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by Charalambos Pissouros

Strategic Report, 2019 Newsletter 7

Technical Analysis

1. GBP/USD WEEKLY OUTLOOK

REVIEW

Last week, after breaking below the short-term upside support line taken from the low of January 2nd, GBP/USD made its way lower, finding good support near the 1.2920. Although on Thursday, the rate shot below that support area, still, the pair was quick to rebound and close the week above that hurdle. Even though the bulls are trying to fight back, the British pound remains vulnerable due to the Brexit developments, hence why we will continue targeting lower levels.

OUTLOOK (SCENARIO A / B)  

If GBP/USD continues trading below the psychological 1.3000 barrier and struggles to overcome it, then we will wait for a break below the above-mentioned 1.2920 hurdle, in order to get more comfortable with the downside. We will then aim for a possible re-test of the 1.2850 area, a break of which may lead the pair towards the 1.2800 support zone, marked near the lows of January 8th and 11th.

On the other hand, a break through the short-term downside resistance line taken from the highest point of January and a push back above the psychological 1.3000 zone could initially pave the way for the 1.3050 barrier, marked by the high of January 5th. Another break, above that level, could increase the chances of seeing a further rate-acceleration, and could drive the pair to the 1.3103 obstacle. That obstacle held the rate down on February 4th, but if this time it fails to resist the bulls, GBP/USD could easily re-test the high of January 31st, near the 1.3220 barrier.

GBP/USD daily chart technical analysis

2. NZD/USD WEEKLY OUTLOOK

REVIEW

The New Zealand dollar took a hit last week during Wednesday’s Asian morning, which led to a strong rate depreciation against the other G10 currencies. We saw NZD/USD wiping out almost two weeks’ worth of gains, but on a positive note, the pair is still trading above its medium-term upside support line taken from the lowest point of October.

OUTLOOK (SCENARIO A / B)  

NZD/USD could continue sliding a bit more, towards that upside line, but if it fails to break below it, then we might see some bull-action coming back in and potentially lifting the rate higher. The pair might continue traveling in the upwards direction, where it may reach the 0.6778 barrier, a break of which could push the pair towards the 0.6815 obstacle again, marked by the low of January 29th. If that level fails to keep the rate down, its break could open the door to the 0.6870 level, marked by the low of February 4th.

On the other hand, if the aforementioned upside line is violated and the rate falls below the 0.6707 support level, or even drops under the 0.6670 zone, this may clear the path towards the 0.6630 obstacle, which marks the closing and opening levels of January 2nd and January 3rd respectively. If the bear-pressure remains strong, it could easily push NZD/USD lower, to test the 0.6580 hurdle, marked by the low of January 2nd.

NZD/USD daily chart technical analysis

3. USD/JPY WEEKLY OUTLOOK

REVIEW

Last week, the bulls managed to keep the upper hand and did not allow USD/JPY to close in the negative territory, even though the pair started sliding on Tuesday. The rate is also sitting above its short-term upside support line, drawn from the low of January 3rd, which keeps the short-term outlook somewhat positive. For now, we will continue aiming towards slightly higher areas.

OUTLOOK (SCENARIO A / B)  

Of course, as mentioned above, the short-term outlook remains somewhat positive, but for a better confirmation of the upside, we would need to see USD/JPY breaking last week’s high, near the 110.10 level. Such a move would create a higher high and the rate could accelerate towards the 110.85 hurdle, a break of which could invite even more bulls, who could lift the pair to the 111.40 barrier, which is the high of December 26th.

On the downside, so that we could start looking towards lower levels, we would first like to see a break of the aforementioned upside support line and a drop below the 109.10 hurdle. The bears could then continue driving the rate to the 108.50 obstacle, marked by the low of January 31st, which if broken could clear the path towards the 108.00 area, or even to the 107.75 support zone, which is the low of January 10th.

USD/JPY daily chart technical analysis

4. EUR/SEK WEEKLY OUTLOOK

REVIEW

After a successful week of running higher, EUR/SEK still has got some potential to travel further up, in our view. The pair keeps on trading above a couple of short-term upside support lines. The slightly longer one is taken from the low of December 31st, whereas the slightly steeper one is drawn from the low of January 25th. Even though we may see a small correction back down, as long as the rate remains above the steeper upside line, we will remain strongly-bullish.

OUTLOOK (SCENARIO A / B)  

If EUR/SEK retraces a bit lower but fails to get below the above-mentioned steep short-term upside line, we will consider the drop as just a small correction. The pair could easily rebound and travel back to its last week’s high, near the 10.515 hurdle, or even move slightly further up to test the 10.536 barrier, marked by the high of October 11th. If the buying doesn’t stop there, EUR/SEK could get lifted to the 10.567 level, which is the high of September 14th.

Alternatively, a break below the aforementioned steep short-term upside line could send the rate lower, towards the 10.435 level, marked near the high of February 4th. If the bears continue dictating the rules, a drop below that level could take the rate to the 10.392 obstacle, which acted as one of the good support levels on February 5th and 6th. If the selling continues, EUR/SEK may reach the other previously-mentioned upside line, which runs from the low of December 31st.

EUR/SEK daily chart technical analysis

5.  XAU/USD WEEKLY OUTLOOK

REVIEW

In the beginning of last week, it seemed that Gold could re-visit the short-term upside support line taken from the low of November 13th. But on Thursday and Friday the bulls entered the game and pushed the precious metal back up again. That said, it was still not enough to close the week in the green, hence why, from the short-term perspective, gold might continue aiming slightly lower, but only until the commodity could reach the above-mentioned upside line. If the line remains intact, the yellow metal could get picked up again by the bulls.

OUTLOOK (SCENARIO A / B)  

There is a chance that we may see a small move lower, but, as mentioned previously, if the upside line remains intact, the price may reverse and travel back up. Such a move could allow more bulls to join in and potentially lift the commodity to the 1317 hurdle, which if broken could push gold a bit higher, to test the high of January 31st, at 1326. That said, let’s not exclude a scenario, where the precious metal might not even test the upside support line, but head straight away for January’s highest point, at 1326, a break of which may confirm a forthcoming higher high.

On the other hand, a break of the previously-mentioned upside line and a drop below the 1297 mark could lead to further declines towards the 1286.5 hurdle, a break of which might push the precious metal further down. This is when the 1276 support zone may get tested, as it held the price from moving lower between December 31st and January 24th.If this time, that zone fails to withstand the bear-pressure, a break below it could pull the precious metal down to the 1266 hurdle, marked near the low of December 26th and the high of December 20th.

Gold XAU/USD daily chart technical analysis

6. WTI CRUDE OIL WEEKLY OUTLOOK

REVIEW

Even though WTI oil closed last week in the negative territory, still, the commodity continues its sideways trading activity, which has been in play since around the beginning of January. For now, we will step aside and take a somewhat neutral stance until we see a clear break through one of our key levels.

OUTLOOK (SCENARIO A / B)

A drop below the 51.90 support area would confirm a forthcoming lower low on the daily chart and could clear the path lower, towards levels last seen in the beginning of January. If such a move occurs, we may consider the psychological 50.00 hurdle to be the next potential area for a test. But if that zone fails to withhold the price from dropping, then a further move lower could lead the commodity towards the low of January 8th, near the 48.35 level.

Alternatively, in order to get comfortable with the upside, we need to see a break above last week’s high, near the 56.00 barrier. This way WTI oil may travel higher to test the 57.57 obstacle, a break of which could lift the price to the 59.40 barrier, which is near the high of November 13th and the low of November 9th.

WTI crude oil daily chart technical analysis

7. S&P 500 WEEKLY OUTLOOK

REVIEW

The S&P 500 closed on Friday almost at the same spot where it had started off the week. But one positive aspect is that the US index continues to trade above its medium-term downside line, taken from the high of October. For now, we remain somewhat bullish, as we wait for a break above last week’s high in order to see further higher highs.

OUTLOOK (SCENARIO A / B)

As mentioned above, a break above the 2740 barrier, which is near last week’s high, may open the door to slightly higher areas. This is when we will target the 2764 obstacle, a break of which may increase the chances for S&P 500 to travel further up. The next potential resistance zone to watch out for could be the 2813 level, marked by the high of December 3rd.

Alternatively, a drop back below the aforementioned downside line could eliminate the bullish case and the price might fall lower. The index could then test the key support area at 2625, which held the S&P 500 from dropping between January 23rd and 29th. We may see the index rebounding back up slightly, but if it remains below the previously-mentioned downside resistance line, there could be another leg of selling and the price may slide below the 2625 and hit the 2567 level, marked by the low of January 14th.

S&P 500 daily chart technical analysis

FX Weekly Market Preview

Weekly Outlook: Feb 11 – Feb 15: RBNZ and Riksbank Meet, Brexit and Trade Talks also in Focus

We have a very busy week ahead of us with two central bank decisions on the agenda, the RBNZ and the Riksbank, another Parliamentary debate on Brexit, a new round of US-China trade talks, and several economic releases, including the 1st estimate of the UK GDP for Q4 and January inflation data from both the UK and the US. What’s more, on Friday, the US government may be headed for another shutdown if the Congress does not agree on a budget plan throughout the week.

On Monday, during the European day, we get inflation data for January from Switzerland and expectations are for a tick down to +0.6% yoy after December’s slide to +0.7% from +0.9%. At their last meeting for 2018, SNB officials kept their benchmark rate unchanged at -0.75%, reiterating that they will remain active in the FX market as necessary and repeating that the Swiss franc is highly valued. They also revised down their inflation projections, suggesting that inflation is unlikely to hit their 2% target during their forecast horizon, even with interest rates staying at current levels. Although a +0.6% yoy inflation rate would be above the Bank’s estimates for the first quarter of 2019, which is at +0.5%, it would still be well below the Bank’s objective. Therefore, we see it unlikely for SNB policymakers to be tempted to alter their policy stance soon.

From the UK, we get the 1st estimate of GDP for Q4, industrial and manufacturing production for December, as well as the trade balance for the month. Expectations are for the preliminary GDP estimate to show that economic activity slowed to +0.3% qoq from +0.6% in Q3, something that could push the yoy rate down to +1.4% from +1.5%. Industrial and manufacturing production are expected to have rebounded somewhat in December, after sliding the month before. However, although this would drive both the yoy rates slightly higher, it would still keep them within the negative territory. With regards to the nation’s trade data, the forecast suggests that the UK trade deficit stayed more or less unchanged in December. Having said all that though, bearing in mind that the BoE has already met last week and downgraded its growth projections, we don’t expect these data releases to be major market movers. We expect market attention to stay locked on the Brexit landscape and this week’s new debate in the UK Parliament.

With regards to the US-China trade sequel, a US delegation led by US Tr. Secretary Steven Mnuchin and Trade Representative Robert Lighthizer travelled to China for another round of trade negotiations. Following last week’s headlines that US President Trump and his Chinese counterpart Xi Jinping are unlikely to meet before March 1st, which is the deadline set for the two nations to reach common ground, investors will be sitting on the edge of their seats to see whether an accord can be reached at this gathering.

However, as we noted on Friday, we don’t expect a final deal. We believe that if that happens it will be at a meeting between Trump and Xi. Yes, such a meeting may take place after March 1st, but we assume that Trump could postpone any tariff increases if the chances for a final accord are high in the aftermath of this week’s talks. That said, even if we get another set of “substantial progress” remarks, the big question is whether markets will believe them again or shrug them off. Remember that investors cheered the positive comments just after the previous negotiations but were largely disappointed after White House economic adviser Larry Kudlow said that there is still a “sizable distance” before a final deal can be sealed.

Tuesday appears to be a relatively light day in terms of economic releases. Thus, we expect investors to stay focused on headlines and developments surrounding the US-China trade negotiations, but also keep an eye on speeches by BoE Governor Mark Carney and Fed Chair Jerome Powell.

On Wednesday, during the Asian day, it’s the turn of the RBNZ to decide on interest rates for the first time this year. This would be one of the “bigger” meetings, where apart from the decision and the accompanying statement, we will get updated economic projections and a conference by Governor Adrian Orr. When they last gathered, policymakers decided to keep the official cash rate unchanged at +1.75% as was widely anticipated, while in the statement accompanying the decision, Governor Orr repeated that rates are expected to stay at this level through 2019 and into 2020. What appeared interesting at first glance was that the Governor removed from the statement the part saying that the next move could be up or down. However, at the press conference, he said that a rate cut is not off the table and that he would consider such a move if GDP falls short of the Bank’s projections.

RBNZ New Zealand interest rates

Since then, GDP data showed that the economy slowed to +0.3% qoq in Q3 from +1.0% in Q2, well below the Bank’s own estimate of +0.7%, and although inflation data for Q4 came in somewhat better than expected, the employment data for the quarter disappointed, with the unemployment rate rising to 4.3% from 3.9% and the employment changed slowing to +0.1% qoq from +1.1%. Officials may not be tempted to cut rates at this meeting, as they may prefer to wait for evidence as to whether the softness in the data was temporary or not, but we expect Governor Orr to keep the prospect well on the table. It would also be interesting to see whether policymakers will decide to push back their hike timing. According to the November Monetary Policy Statement, interest rates are expected to start rising in the second half of next year and hit 2.0% during the last quarter.

During the European morning, the central bank torch will be passed to the Riksbank. At its latest policy meeting, the world’s oldest central bank decided to raise rates to -0.25% from -0.50%, which is the first increase since 2011, while in the accompanying statement, officials noted that the next hike is likely to come during the second half of 2019.

Riksbank Sweden interest rates

Since then, inflation data showed that the headline CPI rate remained unchanged at +2.0% yoy, the CPIF rate ticked up to +2.2% yoy, while the core CPIF rate, which excludes energy, rebounded back to +1.5% yoy from 1.4%. Although the Krona strengthened when these numbers were published, it was quick to give back all the inflation-related gains, which suggests that the prints were not strong enough for investors to raise bets that Riksbank officials may to bring forth the timing of when they expect rates to rise again, something we agree with. We expect the Bank to keep policy on hold at this meeting and to maintain a more or less unchanged narrative in the accompanying statement.

As for Wednesday’s economic releases, during the European morning, we get the UK CPIs for January. Expectations are for the headline rate to have slid further, to +1.9% yoy from + 2.1%, while the core rate is expected to have remained unchanged at +1.9% yoy. At last week’s BoE gathering, policymakers kept interest rates unchanged, downgrading their GDP forecast for 2019 and 2020 and revising somewhat lower their CPI estimate for the end of this year. However, they maintained their position that interest rates could move in either direction post-Brexit, even in case of a no-deal outcome. We agree with that view and we still believe that pre-Brexit inflation numbers are unlikely to attract much attention, as everything could change after the UK departs from the EU. In case of a no-deal outcome, economic growth could get hurt, but a potential slide in the pound could lift inflation up again.

UK CPIs inflation

We believe that GBP traders will keep their gaze locked on the Brexit sequel, and the new debate in Parliament. On Wednesday, UK Prime Minister Theresa May will update lawmakers on her progress so far with regards to any changes in her Brexit bill, but she is unlikely to put the deal under a new “meaningful vote”. The following day, MPs will debate on the matter, with a chance of another round of voting on proposed amendments. Last week, PM May agreed with EU officials to resume talks, but to officially review progress at the end of February, which suggests that a deal vote in Parliament is likely to take place after such a meeting.

We get inflation data from the US as well. Expectations are for the headline CPI rate to have declined to +1.6% yoy from +1.9%, further below the Fed’s objective of 2.0%, while the core rate is anticipated to have ticked down to 2.1% yoy from 2.2%. That said, the yoy change of WTI, although still negative, has improved somewhat in January, which suggests that if the core rate slides, the headline rate may decline by less than anticipated. In any case, with the Fed signaling patience with regards to its future moves, such results are unlikely to alter much market expectations on that front. According to the Fed fund futures, market participants are almost certain that the Committee will not push the hiking button this year, while they see a nearly 20% chance for a rate cut. Even if the headline rate falls to +1.6% yoy, we believe that for that percentage to increase notably, the core rate may need to dip below 2% as well.

US CPIs inflation

On Thursday, Brexit will stay in the limelight. As we already noted, the UK Parliament will debate on May’s updates, while amendments may once again be proposed. With less than two months until the official divorce date, approving amendments which include extending Article 50, like the one proposed by Cooper on January 29th, could ease fears that the UK will crash out of the EU without in a chaotic manner. On the other hand, a repeat of the decisions taken on January 29th could add to no-deal Brexit fears.

As for Thursday’s economic data, during the Asian session, Japan’s preliminary GDP for Q4 is coming out and the forecasts suggests that economic activity grew +0.4% qoq in the last three months of 2018 after contracting 0.6% the prior quarter. This would bring the yoy rate back to positive territory, to +1.4% from -2.5%. That said, we doubt that this data set could change market expectations with regards to BoJ’s future policy moves. As we have been repeatedly saying, with all the Japanese inflation metrics, especially the Bank’s own core CPI, well below the 2% price objective, policymakers may still have a long way to go before considering a meaningful step towards normalization. China’s trade balance for January is also coming out. Expectations are for the nation’s surplus to have declined to 32.00bn from 57.06bn in December, while both exports and imports are anticipated to have fallen for the second consecutive month.

During the European morning, Eurozone’s second estimate of Q4 GDP is coming out and is expected to confirm its preliminary print of +0.2% qoq. Later in the day, we may get the US retail sales for December, which were delayed due to the government shutdown. The release is expected to show that the headline rate ticked down to +0.1% mom from +0.2% in November, and that core sales stagnated after rising +0.2% as well. The US PPIs for January are also on the agenda. Both the headline and core rates are expected to have declined, to +2.1% yoy and +2.5% yoy from +2.5% and +2.7% respectively.

Finally, on Friday, during the Asian morning, China’s CPI and PPI data for January are coming out. The CPI rate is expected to have held steady at +1.9% yoy, while the PPI is forecast to have slowed to +0.3% yoy from +0.9%. Japan’s final industrial production for December is also due to be released and it is expected to confirm its preliminary estimate, namely that production slid 0.1% mom.

During the European day, we get the UK retail sales for January. The forecasts suggest that both headline and core sales rose 0.2% mom after sliding 0.9% and 1.3% respectively. This is likely to drive both the yoy rates up, to +3.4% and +3.0%, from 3.0% and 2.6%. The case for rising yoy rates is supported by the BRC retail sales monitor for the month, the yoy rate of which surged to +1.8% from -0.7% previously. Eurozone’s trade balance for December is also coming out, but no forecast is currently available.

In the US, industrial and manufacturing production for January are due out, as well as the preliminary UoM consumer sentiment index for February. Both the industrial and manufacturing monthly rates are expected to have slid to +0.1% mom, from +0.3% and +1.1% respectively, while the UoM index is expected to have risen to 94.0 from 91.2.

With regards to politics, the US government may be heading for another shutdown if the Congress does not agree on a budget plan throughout the week, which could raise concerns over a more serious impact on the US economy, and thereby weigh on the dollar and US equities. The previous 35-day partial shutdown was the result of the divide between President Trump and Democrats over building a wall at the US-Mexico border. Thus, with Trump insisting that a wall should be built, finding common ground and agreeing on a final spending bill appears to be a hard task, in our view.

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