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Forex Market Analysis

Bullish Economy at a Crossroad: Free Trade against Protectionism

 

 

 


Underlying Events


Last week’s volatility was fueled early Monday by Italy’s political instability as Italian president Sergio Mattarella refused to appoint Giuseppe Conte, a Eurosceptic, as Finance Minister even though he has the backing of the majority of the parliament.

Then, on May 30, as fears about Italy eased the markets focused its attention on EU officials statements against the US imposed tariffs on steel and aluminium.

“The US is playing a dangerous game by slapping tariffs on European steel and aluminium,” said Cecilia Malmstrom, warning about the consequences for economic recovery on the EU as well as US industry. (source BBC)

 


 Last week’s Economic Calendar was full of interesting releases


 

US

May’s US Consumer Confidence figure is at its historic highs, at its estimated 128.0 level, non-farm unemployment is at 3.8%, and US GDP (QoQ) grew at 2.2% a tick below estimations, while US Advance Goods Trade Balance was below expectations at -68.2b.

On the consumer front, May 31 brought us the US PCE Core (YoY) that is stable at 1.8%, the Personal Income (APR) stable at 0.3%, and Pending Home Sales (MoM) below expectations at -1.3%, below the expected 0.4%.

On the Energy Front, crude oil inventories were -3620K well below the expected 450k, while the gasoline inventories were 634K, above the expected -1200K

Finally, the USD Manufacturing figures were a bit above expectations, at 58.7 over 58.2 expected.

Eurozone

German retail sales on April (MoM)grew 2.3% well above the expected 0.5% although the yearly figure fell to 1.2% growth, below the expected 1.6%.

On the unemployment front, Germany’s May unemployment change was -11K above the expectations, and the unemployment Claims rate dropped one centile to 5.2%.

Britain’s consumer credit grew to 1.84B, above the expected 1.3B, while the mortgage approvals slightly descended to 62.5K, below the expected 63.2K

Swiss’s main figure this week was its Gross Domestic Product (YoY) for the first quarter at 2.2%, slightly below the expected 2.3%.

Japan:

JPY retail trade (YoY) grew 1.6%, above the expected 1%, while JPY retail sales figure was down -0.8% below the expected 0.2%. Also, JPY industrial production for April was up 2.5%, below the expected 3.6%.

Canada:

Last week BoC kept its interest rate unchanged at 1.25%, as was expected. However, its GDP figure for the first quarter was a disappointing annualised 1.3%, below the expected 1.8%

The overall picture of this economic background is that of a strong US economy, a not so strong Eurozone, and a possible weakening of the Canadian economy. This is especially sensitive as both Europe and Canada have a potential tariffs war against the USA. We also see weakened Japanese industrial production.

All this make us think on the continuation of the strength of the US Dollar and a further weakening scenario for the Euro, the Pound, and the Yen.


Next Week


 

G7

Next week lacks major economic reports and no earnings news, so markets will possibly pay attention to political developments that will fill the headlines, such as President Trump’s trade wars, or the G7 summit by the end of the week in Canada. Mr Trump is expected to arrive on Friday and meet leaders from Germany, UK, France, Italy, and Japan. A statement of the other six members of the group showed their “unanimous concern” about US tariffs.

 

US Trade Data.

To be released on Wednesday (14:30 GMT+2). The forecasted deficit is 50.0 B from 49B in March.

 

China Trade Figures:

To be released in the early hours of Friday. The expectations are for an increase of the surplus figures to $32.5B, higher than last month’s $28.8 B.

It is expected that exports will grow by 6.3% and imports to rise 16%.

 

RBA Policy meeting:

Due on Tuesday early morning, it will likely keep its rates unchanged at 1.5%.

We should also pay attention to the New Zealand GDP release early Wednesday.

 


Technical Analysis


S&P 500

The S&P 500 behave very bullishly on a weekly basis, although it suffered some drawbacks during the week. Technically the price moves inside a very steep upward channel, but right now it is close to a resistance area that matches the opening of a large red candle drawn in March. We need to watch how the price reacts here. If it is crossed next week we see a free path to head for January highs, mid-term.


 

Ehlers Adaptive Moving Average MAMA and cycle indicator show a bullish momentum is developing. The only black cloud in the sky is that the price is facing a strong resistance area.


 

DAX

The weekly chart shows that the DAX and the Euro-zone are not confident of its economic outlook.  The Index has drawn two consecutive bearish candles and we see that it shows descending lows. Its Cycle Indicator also points to the downside.

We have to pay attention next week to the US index because the DAX is correlated to it, but if we only pay attention to the technical outlook, we are more in the side of the bearish scenario.


The daily chart doesn’t change its outlook. We see that the price broke the triangular formation to the downside and tested it three times last week without being able to break it. Last Friday, although the session closed with gains, the inside candle drawn shows indecision and doubt. The most probable scenario is for the DAX to head down to test the support at 12378 level.


 

US Dollar Index

The US Dollar Index weekly chart shows a Spinning Top candle, while Ehlers’ Cycle indicator has changed to bearish. This may indicate that last week’s correction isn’t finished yet and we may look for a test of the Fibo 0.38 or, even to a 50% retracement, although this is less probable.


 

The Dollar Index daily chart’s engulfing candle that happened on May 29 has been challenged but not successfully. The Cycle indicator also points to the bearish side. Therefore our expectation is for more drops next week.


 

This means the Euro and GBP could still be retracing their heavy drops that started mid-May.

 

USDJPY

On a weekly chart the pair made an engulfing candle two weeks ago, and last week it continues moving down toward its support zone, where it bounced sharply up creating a hammer.
The price is moving mainly by its fundamentals, and now it is heading to the resistance area (green rectangle ). We may see the pair moving between those two areas for some time.


Looking at the daily chart, the pair broke the triangle formation to the upside with a large candle. The cycle indicator also points upward.
The target level is at its recent highs.


 

Categories
Forex Market Analysis

USA VS China Trade, Inflation and Quarterly Results

 

Macroeconomic Outlook

Three references for the markets this week

1)      Trade relation between China and USA

  1. Last Friday it was agreed what it could be the beginning of talks that will take time
  2. Rather a constructive agreement than a bad one

2)      Inflation

  1. American inflation is the key variable this week
  2. It is expected to increase to 2.5% from previous 2.4%
  3. Currently is above the 2% target and this creates certain anxiety and can have some effect on bonds
  4. Might consider the option of a lower than expected inflation (<2.4%)
  5. Payrolls data, which was published on Friday, was 2.6% instead of 2.7% moving away from the 3% barrier
  6. The option of a lower inflation rate provides a less stressful outlook

3)      Quarterly Results

  1. Really good so far in the USA
  2. Partly because of the tax reform
  3. EPS had increased to an average of 24,8% when at the beginning it was expected to be around 17%
  4. Good so far too in Europe
  5. More European companies will publish results this week

Hence, bearing in mind a decent agreement between USA and China, the possibility of lower inflation and good corporate results, the markets should bounce and rise a little this week.

Furthermore, if the inflation turns out to be lower, it could be good for bonds and could contribute to a weaker US Dollar wich has increased significantly recently.

 

Technical Analysis

US Dollar Index

Daily Chart

It is possible to appreciate how the US Dollar Index, after tumbling for a couple of weeks, broke all the resistances and increased significantly. The most important resistances generated from its monthly bearish trend have been broken in one strong movement upward. Including, also, its 200-day EMA which is retesting right now. The only significant resistance that is facing now is at the 93.5 which will be the next target leaving some space for a longer run.

EURUSD

Daily Chart

After testing for the third time the bearish trend line on the top it dropped,  strongly breaking its two supports below it. Not only it fell after testing its resistance and breaking the upcoming supports but also, on Wednesday it broke below the third support which is currently retesting. This can be either a fake breakout or another shorting opportunity.

 

GBPUSD

Daily Chart

After breaking the support, which has been holding price during its bullish trend line, it is eyeing the next solid resistance which is at a level of 1.34 more or less. After breaking the 200-day EMA, it is taking a rest. It may either retest the recent support broken which is hard as the bullish trend was really steep or test the next resistance which is closer and extending the bearish move.

 

USDJPY

Daily Chart

The dollar broke both resistances after doing a fake breakout and bouncing back from the monthly support. It has created a small bullish trend in the short term where it can be holding on until it reaches its next target which is the monthly bearish trend, currently situated at a level of 111.5. Either that or starts going sideways for the next days until it breaks one of the monthly trends.

Crude Oil

Daily Chart

Recent geopolitical events and tensions in Syria have created volatility in the markets, and consequently, the price of oil has been on the rise. After holding to the bullish trend line and breaking above $65 it did a retest of the recent resistances it just broke above. Without more resistances ahead, it has just reached the expected target of $70 per barrel. There are not any significant resistance above which leaves the door open for a longer bullish run.

DAX

Daily Chart

It bounced back from the monthly bearish trend which was the strongest one and consequently in the recent run it has just broken both two bearish weekly resistances. Last Friday it closed above the last resistance which leaves the door open for a continuation, possibly at less slow pace, of the recent bullish trend formed from testing the resistances and breaking the supports.

©Forex.Academy

Categories
Forex Market Analysis

Opposing forces drive the markets in the upcoming week

Weekly Update

Regarding fundamentals, we are expecting opposing forces drive the markets in the upcoming week. Volatility has sparked bearing in mind the recent intervention of the USA in Syria. However, stock futures are up, and oil is down on hopes Syria attack a one-off.

Thus, we’ll focus on the most foreseeable variables. There are three variables that are mainly moving the markets

  • Protectionism
    • A less negative pressure in the short term as fears erase
    • Recent formal declarations by Chinese president rise expectations of a friendlier trade
    • There are still two months until Trump takes in action any tariff measure
  • Technology
    • Recent testimony by Mark Zuckerberg leaves good feelings and calms the markets
    • Relieves pressure on technology companies
  • Quarterly results
    • 2018 benefits are revised downwards
    • However, 1st quarter is expected to be robust with strong corporate volumes and margins which will be positive in the short term
Macro Data

This week there is no major macroeconomic event that will affect considerably the markets.

On Monday we have American Retail Sales which are expected to increase to 0.4% from the last- 0.1%. This can benefit the US Dollar. On Tuesday, the German ZEW Economic Sentiment can have some impact on the Euro and DAX. It is expected to decrease to -0.8 from 5.1. Finally, on Thursday, the American Manufacturing Index is released, and it is expected to decrease around one point.

In general, the macro outlook is more pessimist than positive. However, the previous three variables provide a more positive outlook and provide a better understanding than the macroeconomics events on how the markets will act this week. So that, we could expect a stabilization phase in the markets after the recent volatility. In general, slightly more positive than negative.

 

 USD Index

Weekly Chart

 

In the weekly chart, it is possible to appreciate how the USD Index is not only below the 200 EMA but also broke below the weekly support that has been retesting in the recent weeks and which has not been successful so far. In the short term is facing a bearish trend line caused by its recent devaluation.

During the first half of this week, there are not big news. However, on Wednesday, American Inflation numbers come out. It is forecasted that the core CPI will increase to 2.1% from previous 1.8%. Furthermore, on Friday, Moody’s published its USA rating, which right now has the highest rating possible with stable perspective. Hence, recent controversial policies from the American government making protectionism and a trade war a reality can alter the expectations for the mention economic events. In case the forecast does not vary the USD should not be hurt. However, an unexpected increase in the Core CPI and a rating downgrade from Moody’s can really hurt the Dollar.

Daily Chart 

The daily chart is similar to the weekly chart. The retest cannot break above the recently broken support and is facing more bearish pressure ahead. Nevertheless, it just formed double bottom pattern followed by a short-term bullish trendline. This week will be critical to know whether the bearish support is strong enough or it holds on to the current bullish trend.

EURUSD

Daily Chart

Regarding the EURUSD, it has been flat since February. Last month it broke its monthly bullish trend, and the consequently retest it.  From there, it has remained flat with no major fluctuations. However, with the recent uncertainties facing both the Eurozone and the USA it will not be surprising to see the EURUSD leaning towards a side. For now, it is holding at a strong resistance that dates back to September of 2017.  It is facing a couple of support and resistance which will help to know towards what side it will lean and leave the rectangle it is in now.

USDJPY

Daily Chart

Moving into the USDJPY, it has just bounced from a monthly bullish trend after doing a fake breakout and consequently bouncing back. A bullish trend could be considered since there are not big resistances ahead part from the 200 EMA and the recent bearish monthly trend. In the short term, there are two resistances not very strong, but that may cause a small retracement. However, the monthly support is stronger than the resistance it is locked up between.

GBPUSD

Daily Chart

GBPUSD seems to have no limits. At the beginning of the year, the Pound broke an important bearish trendline holding to its current bullish trendline. Moreover, last week just broke another key resistance. With no more important resistance ahead it has a clear path to keep up with the current upward trend. Maybe it is possible to do small retest as we saw with the previous one.

Crude Oil

Daily Chart

Recent political events, like the recent issue of the missile attack against Syria, have created volatility in the markets and consequently, the price of oil has been on the rise. After holding to the trendline and breaking above $65 it is possible to see a retest of the recent resistances it just broke above. Without more resistances ahead, analyst set that next target is $70 per barrel.

DAX

Daily Chart

Regarding technical, it is within a bearish trend that can be prolonged as there is still uncertainty in terms of politics and the recent macroeconomics event have not been reaching the forecasted ones. However, an improvement in the economic sentiment and political stability can help the DAX to break the ahead resistance and enter a bullish trend, leaving the current flat to bearish trend it is involved in now.

As commented at the beginning, on Tuesday the German ZEW Economic Sentiment is released. Hence, it can major point to decide whether it breaks the recent resistance and follows the daily bearish trend.

© Forex.Academy