EU equities traded in red sea yesterday, weighed on by the tensions in the Middle East. However, US and Asian indices rebounded, perhaps due to a letter sent by the US military to Iraq, saying that it would pull out of the country, or due to speculation that Iran may not risk striking against the US in a way that would hurt its oil supplies and exports. In the FX sphere, the pound was the G10 winner, aided by the UK services PMI. Today, focus turns back to the Parliament, where MPs will debate on the Withdrawal Agreement.
The dollar traded lower against most of the other G10 currencies on Monday and during the Asian morning Tuesday. It gained only against JPY and slightly against AUD, while it underperformed the most versus GBP, NOK and NZD in that order.
Once again, the performance in the FX sphere does not paint a clear picture with regard to the broader market sentiment. However, the weakening of the yen suggests that risk appetite received a support at some point during the day. Middle East tensions continue to weigh on European equities, after Iran vowed to expel US troops from the region and US President Donald Trump warned of a “major retaliation” if Iran acts. Nonetheless, US and Asian indices rebounded and finished their sessions in green territory, perhaps due to a letter sent by the US military to Iraq, saying that it would pull out of the country, or due to speculation that Iran may not risk striking against the US in a way that would hurt its oil supplies and exports.
That said, US Defense Secretary Mark Esper said that no decision has been made yet and that the letter was only a poorly worded draft, keeping on the table the prospect of another round of escalation. Despite the rebound in market sentiment, we would like to see the situation easing further before we start examining the case of further gains in the equity world. We still don’t know whether and how Iran may retaliate, neither how the US could react.
Even if the tensions ease further, we would still be reluctant to call for a long-lasting recovery as there are still several downside risks ahead of us in the new year. We repeat that the US and China may sign a “Phase One” deal soon, but the road towards a final accord may not be “paved with rose petals”. What’s more, the US may now be ready to turn its tariff guns against the EU, while the upcoming US elections and the Brexit transition period may increase the element of uncertainty.
The Dow Jones Industrial Average cash index edged north yesterday, after it hit support slightly above the 28370 zone, marked by the low of December 31st. That said, the recovery was stopped near the 28730 zone. Overall, the index is still trading above the tentative upside support line drawn from the low of October 3rd, and thus, we would consider the medium-term outlook to still be positive.
If the bulls are willing to stay in charge and push the price above the 28730 line, we could see them aiming for the index’s record high, near 28920, marked by the peak of January 3rd. Another break, above 28920, would drive the cash index into uncharted territory.
Taking a look at our short-term oscillators, we see that the RSI lies above 50, but has just ticked down, while the MACD lies slightly above both its zero and trigger lines. Both indicators detect positive momentum and support the notion for some further recovery. However, the fact that the RSI ticked down suggests that a small pullback may be possible before the next positive leg.
On the downside, we would like to see a decisive dip below 28235 before we start examining whether the bulls have abandoned the battlefield. Such a move may also bring the price below the aforementioned upside line and may pave the way towards the low of December 13th, at around 28030. Another break, below 28030, could extend the slide towards the low of the day before, near 27850.
Back to the currencies, the pound was the main gainer, coming under buying interest after the UK services PMI for December was revised up to 50.0 from 49.0, signaling an exit out of contractionary territory and driving the composite index up to 49.3 from an initial estimate of 48.5. The services survey showed that optimism among companies has improved notably since the elections, although the economy is still in stagnation.
At its latest meeting, the BoE said that if global growth fails to stabilize or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation. Thus, GBP traders may keep their gaze locked on Brexit developments, with the UK Parliament set to resume today. MPs have already voted to approve the Brexit bill agreed by UK PM Johnson and the EU, but it will be reintroduced to the Commons today, with opposition parties pushing for several amendments.
With UK PM Johnson setting a hard line that a trade accord with the EU needs to be found by the end of 2020, the Labour party has signaled it will push for amendments ensuring parliamentary control over the negotiations timeline, in an attempt to prevent a disorderly exit in December. With the pound tumbling on Johnson’s hard stance, the acceptance of such an amendment may prove positive for the British currency, while a rejection may be negative, as it will keep alive chances of a no-deal Brexit.
GBP/CHF traded higher yesterday, after hitting support near the 1.2685 barrier, which has been acting as the lower end of the sideways that’s been containing most of the price action since December 19th. Th upper bound stands at 1.2835. Bearing in mind that the rate is still trading within that range, we will hold a flat stance for now.
In order to start examining the bearish case, we would like to see a clear break below the range’s lower end, at 1.2685. Such a move could initially aim for the 1.2620 barrier, marked as a support by the lows of October 16th and 17th. If that level does not hold either, its break may carry larger bearish implications, perhaps setting the stage for the 1.2460 area, defined by the low of October 14th.
Shifting attention to our short-term momentum studies, we see that the RSI lies above 50, but has just ticked down, while the MACD lies above its trigger line, but near zero. Combined, these indicators suggest lack of directional speed and enhance our choice to stand pat for now.
On the upside, before we assess whether the short-term picture has turned to somewhat positive, we would like to see a strong break, not only above the upper end of the range, at 1.2835, but also above 1.2875, a resistance marked by the high of December 19th. Such a break could pave the way towards the psychological zone of 1.3000, the break of which could extend the recovery towards the high of December 17th, at around 1.3070.
During the European morning, we get inflation data for December from the Eurozone. The preliminary headline CPI rate is forecast to have risen to +1.3% yoy from +1.0%, while the core one is forecast to have held steady at +1.3% yoy. Last week, the German preliminary CPI accelerated to +1.5% yoy from +1.1%, supporting the case for a similar reaction in Eurozone’s headline number. At the latest (and the first for Christine Lagarde) ECB policy meeting, officials kept interest rates untouched and reiterated that they expect them to remain at their present or lower levels until the inflation outlook robustly converge to their aim. At the press conference, Lagarde reiterated Draghi’s words that officials stand ready to adjust all their instruments if needed, but added that there are some stabilization signs in growth slowdown. Thus, a relative recovery in economic data would confirm her view and may lessen the need for additional stimulus.
Later in the day, we get the US ISM non-manufacturing index for December, which is expected to have risen to 54.5 from 53.9. On Friday, the manufacturing index dipped further into the contractionary territory, to 47.2 from 48.1, which is the lowest level in more than a decade. If the non-manufacturing index disappoints as well, this would increase concerns with regards to the performance of the US economy in the last quarter of 2019 and may lead to downside revisions in GDP estimate models, like the Atlanta Fed GDPNow and the New York Fed Nowcast. The US factory orders and Canada’s trade balance, both for November, are also due to be released.
With regards to the energy market, we get 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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