Euro about to take on serious momentum against the USD? Will it be sustainable?
Economic Events 17 - 21 September 2018
Source: Admiral Markets' Forex Calendar
Equities
Over the last week of trading the DAX had trouble making it back above 12,000 points. When the bulls finally succeeded, the bullish momentum was capped around 12,100 points, the break out region of around two weeks ago. For the upcoming week of trading, the outlook for the DAX remains bearish. This is not only due to the technical picture on a daily chart, where we still trade below the SMA (200), and the overall picture begins to brighten up if the bulls push the DAX back above 12,600 points.
There is also a good chance that, after the ECB press conference on Thursday, the DAX will see another push towards and below the level of 12,000 points. The reason: during the press conference Mario Draghi was asked if he would allow inflation to overshoot the ECB's target level at 2% ceiling. He reply was straightforward: he responded "No". That is an overall hawkish statement, and in sharp contrast to ,for example, the FED which is allowing inflation to become symmetrical above 2%. With this in mind, and with growing tensions concerning the trade war between the US, the Euro-Zone, and China still remaining a major topic among market participants, chances are still high that the DAX will, sooner rather than later, see a test of the region of the yearly lows around 11,700 points.
Source: Saturday 15 September 2018 1pm CEST - Admiral Markets MT5 with MT5SE Add-on
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US-Dollar
The US Dollar Index Future failed to start another attack at the region around 97,00 points over the last week of trading. And after the ECB rate decision, it seems as if the probability of such an occurrence is not only lower now, but in fact, the chances are high that a test of the important support region around 93,00 is now very likely. The reason for this was mentioned earlier in the paragraph concerning the DAX above. While it might not seem like such a big deal at first glance, it is in fact in sharp contrast to the FED's more dovish policy. The FED is willing to allow inflation to be symmetrical above 2%. With this in mind, and based on the fact that the commitment of Traders Report shows an elevated net Long position from the non-commercials, it wouldn't come as a surprise if the large speculators started to unload at least some of their USD Longs against the Euro, and reduced their bets on a widening yield differential between European and US yields.
Source: Saturday 15 September 2018 1pm CEST - U.S Dollar Index - Weekly Nearest OHLC Chart: Barchart
Nevertheless, when looking at the 2-year yield differential between US and European yield long engagements in the Euro against the USD, it should be taken with caution, as the overall momentum from a yield perspective is still with the USD bulls, especially against the Euro, and as the chart in the paragraph below illustrates, this is especially true as long as we trade below 1,1800.
Source: Wednesday 12 September 2018 3pm CEST – 2-year-yield differential US/EUR (white) | EUR/USD (blue) - Reuters
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Euro
As already pointed out in the paragraph above around the USD, the main event of last week in terms of trading was the ECB, and especially the press conference with Mario Draghi. A serious attack at the region around 1,1800 USD in the next few days of trading wouldn't come as a big surprise. But the question is: can a sustainable break be expected and lead the way higher in the Euro?, especially against the USD, and not only in the next week, but also into the yearly close? While Mario Draghi said that he wouldn't allow inflation to overshoot the target of the ECB at 2%, the ECB also cut its economic growth outlook. And in combination with the quite huge divergence in US-Euro yields which points towards to another attempt to push the EUR/USD towards 1.1000 USD, the EUR/USD should also be expected to consolidate between 1.1500 and 1.1800 at least into the end of the 3rd quarter of 2018.
Source: Saturday 15 September 2018 3pm CEST - Admiral Markets MT5 with MT5SE Add-on
GBP
As expected in the weekly market outlook last week, the BoE didn't take any actions in terms of a rate hike at their meeting last Thursday, but once again underlined the fact that further rate hikes will be necessary to get inflation back to the target level at 2% from currently 2.5%. Even though Mark Carney sounded a little sceptical around the current status of the BREXIT negotiations, and that the BoE does not have any further rate hikes on the agenda this year, GBP/USD took on momentum and made it back above 1.3100. Keeping in mind the still elevated short position of the large speculators in the Commitment of Traders Report, chances seem good that a simultaneous reduction of longs in the USD, and GBP/USD can push back towards and above 1.3200 in the next week of trading. The picture would lose its short-term bullishness only if we drop back below 1.2800.
Source: Saturday 15 September 2018 3pm CEST - Admiral Markets MT5 with MT5SE Add-on
Source: Saturday 15 September 2018 3pm CEST - U.S Dollar Index - Weekly Nearest OHLC Chart: Barchart
On Thursday, Gold started a serious attack to break above 1,215 USD, but failed to do so. One main reason for this seems to be a recent comment from US president Trump who stated that the US is under no pressure to make a deal with China, bringing the CNH under pressure, which also resulted in losses to the positive CNH correlated Gold price. Nevertheless, chances seem good that another serious attempt to break above 1,215 USD lies ahead of us. From a technical perspective, this is true as long as we trade above 1,185 USD:
Source: Saturday 15 September 2018 3pm CEST - Admiral Markets MT5 with MT5SE Add-on
The situation looks still tense from a sentiment perspective, with large speculators still showing a net short position which we haven't seen since 2002:
Source: Saturday 15 September 2018 3pm CEST - U.S Dollar Index - Weekly Nearest OHLC Chart: Barchart
The same is true for the also stretched net short exposure in 10 year US-T-Notes, which could, sooner rather than later, result in a massive short squeeze induced by a potential risk off move, shooting Gold higher:
Source: Saturday 15 September 2018 3pm CEST - U.S Dollar Index - Weekly Nearest OHLC Chart: Barchart
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
