DAX drops towards 13,000 because of coronavirus fears – further losses to come?

February 03, 2020 16:00

Source: Economic Events Calendar February 3 – 7, 2020 - Admiral Markets' Forex Calendar


DAX30 CFD

In our last weekly market outlook we mentioned in regards to the recent news and developments around the coronavirus, that […]the risk of a sharper correction seems limited[…].

Well, we were clearly wrong on this. Already into the start of the last week of trading, Equities sold off sharply after news and developments on the Coronavirus pointed to increasing risks of a wide spread pandemic.

After the risk-off mode faded into the Fed rate decision on Wednesday, it fully came back into the weekly close with the DAX30 CFD attacking the psychologically relevant 13,000 point mark.

While the Fed rate decision didn't deliver anything new then, rising expectations among market participants of a dovish Fed in the months to come, seeing the central bank cutting rates minimum once by 25 basis points in 2020 with a likelihood of over 80% as of last Thursday, leaves us to expect only limited downside potential in the days and weeks to come from this perspective.

And while we stay technically bullish on a daily time-frame as long as the German index trades above 12,900 points, with targets on the upside being found around 13,800 and 14,000 points if we make it to new all-time highs with a break above 13,640 points, the weak weekly close leaves chances elevated that we get to see a break of the trend support around 12,900 points.

Such a drop clearly darkens the technical picture, then making a test of the SMA(200) and thus further losses down to min 12,500 points a possibility:

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between October 19, 2018, to January 31, 2020). Accessed: January 31, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of the DAX30 CFD increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, in 2019, it increased by 26.44% meaning that after five years, it was up by 34.2%.

Check out Admiral Markets' most competitive conditions on the DAX30 CFD and start trading on the DAX30 CFD with a low 0.8 point spread offering during the main Xetra trading hours!


US Dollar

Despite the Fed rate decision, the US dollar hasn't seen a significant push higher in regards to volatility and our picture for the greenback hasn't significantly changed.

While the Fed rate decision didn't deliver anything new last Wednesday, rising expectations among market participants of a dovish Fed in the months to come, seeing the central bank cutting rates in 2020 minimum once by 25 basis points with a likelihood of over 80% as of last Thursday, should keep the pressure on US yields, recently induced by risk-off tendencies around the Coronavirus, elevated.

Even though it is notable, that technically the bullish picture stays intact as long as the USD Index Future trades above 95.00 points on a weekly time frame, while a break below 96.00 points could trigger a more dynamic move to this important region of support.

A break below 95.00 points would make a quick drop lower down to 93.00 points likely and switch the mode on a weekly time-frame to bearish from the beginning of October 2019 with an established sequence of falling highs and lows. On the other hand, only recapturing 98.50 brightens the technical picture.

With our expectation of the Fed continuing to expand its balance sheet with the main target to overcome any new arising tendencies of increasing funding pressures in the Repo market, we see the upside in the US dollar limited, not only against the Euro, but also against GBP and the JPY:

Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between January 2017 to January 2020). Accessed: 31 January 2020 at 10:00 PM GMT

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Euro

With volatility in the Euro stabilising at its lowest levels in over a decade, the outlook for the European currency hasn't changed substantially over the last week of trading.

Still, since last Friday we potentially found a new, potentially short-term volatility trigger: on January 31, the United Kingdom and Gibraltar left the European Union.

While starting February 1, an 11-month transition period started, ensuring that cross-border travel, personal rights and immigration remain unchanged until at least December 31, the clock is now ticking in regards to the tangible changes that Brexit will bring: new arrangements for Britain's trade, customs, travel and regulation with the EU and the rest of the world.

That said, any news here could trigger at least short-term volatility in both, the Euro, but also the British Pound Sterling.

In general, we still consider the overall picture for the Euro positive, technically as long as we trade above 1.1000 in the EUR/USD, but the latest drift towards this level gives our positive outlook some scratches.

Fundamentally, our positivity in the Euro is mainly based on our expectation that we see an elevated likelihood of fiscal stimulus, especially from Germany, even though without any announcement or clear hints into that direction, bulls should remain cautious.

This is especially true after the remarks from US President Trump in Davos which leave the Euro vulnerable to at least a short-term drop after he mentioned that the EU and the US have to make a trade-deal, else the US has to put tariffs of 25% on European cars.

On the upside, we continue to see a first target in EURUSD around 1.1400 in the weeks to come and as long as we trade above 1.1000.

A sustainable drop below 1.1000 activates the 2019 yearly lows around 1.0880/0900 as a first target:

Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between November 30, 2018, to January 31, 2020). Accessed: January 31, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of the EUR/USD fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, 2019, it fell by 2.2%, meaning that after five years, it was down by 7.3%.


JPY

With the drop below the 109.50, we saw, as expected in our research piece last week, further bearish short-term-momentum in USD/JPY.

The move accelerated with the latest news and developments on the Coronavirus which resulted in a short-term risk off mode, driving US yields lower and thus USD/JPY lower, too.

While the main question is whether respectively how long these risk-off tendencies last (based on a 2017 paper, economists calculated that the expected annual losses from pandemic risk could amount to 'only' about $500 billion (ca. 0.6% of global income) per year)), there are other reasons why our scepticism around the recent push above 110 in USD/JPY sees a revival now.

While the Fed rate decision didn't deliver anything new last Wednesday, rising expectations among market participants of a dovish Fed in the months to come, seeing the central bank cutting rates in 2020 minimum once by 25 basis points with a likelihood of over 80% as of last Thursday, should keep the pressure on US yields and thus fuel our expectation of USDJPY seeing a further drop, finding a potential first target around 107.80/108.00.

Technically the region around 107.80/108.00 is activated if we get to see a drop below 108.50 while above the mode stay choppy with a neutral tendency, leaving chances of a near-term test of the region around 110.30 on the table:

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between November 21, 2018, to January 31, 2020). Accessed: January 31, 2020, at 10:00pm GMT

In 2015, the value of USD/JPY increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, in 2019, it fell by 0.85%, meaning that after five years, it was down by 9.2%.


Gold

Gold presented itself with a clear bullish tendency over the last week of trading with a clear demand being given against the region around 1,555 USD, the region of the 2019 yearly highs.

Main driver was certainly the latest news and developments on the Coronavirus which resulted in a short-term risk off mode, driving US yields lower and thus Gold higher.

While the main question is whether respectively how long these risk-off tendencies last (based on a 2017 paper, economists calculated that the expected annual losses from pandemic risk could amount to 'only' about $500 billion (ca. 0.6% of global income) per year)), Gold still finds other, bullish drivers into the start of the month.

While the Fed rate decision didn't deliver anything new last Wednesday, rising expectations among market participants of a dovish Fed in the months to come, seeing the central bank cutting rates in 2020 minimum once by 25 basis points with a likelihood of over 80% as of last Thursday, should keep the pressure on US yields and thus support the outlook of further gains in Gold.

Technically, we favour further gains in Gold, too. As long as we trade above 1,440/450 USD the potential next target on the upside can be found in the region around 1,650/700 USD.

And then there is also the still bullish seasonal window which lasts in Gold for the days to come while Silver, a usually highly positive to Gold correlated asset, finds itself in a favourable window for another two weeks:

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between October 31, 2018, to January 31, 2020). Accessed: January 31, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of Gold fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, in 2019, it increased by 18.9%, meaning that after five years, it was up by 28%.


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