The main news that hit the wires yesterday before the European close, was that the US and China trade-talk representatives have agreed on more talks in the near future and that there would be a delay on certain tariffs. UK will provide with their YoY and MoM inflation numbers for the month of July. Both figures are believed to have slid a bit.
The main news that hit the wires yesterday before the European close, was that the US and China trade-talk representatives have agreed on more talks in the near future and that there would be a delay on certain tariffs. The news comes after China’s Liu He discussed over the phone the current trade war situation with his US counterparts, Lighthizer and Mnuchin. It is believed that China has agreed to purchase more agricultural products from the US in exchange to US delaying their tariffs on a few Chinese goods until mid-December. The main Chinese imports into the US that fall under those exclusions are electronic devices. And that is understandable, as companies start to get ready for the Christmas and New Year festive season, where electronic goods are always in high demand.
The market took the news in a very positive way, straight away switching from a risk-off to a risk-on mode. After the US opening bell, all the major indices moved up, as investors started dumping safe-haven assets and jumping back into equities. This resulted in gold dropping back to the psychological 1500 area and currencies like the yen and the Swiss franc depreciating against their major counterparts. Certainly, all this looks good for now, but we need to let the market digest everything, as the trade war did not disappear anywhere. It still remains in play, as China and the US continue to disagree on a range of issues and yesterday’s positive remarks from the phone negotiations could eventually fade away in the medium term. We will definitely enjoy this bounce in equities and the positive news from the trade negotiations of the two major economical giants, but can that positive tone be maintained at least in the near term? Most likely that there will still be plenty of bumps on the way forward, so let us take the yesterday’s positivity cautiously.
In other news released yesterday, the UK delivered its employment figures for the month of June. The average earnings including bonus came out as expected, at +3.7%, but the unemployment number went up a tenth of a percent. After the news, GBP pushed a bit higher against most of its major counterparts, putting itself in the positive territory for the day. But once the tariff-news came out, the quickly depreciated against a basket of currencies. The only two currencies, against which the pound managed to stay strong, were the safe-haven yen and Swiss franc. That’s understandable, given the positive news from the trade negotiations.
Another important set of data which we got yesterday, was from the US. The country released its inflation numbers for July and the figures have beaten expectations. The headline inflation came out at +1.8%. This was better than the forecasted +1.7%, which already was higher than the previous +1.6%. The core CPI on a YoY basis, which came out at +2.2%, was also slightly better than the expected +2.1% (the same as the previous). Both figures are still around Fed’s inflation target, which is currently at+2.0%. These released numbers made USD-bulls quite happy. The US dollar did have a positive reaction to the numbers, but, of course, the bigger gains came after the announcement of the tariff-delay on certain electronic goods imported into the US.
In terms today’s economic data, China had already released some of its during the Asian morning. The YoY fixed asset investments have dropped by a tenth of a percent, from +5.8% to +5.7%, although the expectation was to higher side, at +5.9%. The Chinese YoY industrial production for the month of July also came out as a disappointment, at +4.8%, when it was believed to be at around +6.0%. The forecast was already below the previous +6.3%. Chinese unemployment also saddened, as it increased by two tenths of a percent, going from the previous 5.1% to 5.3%.
Also, this morning, Germany delivered their preliminary GDP figures on a YoY and QoQ basis for Q2. The expectations were already very much to the lower side, but the numbers were not that bad. The QoQ figure came out as expected, at -0.1%, whereas the YoY number was 0.0%, which is better than the forecasted -0.3%. The euro had a modest, but positive reaction to the numbers. EUR-traders should remain somewhat cautious, as there is another data set to watch out for today and that’s the preliminary YoY and QoQ GDP figures for Q2 from the whole eurozone. The numbers are believed to have stayed the same, at +0.2% and +1.1%, for QoQ and YoY respectively.
Today, UK will provide us with their YoY and MoM inflation numbers for the month of July. Both figures are believed to have slid a bit. The MoM one is forecasted to have turned negative, going from +0.3% to -0.1%, whereas the YoY number is expected to have slid just by a tenth of percent, from +1.9% to +1.8%. Although everyone is expecting a slight decline in the YoY figure, it is still very close to the Bank of England’s inflation target, which is currently at +2.0%.
After hitting a new high this year, at 0.9325, EUR/GBP retraced slightly lower, where it is currently balancing fractionally above its short-term upside support line taken from the low of August 1st. But given that the line was violated a few times already, we will not put too much emphasis on it, but instead focus on our key support and resistance levels. For now, we will remain neutral and wait for a clear break through one of our barriers, before examining a further directional move.
A push back above the 0.9300 barrier could spook the bears from the field and allow more bulls to join in. This is when the pair might travel to the current high of August, at 0.9325 hurdle, a break of which would confirm a forthcoming higher high, and it may lead EUR/GBP towards the 0.9411 level, marked by the highest point of October 2009.
In order to aim for some lower areas, at least in the short run, a drop below the 0.9250 hurdle would be needed. That hurdle acted as a good resistance zone on August 6th and 7th, and also played its role of support on August 12th. A break of that zone could open the door to a further decline, targeting the 0.9208 obstacle, which may initially hold the rate from sliding further. We may even see a rebound back up, but if the pair continues to trade below the above-mentioned 0.9250 barrier, this may lead to another leg of selling, where EUR/GBP could end up testing the 0.9188 level, marked by the low of August 7th.
Yesterday, we saw the safe-haven currencies falling against all of their major counterparts, after there were a few positive outcomes from the China-US trade negotiations. USD/CHF managed to make its way higher, breaking some key resistance barriers. Given that the risk-on sentiment might stay for a short while in the markets, we believe there could be a chance to slightly higher areas being met. That said, let’s not forget that, still, the pair is within a large downtrend and this move higher might be considered as a correction.
This morning, we saw the pair getting held near the 0.9770 barrier, but if USD/CHF makes another run towards it and eventually breaks it, this may attract a fem more buyers into the game. The rate may then get lifted to the 0.9797 zone, marked by the high of August 7th, which coincides with the 100 EMA on the 4-hour chart. If the buying is still strong and the 0.9797 hurdle breaks, the next possible resistance level could be seen around the 200 EMA, or near the 0.9845 hurdle, marked by low of July 25th.
On the downside, if the rate slides back below the 0.9727 area, marked by yesterday’s intraday swing high, this would also place the pair below its 21 EMA on the 4-hour chart. Such a move could increase the pair’s chances of moving further south towards the 0.9676 obstacle, a break of which could lead USD/CHF to the 0.9660, which is yesterday’s lowest point.
US will deliver the crude oil inventories number, which is forecasted to have declined from the previous +2.385M barrels to -2.775M. If so, there is a chance to see a move higher in oil prices. If we get a number, which is higher than expected, the price of oil might fall. This could still be in the scenario, if the real number comes out higher than the forecast, but lower than the previous one. In that case it would mean that, although the amount oil barrels have dropped from the previous reading, still, there is not enough demand for the black liquid as it was expected.
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