on the other, given that EUR/GBP closed yesterday below the psychological 0.9000 zone, this could raise some concerns in the bull-bloc. This is why we will take a neutral stance for now and wait for a clear break of one of our key areas, before examining a further directional move.

A push back above the 0.9015 barrier, marked by the inside swing low of July 17th, could invite more bulls back into the field and we could see the rate accelerating further. The next target for us could be yesterday’s high, at 0.9039. The pair might stall around there for a while, or even correct to the downside again. But as long as EUR/GBP stays above the psychological 0.9000 zone, we will remain positive, at least over the short-term outlook. Another push from the bulls could help the pair to bypass the 0.9039 obstacle and target this week’s high, at 0.9051.

Alternatively, if EUR/GBP reverses sharply breaks the aforementioned upside line and falls below the 0.8972 hurdle, marked by yesterday’s and today’s lows, this could open the door to some further declines. More sellers may join in and drive the rate to the 0.8955 obstacle, a break of which could send the pair sliding to the 0.8937 mark, which is near the low of June 27th and also coincides with the 200 EMA.

EURGBP 4hour

Markets Enjoying A Bounce Again

During the Asian morning today, we saw the Asian stock indices rebounding strongly and making their way up again, after e few days of selling. The US markets managed to eventually close the day in the positive territory. All this has partially been triggered by the comment of John Williams, who is the New York Fed President. He stated that the Fed is already cementing the idea of having a rate cut this month by 25 bps, as widely expected. Policymakers want to keep the economy going forward, so they believe that these measures of adding more stimulus are necessary, as they want to support the economy before an economic blow-up could occur. Currently, the Fed Funds Futures are showing a 51.7% rate cut by 25 bps this month.

Such news made investors jump back into riskier assets, such as stocks, which pushed indices higher. The Asian stock market, in particular, had a good boost, as such actions are putting a cap on the US dollar, at least for a while. 

S&P 500 – Technical Outlook

The S&P 500 index did not have a good start this week, as it started moving south on Tuesday. But yesterday’s remarks from the President of the New York Fed helped the index to stay afloat and close the day in the green. We can see that the price on the cash index continued rising after hours and took S&P 500 back above the psychological 3000.00 mark. This might be seen as a good sign for the buyers, but still, we will stay cautiously-bullish for now.

If S&P 500 moves further north, away from the 3000.00 mark, we will then examine the possibility of testing the all-time high again, near the 3019.50 barrier, which was tested this week. The price might initially stall there, or even correct back down a bit. But if continues to trade above the 3000.00 zone, we will continue aiming higher. A break above the 3019.50 area would confirm a higher high and place the index into the uncharted territory.

On the downside, if the price falls below this week’s low, at 2971.00 hurdle, this might trigger some further selling, potentially taking the index to the 2951.50 area. That area is the lowest point of July and also coincides with the 200 EMA on the 4-hour chart. But if the sellers are still feeling strong, that area could just be seen as a temporary obstacle on their way lower, where the next possible support zone could be seen around the 2935.00 level, marked by the highs of June 26th and 28th.

S&P500 4hour

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