Yesterday, the European indices took a hit, whereas the US ones were mixed. Asia managed to close today in the positive territory. The US retail sales showed good results yesterday, where they came out better than expected, unlike the US industrial and manufacturing production numbers, which were released 45-minutes after the retail sales figures, have disappointed the market, hence why the indices were not able to push more to the upside straight after the opening bell.
Yesterday, the European indices closed well in the red, most likely still driven by a sharp sell-off on Wednesday. The US equity markets had a mixed close. The Dow Jones Industrial Average and the S&P 500 manged to stay slightly in the positive territory, whereas the Nasdaq still ended the day fractionally in the red. The help for Dow and the S&P came the better-than-expected retail sales figures, but the US indices were still halted from moving higher by the industrial and manufacturing numbers on a MoM basis for July, which came out as a slight disappointment. Asian indices have gained today, where they managed to recover some of their losses made during the week. The Asian markets welcomed the news from China, which is believed to try and boost disposable incomes in the near term. But the markets still remain under pressure by the current geopolitical tensions, which could weigh in on them in a negative way at any point. The temporary delay on certain Chinese goods could get removed very easily, causing bigger problems for the equity markets.
As mentioned above the US retail sales showed good results yesterday. The MoM figure for July was at +0.7%, where the initial expectation was only to be at around +0.3%. The retail sales excluding autos showed even better results, as it came out at +1.0% versus the forecasted +0.2%. This gave a good boost to the US dollar after the data got released, and the greenback managed to remain strong against its G10 counterparts (apart from the GBP and AUD). That said, USD struggled to keep its cool against some of the emerging market currencies, which showed good results yesterday after depreciating the day before.
The US industrial and manufacturing production numbers, which were released 45-minutes after the retail sales figures, have disappointed the market, hence why the indices were not able to push more to the upside straight after the opening bell. The July’s MoM industrial production figures dropped from the previous +0.2% to -0.2%, where the forecast was to see a +0.1% reading. The manufacturing production figure on the same basis for the same month was even a bigger disappointment, as it went from the previous revised +0.6% to a -0.4%, with an initial expectation being at -0.1%. So, the market participants could not decide on clear direction, as on one hand you have strong retail sales, but on the other, the country’s production is slowing down, which could spill into negative consequences in the domestic economy. We believe that, for now, the US equity markets might stay vulnerable to any news regarding trade talks. That said, let’s not forget that we should be heading into the Thanksgiving and Christmas seasons, where the market tends to show better results. But it will be interesting to see, if the so-awaited rallies will take place, given that China and the US are not able to reach a consensus overall. This is where the Fed might come to rescue with the expected rate cuts by the end of this year, which could help stimulate the economy, at least for a bit more.
From the short-term perspective, USD/CAD continues to move higher, forming higher lows, while trading above a short-term upside support line taken from the low of July 18th. Yesterday, the pair almost managed to reach its key area of resistance, near the 1.3345 barrier, but the bears were quick to jump in and push the rate back down a bit. There is a possibility to see some movement to the downside, but as long as USD/CAD stays above the above-mentioned upside line, we will class this move lower as a temporary correction before another leg of buying.
A further slide may bring the rate a bit lower to the 1.3285 obstacle, a break of which could lead GBP/USD a bit more to the downside. The pair could then test 1.3265 zone, which may provide some good support. If the pair rebounds and makes its way back above the 1.3285 area, this could interest more bulls join in and lead GBP/USD up again, potentially targeting the 1.3345 barrier. If that barrier, eventually, surrenders to the buyers, its break would confirm a forthcoming higher high and we could see the pair aiming for the 1.3383 level, marked by the high of June 19th.
On the downside, if the aforementioned upside line breaks, this could make the bulls worry, as it could increase the pair’s chances of moving further down. But for us to get slightly more comfortable with lower areas, we need to see a rate-drop below the 1.3196 zone, which could clear the path to the 1.3157 hurdle, marked near the intraday swing high of July 31st. But if that hurdle is just seen as a temporary obstacle on the way down, USD/CAD could fall even to the 1.3105 area, which is the low of July 31st.
GBP-traders took the UK retails sales slightly better than their US counterparts. The British pound was strong against its G10 companions. The UK retail sales figures came out much better than expected. The July core retail sales on a MoM and YoY basis showed up at +0.2% and +2.9%, versus the forecasted -0.2% and +2.3%, respectively. Similar story was with the headline numbers, where the MoM and YoY readings came out at +0.2% and +3.3%, versus the expected -0.2% and +2.6%. The pound traders took a liking of the data and rushed into GBP again. But as we mentioned yesterday in our daily report, once traders digest everything and understand that the numbers are still not very satisfying, as they are well below the previous figures, GBP might come under selling interest again. Let’s not exclude that the Brexit dilemma has not disappeared anywhere, which eventually could weigh in on the pound in the negative way.
On Wednesday, the European Central Bank had warned that some UK banks are behind schedule of moving their staff to Europe ahead of Brexit. Many UK banks must shift some of their crucial operations to the mainland Europe, in order to minimise the disruption in their work. The ECB are rushing to get their contingency plan in order, as in the no-deal scenario, UK assets won’t be covered by the EU rules.
Overall, GBP/USD is still within a downtrend, trading below a medium-term tentative downside resistance line taken from the highest point of May. On Monday, we saw the pair getting closer to the psychological 1.2000 zone, but it got held near the 1.2013 zone and the rate retraced back up a bit. Although there is a chance to see a further move slightly higher, still, the overall pressure on the pound remains, given the ongoing issues with Brexit, hence why we will class any move higher, as a temporary correction.
If GBP/USD moves a bit higher, but fails to climb above either 1.2150 hurdle, or the 100 EMA on the 4-hour chart, this could be a good opportunity for the sellers to step in again and drive the rate back down. We will then aim for the 1.2044 obstacle, a break of which may lead the pair a bit lower, targeting the 1.2013 level, marked by the low of this week. If that level is not able to withstand the bear pressure, its break would confirm a forthcoming lower low and GBP/USD could slide to the psychological 1.2000 zone, or even to the 1.1990 mark, which is near the lowest point of January 2017.
Alternatively, the bulls continue to drive the pair a bit more to the upside, a break above the 1.2210 barrier, marked by the high of August 6th, could open the door for a larger correction, possibly leading the rate towards the 1.2250 hurdle, which is the high of July 31st. The rate might stall there initially, or even correct back down a bit. But if GBP/USD continues to balance above the 1.2210 area, it may move higher again, potentially bypassing the 1.2250 zone and aiming for the 1.2310 level, or even the aforementioned downside line, which may help keep the pair down.
The only interesting data set, which we will get before the US opening bell, will be the US building permits and housing starts on a MoM basis. The building permits for the July are believed to have risen from the previous -5.2% to +3.1%, which is a significant change. The housing starts figure is forecasted to have increased as well, from -0.9% to around +1.5%. We doubt that this data could have any significant effect on the USD traders.
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