Dovish rhetoric from the ECB and Fed deliver breakout fuel for multi-year highs in Gold
Economic Events June 24 – 28, 2019
Source: Economic Events Calendar June 24 – 28, 2019 - Admiral Markets' Forex Calendar
DAX30 CFD
The last week of trading was embossed by the Fed rate decision. Even though the Fed did not cut rates, the rhetoric used pushed expectations among market participants to a 100% likelihood of a cut in July and the Fed Watch Tool seeing a 65% chance of three cuts by December 2019 last Friday.
As a result, 10-year-UST yields dropped below 2%, the US dollar was aggressively sold while Gold pushed to new multi-year highs (more details in the respective paragraphs below). Equities and the DAX30, on the other hand, pushed higher with the DAX30 CFD failing to make new yearly highs, while the SP500 CFD made new all-time highs.
While the failed attempt to break higher leaves a grain of salt, in addition to the dovish remarks from ECB president Draghi in Sintra/Portugal last Tuesday, the overall outlook for the DAX30 CFD in the coming days can be considered bullish, with a first target on the upside in the region around 12,600 and 12,870/900 points.
Nevertheless, we should carefully watch the news ticker and any hints to the meeting between Xi and Trump at the G20 summit in Osaka next weekend.
While the past has shown that especially US president Trump announced 'a big deal' coming, a hope which was more than once disappointed, but nevertheless resulted initially in especially US equities rising, this time any such hints could be sceptically reviewed and probably dampen any bullish momentum.
From a technical perspective, only a drop below 11,600 points and the SMA(200) would be considered a bearish sign and seems unlikely, at least for now:
Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD daily chart (between March 5, 2018, to June 21, 2019). Accessed: June 21, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2014, the value of the DAX30 CFD increased by 2.65%, in 2015, it 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%, meaning that after five years, it was up by 10.5%.
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US dollar
As we expected in our weekly market outlook last week, the US dollar took a serious hit after the Fed rate decision last Wednesday with 10-year US-Treasury yields dropping below 2% to their lowest level before Trump's election in November 2016.
The push lower in US yields resulted mainly out of the fact, that market participants obviously found several hints in the Fed statement for several cuts in the second half of 2019 (e.g. in the Fed Dot plot), starting from the next meeting in July already where the Fed Watch Tool now shows market participants expecting a cut by 100%.
While the latest remarks from Trump via Twitter towards the very dovish rhetoric of Mario Draghi at his speech last Tuesday clearly show the willingness of the Trump administration to weaken the US dollar, this could rather sooner than later backfire, especially when they announced talks between Trump and Xi in Osaka at the G20 summit next weekend go nowhere and increase chances of a new round of trade war escalation also with the EU which would naturally result in the USD to strengthen against the European currency.
Nevertheless, until the next weekend, the advantage in the USD seems to be found on the short side, even though from a technical perspective the mode in the USD index Future stays at least neutral above 95.00 points on a weekly time-frame:
Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between May 2016 to June 2019). Accessed: June 21, 2019, at 10:00pm GMT
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Euro
The last week has seen some very interesting developments, not only in regards to the Fed, but also in regards to the ECB.
Last Tuesday, ECB president Draghi made further monetary stimulus from the ECB a topic at a speech in Sintra/Portugal which resulted in a sharp shift in the markets implied the increased probability of an ECB rate cut by September from 40% on Monday to 87% last Tuesday.
While this aggressive dovish rhetoric from Draghi came initially as a surprise, after the also very dovish Fed on Wednesday with market participants now expecting with a likelihood of more than 60% the Fed to cut rates 3 times until December 2019 (based on the Fed Watch Tool), it seems to make perfect sense.
Draghi's rhetoric had obviously only one reason: he tried to down-talk the Euro in expectation of a weaker USD after the Fed. While his plan worked initially out as hoped, the EUR/USD closed the week significantly above 1.1300 and due to the expected US dollar weakness in the days come, further gains with a target around 1.1450/1500 seem likely in our opinion.
On the other hand, being Euro aggressively Long seems to be a dangerous bet since it seems as if we should be prepared for another round of trade war escalation between the US and EU.
The main reason for this expectation: Trump's reaction to Draghi's remarks via Twitter.
So any stint on the upside towards 1.1450/1500 could be short-lived with another drop and attempt to break below 1.1100 staying serious option:
Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between March 19, 2018, to June 21, 2019). Accessed: June 21, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2014, the value of the EUR/USD fell by 11.9%, in 2015, it fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, meaning that after five years, it was down by 16.5%.
JPY
After the Fed rate decision last Wednesday and especially the resulting drop below 2% in 10-year US-Treasury yields to the lowest levels since 2016, USD/JPY pushed below 107.70, an important support region making now further losses in the currency pair and a drop to the Flash Crash lows around 105.00 likely.
In general, in our opinion there are several reasons to see the USD/JPY take on further bearish momentum:
first of all, there is the current bearish bias in the USD as described in the paragraph around the Greenback above, speaking for further bearish momentum in the USD/JPY.
Then we should recall the upcoming G20 summit in Osaka next weekend: not only will it be interesting to see whether Trump and Xi will make a step towards a potential trade deal (which seems unlikely in our opinion and the chances of that said increase of a risk-off mode which usually favours JPY strength).
But there are also rumours that US Treasury secretary Mnuchin and Japanese Fin minister Aso will discuss a currency clause in a US-Japan bilateral trade deal at this summit, likely to push the USD lower against the JPY.
With that in mind, the mode in USD/JPY stays short, technically on a daily time-frame below 108.80/109.00 and if the break below 107.50/70 is sustainable the target can be found around 105.00:
Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between March 19, 2018, to June 21, 2019). Accessed: June 21, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2014, the value of the USD/JPY increased by 13.7%, in 2015, it 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%, meaning that after five years, it was up by 4.1%.
Gold
Last Wednesday, all eyes were on the Fed rate decision and the projection for the US economy, and the release of the next monetary steps from the Fed.
While the US central bank did not cut rates, markets found several hints in the Fed statement for several cuts in the second half of 2019 (e.g. in the Fed Dot plot), starting from the next meeting in July where the Fed Watch Tool now shows market participants expecting a cut by 100%.
As a result, Gold pushed already to new yearly highs on Wednesday and took out the multi-year-resistance zone around 1,360/365 in the early hours of trading on Thursday.
As we pointed out in our weekly market outlook on last Monday,
[…]A break higher and above 1,360/365 can be considered a strong mid-term buy-signal which sees a projected target somewhere around 1,700 USD, and possibly even higher.[…]
That said, under the given fundamental and technical outlook, the current device in Gold seems clearly to be 'buy the dip', with finding an interesting first long-trigger around 1,360/365 USD.
In general, the bullish picture in Gold on a daily time-frame stays active as long as we trade above 1,266 USD:
Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between March 19, 2018, to June 21, 2019). Accessed: June 21, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2014, the value of Gold fell by 1.7%, in 2015, it 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%, meaning that after five years, it was up by 6.4%.
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