Most equity markets traded in the red yesterday, with investors adopting a cautious stance ahead of the December 15th deadline for the next round of US tariffs against China, as well as ahead of the UK elections and the FOMC and ECB central bank decisions.
The dollar traded mixed, but within a ±0.30% range, against the other G10 currencies on Monday and during the Asian morning Tuesday. It gained versus SEK, NOK, AUD and JPY in that order, while it underperformed against CHF, CAD, EUR, NZD and GBP.
In the equity world, major EU and US indices closed in the red, with the cautious investor morale rolling into the Asian trading today. It seems that market participants adopted a cautious approach ahead of the looming deadline (Dec.15th) for the next round of tariffs the US is planning to impose on Chinese imports, ignoring comments by US President Donald Trump that they are doing well with China with regards to a trade deal. It could also be that ahead of the tariff-deadline there are several other significant events on this week’s agenda that could shake market sentiment.
On Wednesday, we have an FOMC policy decision, while on Thursday, the spotlight will fall on the UK elections, with an ECB meeting also on the same day’s schedule.
Kicking off with the political scene and the UK elections, opinion polls suggest that the Conservative Party is on course for gaining parliamentary majority, something that could open the door for ratifying the Brexit deal agreed between UK PM Boris Johnson and the EU, thereby ending more than three years of political uncertainty. That said, we find it hard trusting polls. After all they were wrong in estimating the Brexit referendum outcome back in 2016, as well as the results of the 2017 election. As for the pound, it could gain a bit more in case the Tories indeed gain majority, but we don’t expect a huge rally, as most of that outcome appears to be already priced in. What could come as a big disappointment, and thereby trigger a pound tumble, is another hung parliament as this would bring the risk of a disorderly exit back on the table.
Passing the ball to the central banks, both the FOMC and the ECB are anticipated to refrain from making any policy changes, thus the attention is likely to fall on clues and hints on how they intend to move forward. With regards to the FOMC, market participants may lock their gaze on the updated “dot plot”. At the previous meeting, the Committee cut rates by 25bps, but signaled that it would turn to the sidelines, unless things fall out of orbit. That said, the market remained unconvinced that Fed officials are done cutting rates and they still see another one being delivered in September next year. Therefore, if the new plot continues to point to no rate reductions next year, this may prompt investors to price out their cut bets, and thereby support the greenback.
Moving on with the ECB, this will be the first gathering headed by Christine Lagarde and therefore, market participants may be eager to find out how she intends to drive the monetary policy wheel. However, our view is that she will refrain from making bold comments at this meeting, as she may prefer to wait for some time in order to coordinate with her colleagues. For now, she may echo Draghi’s remarks, calling for more fiscal support by the Euro-area nations.
GBP/JPY is still trading above its short-term tentative upside support line taken from the low of November 22nd. But the rate had distanced itself from that line lately and the pair is now forming something of a symmetrical triangle, which is forcing the pair to coil up. Although we need to wait for GBP/JPY to get out of that triangle pattern first, we will stay somewhat bullish overall, as the rate continues to balance above the aforementioned upside line.
If the pair breaks the upper side of the triangle and climbs above the 143.25 barrier, which is the current highest point of December, this would confirm a forthcoming higher high and more buyers might be joining in. This is when we will target the 143.77 obstacle, a break of which may set the stage for a test of the 144.05 level, marked by the low of April 30th.
Alternatively, a break of the lower side of the previously-discussed triangle and a rate-drop below the 142.57 hurdle, marked by one of yesterday’s intraday swing lows, may signal the start of a downside correction. The bears might then try to bring the rate a bit lower, towards the 142.36 zone, which if broken may lead GBP/JPY for deeper declines. The pair could then end up testing the previously-mentioned short-term upside support line, or the 141.85 level, marked near the highest point of November.
After Friday’s strong move lower, EUR/USD managed to recover some of its losses made during that day. The pair looks trendless at the moment, as it continues to move around its EMAs. Our oscillators, the RSI and the MACD, are also somewhat flat. For now, we will take a neutral stand and wait for the rate to break through one of our key levels, before we could examine a short-term directional move.
A drop below one of yesterday’s intraday swing lows at 1.1055, would also place the rate below all of its EMAs and more sellers could jump into action, in order to bring the pair a bit lower. We will then aim for Friday’s low, at 1.1040, which if broken may open the door for a further move down, potentially aiming for the 1.1028 zone, marked by the high of November 29th. EUR/USD could initially stall around there, or even correct back up a bit. But if the pair fails to climb back above the 1.1055 barrier, this may trigger another round of selling. If this time the 1.1028 hurdle fails to withstand the bear pressure, its break might clear the path to the 1.1003 level, marked by the low of December 2nd.
On the other hand, if the pair moves above yesterday’s high, which is at 1.1078, this might interest a few more buyers to join in and try to lift the rate to its next possible resistance area, at 1.1091. That area is marked near an intraday swing high of December 4th and near an intraday swing low of December 6th. If the bulls see that area only as a temporary pit-stop, a break higher may lead EUR/USD to the 1.1110 and 1.1160 levels, marked by the highs of December 6th and 4th respectively.
During the European session, we get Norway’s CPIs for November. Both the headline and core rates are expected to have ticked down to +1.7% yoy and 2.1% yoy, from 1.8% and 2.2% respectively. With the Norges Bank holding the view that interest rates will most likely remain at the present level in the coming period, a small slowdown in inflation is unlikely to alter expectations around the Bank’s future course of action.
From the UK, we get the final GDP for Q3, the industrial and manufacturing production data for October, as well as the nation’s trade balance for the month. The GDP is expected to be revised lower, to -0.2% qoq from +0.3%, while the IP and MP rates are expected to have increased. The IP rate is forecast to have rebounded to +0.2% mom from -0.3%, while the MP one is anticipated to have increased to -0.1% mom from -0.4%. With regards to the trade balance, the nation’s deficit is expected to have narrowed somewhat. Having said all that, we don’t expect this bunch of data to prove a game changer for the pound as its traders are most likely to keep their gaze locked on Thursday’s election and thus, opinion polls heading into the ballots.
In Germany, the ZEW survey for December is due to be released. The current conditions index is expected to have inched slightly higher but to have stayed in negative territory. Specifically, it is expected to have risen to -22.3 from -24.7. The economic sentiment index is anticipated to have exited the negative zone. It is forecast to rise to +0.3 from -2.1.
From the US, we have the API (American Petroleum Institute) weekly report on crude oil inventories, but as it is always the case, no forecast is currently available.
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