Major EU indices closed in positive territory yesterday, but investors’ morale took a 180-degree spin during the US session, after a whistleblower report revealed that US President Trump pressured the Ukrainian President to investigate the son of Joe Biden, as well as due to another report saying that the US was unlikely to extend a waiver over Huawei. In the FX world, the greenback continued trading north against most of its major peers, perhaps staying supported by Richmond Fed President Barkin’s remarks on interest rates.
The dollar continued trading north against most of the other G10 currencies on Thursday and during the Asian morning Friday. The main losers were NOK, EUR and GBP in that order, while the currencies against which the greenback failed to record any gains were AUD and JPY, with AUD/USD and USD/JPY found virtually unchanged.
The fact that both the Aussie and the yen were among the top performers paints a confusing picture with regards to the broader market sentiment. Thus, we prefer to take a look on how equity indices performed. During the EU trading, risk appetite was supported, and this may have been due to upbeat remarks on trade by China’s Commerce Ministry, less than a day after Trump said that a deal could be reached sooner than people think. The Ministry said that it welcomes the US to invest in China and that they are preparing for making progress in the October talks.
That said, the joy did not last for long. All three of the major US indices closed in negative territory, with the downbeat sentiment rolling into the Asian trading today. Although China’s Shanghai Composite gained 0.11%,Japan’s Nikkei 225 slid 0.80%. The switch from risk-on to risk-off may have been the result of the whistleblower complain, according to which US President Trump pressured the Ukrainian President to investigate the son of Je Biden, as well as report saying that the US was unlikely to extend a waiver over Huawei Technologies blacklist.
As we noted yesterday, we don’t expect Trump to be removed from office, and this is because the impeachment call is unlikely to gather a two-third majority in the Republican-controlled Senate. However, we do expect this whole story to weigh on his chances of being re-elected next year. It remains to be seen how this would affect his stance over the US-China sequel. Following his latest remarks, someone could say that he may soften his stance in order to regain some popularity. That said, we stick to our guns that before a final accord is sealed, a long-lasting recovery in investors’ appetite is hard to materialize, and the recent ups and downs due to contradicting headlines prove just that.
Now back to the FX world, the greenback remained supported throughout the whole day, defying the impeachment updates and the report over Huawai. It seems that the greenback was aided by comments from Richmond Fed President Thomas Barkin, who said that that it is too early to determine whether another cut is needed. Remember that last week, the Fed decided to lower interest rates by 25bps, but the new “dot plot” pointed to no more cuts this year and the next, one hike in 2021 and another one in 2022. That said, despite the 2019 median dot suggesting that there are no more rate reductions on the table, the Committee was largely divided, with only 5 members supporting that view. Seven still believed that another quarter-point reduction may be appropriate, while the remaining 5 argued that last week’s cut was not needed.
According to the Fed Funds futures, market participants remain convinced the Fed will cut again this year, in December, while another cut is fully factored in for June next year. Today, they may pay some attention to the release of the core PCE index for August, which is the Fed’s favorite inflation gauge. The index is expected to have accelerated to +1.8% yoy from +1.6%, something supported by the core CPI rate for the month, which rose to +2.4% from +2.2%.
A rising core PCE rate could add some more credence to the case that no more cuts are needed this year, and may prompt investors to push back the anticipated December reduction. However, in our view, a lot on that front will depend on how the US-China trade sequel unfolds. Despite not providing clear signals with regards to further rate reductions last week, the Fed may be forced to cut again in the months to come if tensions between the world’s two largest economies re-escalate.
The euro was among the main losers, as the resignation of the ECB Executive Board Member Sabine Lautenschläger may have encouraged sellers of the common currency to add to their positions. Lautenschläger was a well-known hawk, and she may have taken the decision to step down due to disagreement over the ECB’s move to restart its QE program. Following the disappointing preliminary PMIs for September, Lautenschläger’s resignation suggests a more dovish ECB and increases further the chances for additional easing by the Bank if circumstances suggest so. According to Eurozone’s money markets, investors are now more-than-fully pricing in another 10bps cut in the deposit rate for March.
Overall, EUR/USD continues to trade below its medium-term downside resistance line taken from the high of June 25th. Yesterday, the pair broke below its key level, at 1.0925, which was previously seen as a strong area of support. The rate continued to slide during the early hours of the Asian morning, but found some support near the 1.0905 level. Given that the pair looks quite overstretched to the downside on the shorter timeframe, we may see a bit of correction back up. But if the bulls are still feeling weak, EUR/USD could slide again. This is why we will stay cautiously bearish, at least over a short period of time.
As mentioned above, if the rate goes for a bit of correction to the upside, it may get back above the 1.0925 zone. That said, if it struggles to climb above the 1.0966 barrier, which is marked by yesterday’s high, this may result in another round of selling. If the pair slides below the previously-discussed 1.0925 area once again, this could attract more sellers into the game, who might push EUR/USD further down, maybe even below this morning’s low at 1.0905. If so, the next possible support zone to consider could be the 1.0839, marked by the low of May 11th, 2017.
On the upside, if EUR/USD travels above the previously-mentioned 1.0966 barrier, it may end up pushing towards the aforementioned downside line again. We would then take a neutral stance and wait for the pair’s next clear move. In order for us to consider near-term advances, a break of that downside line would be needed. Such a move would also place the rate above its 200 EMA and could allow it to move higher towards the 1.1075 hurdle, marked by the high of September 19th. This is when even more buyers may start joining in and lifting EUR/USD to the 1.1110 zone, a break of which could set the stage for a further rise to the 1.1165 level, marked near the high of August 25th.
After the bears’ failed attempted to push USD/CHF below its short-term upside support line taken from the low of August 13th, the bulls quickly took control back into their hands and lifted the rate higher, surpassing some of its key resistance levels, which now may become strong support areas. Given that the dollar index continues to move in the northern direction, we believe there is a good chance for USD/CHF to stay under buying interest at least for a while more. Our oscillators, the RSI and the MACD, are also showing signs of a possible continuation to the upside, hence why we will remain positive for now.
If USD/CHF pushes above the current high of this week, at 0.9948, this would confirm a forthcoming higher high and the rate may accelerate to the 0.9984 barrier, which could be seen as the next strong resistance. That barrier marks the high of September 19th. Initially, the pair might stall around there, or even correct slightly lower. But if USD/CHF manages to stay above the 0.9948 hurdle, this could attract the buyers again, as they may try to take advantage of the lower rate and push the rate up again. If this time the 0.9984 obstacle surrenders to the bulls, the next possible resistance to consider could be around the 1.0014 level, marked by the high of June 19th.
Alternatively, if the pair reverses and falls back below the 0.9923 hurdle, marked by the high of September 25th, this could open the door to another move lower, which may bring the rate to the previously-mentioned upside line, which could provide additional support. That said, in order for us to get comfortable with further extensions to the downside, a break of that upside line is needed. Also, such a move would place the rate below the 0.9875 hurdle, marked by an intraday swing high of September 25th, and could signal a change in the short-term trend. We would then aim for the 0.9843 obstacle, a break of which may send the pair further south, potentially aiming for the 0.9819 level. That level is marked by an intraday swing low of September 5th.
Alongside the core PCE index for August, we also get durable goods orders, as well as personal income and spending for the month. With regards to durable goods orders, the headline rate is expected to have slid to -1.2% mom from +2.0% in July, but the core one is expected to have risen to +0.2% mom from -0.4%. Personal income is expected to have accelerated to +0.4% mom from +0.1%, which is somewhat supported by the uptick in the earnings mom rate for the month, while spending is expected to have slowed to +0.3% mom from +0.6%. The case for a slowdown in spending is supported by the slowdown in retail sales.
We also have four speakers on today’s agenda: ECB Vice President Luis de Guindos, ECB Governing Council member Jens Weidmann, Fed Board Governor Randal Quarles and Philadelphia Fed President Patrick Harker.
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