Economic Events: 1 October - 5 October 2018
Source: Admiral Markets' Forex Calendar
The DAX30 CFD presented itself as very reserved over the last week of trading, especially after the FED rate decision on Wednesday. As expected, the DAX stabilized around 12,400 points after its squeeze, one day before the big expiration at the EUREX (also known as "triple-witching") on 20 September, dissipating its extended mode on the upside over time. But instead of a push towards 12,600 points, the DAX instead pushed aggressively lower into the weekly close, leaving the index vulnerable to further losses in the days ahead. It seems as though (even with some delay) the DAX reacted on the news from Italy, that the Italian government agreed on a budget of 2.4%/GDP, which is above the EU target of 2%/GDP, leaving yields of Italian bonds spiking higher, and shares of the Italian banking sector being halted limit down.
That being said, traders should probably be very cautious and reserved around Long engagements, not only because of the developments in Italy, but also due to trade war fears or the potentially more hawkish rhetoric used from the ECB. Last week on Monday, ECB president had an overall neutral appearance in Paris, nevertheless, he indicated with his wording that the ECB "sees a relatively vigorous pick-up in underlying inflation", and a rate hike of the ECB in 2019 could be just around the corner. With such a hawkish outlook, the upside potential in the DAX seems limited, making another push lower within the next few weeks and months towards 12,000 points and below more likely than another stint towards 13,000 points. If you're interested in trading yourself, why not check out Admiral Markets' most competitive conditions on the DAX30 CFD and Dow Jones CFDs? and start trading on the DAX30 CFD with a low 0.8 point spread offering during the main Xetra trading hours!
The FED rate decision last Wednesday delivered a very interesting picture – not in terms of the decision itself (the FED hiked rate by 25 basis points and will very likely hike by another 25 basis points at their meeting in December) but in terms of price action in the US Dollar on a broad front. While the FED statement only showed one meaningful change (the removal of the sentence on maintaining "accommodative'' policy) the bigger question concerned which path the FED will follow from now on in terms of their rate hike cycle. And here the rhetoric of the FED statement can be interpreted in both directions, a dovish, but also a hawkish one: on the one hand the decision to remove "accommodative" signals, whereby the FED sees the US economy getting closer to a neutral policy rate setting (potentially dovish, since the FED could pause at neutral). On the other hand, the dot plot shows that the majority of the FED will be experiencing a minimum of another three hikes in 2019.
Source: Zerohedge | https://www.zerohedge.com
In terms of the trading outlook for the next few days for the Greenback it means nothing more than this: the picture didn't change for the US-Dollar at all. The buck is still vulnerable to a significant push on the downside, based on the one-sided market positioning in 10-year-T-Notes, so it is likely that yields will be taking on serious momentum after "drifting" above 3% earlier in September. Nevertheless, as long as we don't see an external trigger which acts as a risk off driver, pushing US yields lower, the US-Dollar should present itself as stable, at least as long as we trade above 93.00 points in the USD Index Future.
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The Euro had a very good chance to make it above 1.1800/1850 against the US-Dollar last week – but failed. The recent comments from Mario Draghi at a press conference in Paris where he stated that the ECB "sees a relatively vigorous pick-up in underlying inflation",which, when reading between the lines, hinted towards a rate hike of the ECB in 2019, and the EUR/USD started an attempt to break above 1.1800, but didn't make it. On Wednesday, the FED rate decision delivered the next chance, unfortunately with no such dovish rate hike that would warrant a sustainable break above 1.1800. When on Thursday the news hit the wire that the Italian government agreed on a budget of 2.4%/GDP, and above the EU target of 2%/GDP, the Euro took on further momentum on the downside, with fears building that the right wing government in Rome might cause further headaches in Brussels in the near future. In summary, in the upcoming week, if there is no comment from another ECB central bank that they could raise rates sooner rather than later, and without the US-Dollar not taking a serious hit based on a pullback in US yields, the chances seem slim that another attack at the 1.1800/1850 mark could happen and be successful in the near term. Instead, EURUSD should be expected to trade within a range of 1.1500/1800, and keep its current neutral outlook.
After reading the lines around the Euro in the paragraph above, and with the knowledge that the GBP has a high positive correlation to the Euro, it comes as no big surprise that the Pound Sterling failed to take on serious momentum against the US-Dollar, too. Nevertheless, the chances of Pound Sterling gaining some momentum against the US-Dollar (GBPUSD) in the next few days seems higher than for the Euro. The reason: according to several sources, UK Prime Minister May is reportedly losing more and more support for a no-deal Brexit if the EU discussions fail. That being said, it wouldn't come as a big surprise if in the upcoming days, news hit the wire that negotiations between the United Kingdom and the EU could take on momentum again, with a deal between the EU and UK coming closer. In this context, it is still worth keeping an eye on the still extended net-short-position of the big speculators in the Commitment of Traders Report. If these market participants start to aggressively scale back on their short bets on Pound Sterling due to some "positive" Brexit news, Pound Sterling could see a significant push higher, target around 1.3350 and above:
Source: Saturday 29 September 2018 11am CEST - British Pound - Weekly Nearest OHLC Chart: Barchart
The GBPUSD currency pair would lose its short-term bullishness if we drop back below 1.2800.
The hopes of Gold bulls were high last week, and with a dovish hike of the FED, Gold will make a serious attempt to break above 1,215 USD. With the overall balanced statement, Gold failed for a higher stint, and instead attacked the region around 1,185 USD. While we still should keep the potential bearish outlook for the US Dollar in mind, if it really develops the way as we have described, with a potential unwinding of the net short sentiment extreme in 10-year T-Note futures, we still have a serious chance to see a significant attack and break of the region around 1,215 USD/ounce in Gold within the next fews days and weeks of trading. Nevertheless, with a successful break below 1,185 USD/ounce, the short-term outlook of the yellow metal becomes cloudy, but chances of a test of the current yearly lows around 1,160 USD in the next days are high: