European Central Bank with a ‘hawkish’ touch – Euro up, DAX30 down?
Economic Events June 10 – 14, 2019
Source: Economic Events Calendar 10 – 14 June 2019 - Admiral Markets' Forex Calendar
DAX30 CFD
After the DAX30 CFD dropped below 11,800 points and re-tested the SMA(200) on a daily time-frame around 11,600/620 points, the index showed an initial strong reaction by pushing back towards 12,000 points, and closing the week slightly above this psychologically relevant level.
Still, the ECB rate decision last Thursday should especially be taken with a grain of salt, and leaves the door open for another push on the downside.
The reason being, even though the ECB decision came in line with market expectations (for further details check the Euro subsection below), the bearish reaction in the DAX30 CFD clearly shows that market participants are assuming a dovish stance from the ECBs rhetoric.
In addition to this, in the still-brewing trade war between the US and China, where China should be expected counter attacks from the US on Huawei with attacks on Apple and/or the supply for US software companies in general, the outlook for the DAX30 CFD is not very favourable.
That said, any push below 11,600/620 points makes further losses down to 11,250 points very likely, while still, we only see a brighter picture for the German index with a push above 12,500 and new yearly highs:
Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD daily chart (between February 23, 2018, to June 7, 2019). Accessed: May 31, 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
From a purely fundamental perspective, the outlook for the US dollar didn't significantly change from our last weekly market outlook.
In fact, after FED chairman Powell opened the door for a potential rate cut on Tuesday, the FED Watch Tool now shows market participants expecting the FED to cut rates minimum once by December with a chance of over 95% (market participants expect the FED to cut rates by the end of the year 3 times with a likelihood of 55% as of last Friday…). In addition to this, a weak NFP reading pushed the USD index future below 97.00 points, while the Euro closed the week above 1.1300 against the USD.
Still, the strength of the dollar, which is still trading at its highest levels since mid-June 2017, seems to be an obvious thorn in the side of the Trump administration, which can be seen in the spread of rumours on Thursday, where an unnamed US Secretary official said that US Treasury secretary Mnuchin and Japanese Fin minister Aso will discuss a currency clause in a US-Japan bilateral trade deal at the G20 meeting in Osaka at the end of the month.
With that in mind, long engagements in the USD should be carefully taken and managed, even if from a purely technical perspective only a drop back below 95.00 points darkens the still bullish picture:
Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between May 2016 to June 2019). Accessed: June 7, 2019, at 10:00pm GMT
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Euro
Last week, all eyes were on the ECB rate decision, and market participants waited in anticipation to get details on the TLTRO program starting in September.
As expected, the ECB left the three main rates unchanged, even though the ECB added that it would keep rates at this level at least through the first half of 2020 from "the end of 2019" before.
Regarding the TLTRO details the ECB announced, that "it will be set at a level that is 10 basis points above the average rate applied in the Eurosystem's main refinancing operations over the life of the respective TLTRO." and for those banks whose eligible net lending exceeds a benchmark, "the rate applied in TLTRO III will be lower and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation plus 10 basis points."
Even though these details are in line with the market's expectations, the bullish reaction in the Euro shows that the market interprets this decision as less dovish as expected.
On Friday, following a weak NFP print, the EUR/USD made a first attempt to break above 1.1330 and chances of a sustainable break soon seems good. Such a break could trigger another round of Euro buyers coming into the market, which are squeezed out of their current Euro Shorts.
Still, between 1.1100 and 1.1330/50, the mode in the EUR/USD stays technically neutral, even though a push out of the range on the upside activates the region around 1.1450/1500 as a first target:
Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between March 12, 2018, to June 7, 2019). Accessed: June 7, 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 break below the crucial support region around 108.70, following the biggest five-day drop in 2-year Treasury yields since 2008, the outlook for the USD/JPY stays bearish in the days to come.
This is not only true, after last Tuesday when FED chairman Powell opened the door for a potential rate cut, but particularly the rumours we saw spreading last Thursday that US Treasury secretary Mnuchin and Japanese Fin minister Aso will discuss a currency clause in a US-Japan bilateral trade deal at the G20 meeting in Osaka at the end of the month.
Even though this rumour was denied from an unnamed Japanese finance ministry official, it becomes more and more obvious that the US government is actively after a weaker US dollar, leaving chances high that together with expected lower US yields, the advantage in USD/JPY stays on the short-side and a stint as low as 105.00, the region around the January Flash Crash lows, is a serious option for the weeks to come.
Technically, such a drop stays an option as long as we trade below 110.70 on a daily time-frame:
Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between May 10, 2018, to June 7, 2019). Accessed: June 7, 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
In our technical piece for Gold last Monday we explained that by "[…] reconquering 1,310 USD into the start of the week, further gains up to 1,325 USD are to be expected. Still, we only see this level as a potential stop-over up to the current yearly highs of around 1,347 USD.[…]"
In fact, the precious metal took on bullish momentum on Monday, testing the region around the current yearly highs at 1,347 USD by Wednesday.
Especially after the latest disappointing economic releases with the ISM Manufacturing and NFPs last Friday, and FED chairman Powell opening the door for a potential rate cut last Tuesday, the overall outlook for Gold turned bullish once again, from a fundamental and technical perspective.
That said, the advice seems to be 'buy the dip' in anticipation of a break to new yearly highs, and an attack at the strong resistance zone around 1,360/370 USD. A potential long trigger can be found around 1,325 and a little lower around 1,310 USD.
In general, the bullish picture in Gold on a daily time-frame remains active as long as we trade above 1,266 USD:
Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between March 9, 2018, to June 6, 2019). Accessed: June 6, 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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