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Geopolitical tensions between the US and Iran on the rise – Gold goes parabolic

January 06, 2020 15:00

Source: Economic Events Calendar January 6 – 10, 2020 - Admiral Markets' Forex Calendar


DAX30 CFD

After some light action closed out the year, with the German index closing above 13,000 points for the first time in history, the start into the new year has become unexpectedly exciting.

After White House advisor Peter Navarro said last Tuesday that the "Phase-1" trade deal between the U.S. and China is a certainty at this point, and US president Trump said that it will be signed on the January 15, as of now no further volatility from the US-Chinese trade dispute should be expected in the near future.

Still, Navarro mentioned during his CNBC interview that the US is "going to try to get something going with Great Britain, Vietnam, Europe and anybody else who wants to fairly trade with the United States of America" which will potentially increase speculations and fears among market participants that especially Europe could be attacked with tariff announcement from US president Trump in the days, weeks and months ahead.

In addition to that, the Fed continues to flood markets with liquidity to avoid a funding crisis especially in the repo market (and will thus extend the Fed balance sheet to new record highs by mid-January).

While this is one of the main reasons we continue to see the downside limited in the DAX30 CFD and also stay technically bullish as long as the German index trades above 12,900 points, the recent developments in the Middle East last Friday when the Pentagon launched an airstrike that killed Iranian commander Soleimani, letting fears arise that a war between the US and Iran could be about to start, leaves a broad risk-off mode and break below 13,000 points on the table.

That said, only a break above 13,500 points should be considered clearly bullish, making a test of the current all-time highs around 13,600 points likely and levelling the path up to the next psychological region around 14,000 points.

A drop below 12,900 points activates the region around 12,600 points as a next target:

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between September 20, 2018, to January 3, 2020). Accessed: January 3, 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%.

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US Dollar

In the time since the yearly close, the outlook for the US dollar hasn't significantly changed. However, our longer-term USD scepticism has been fuelled a bit more.

First of all, let's have a look at the technical side: while the bullish picture stays intact as long as the USD Index Future stays above 95.00 points on a weekly time frame, this region is likely to be in our focus in the days to come.

A break lower makes a quick drop lower down to 93.00 points likely, and switch the mode on a weekly time-frame to bearish starting the beginning of last October, with an established sequence of falling highs and lows.

This bearish outlook may surprise some of our readers, since 10-year US-Treasury yields keep on stabilising slightly below 2.00% since October and presented themselves stable in general.

But the outlook of the Fed to keep on flooding markets with liquidity to avoid a funding crisis especially in the repo market (and will thus extend the Fed balance sheet to new record highs by mid-January), leaves the US dollar vulnerable to further losses.

And with White House advisor Navarro mentioning during his CNBC interview last week that the US is "going to try to get something going [in regards to a trade deal] with Great Britain, Vietnam, Europe and anybody else who wants to fairly trade with the United States of America", chances of a risk-off mode in financial markets, a drop lower in 10-year-US-Treasuries yields, and probably European counter-measures (like fiscal stimulus from countries like Germany which would result in a push higher in European yields and would reduce the US-EZ-yield differential), further bearish momentum in the US dollar seems to have a significant higher probability than a sharp turnaround:

Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between January 2017 to January 2020). Accessed: January 3, 2020, at 10:00 PM GMT

Don't forget to register for the weekly "Trading Spotlight" webinar with presenters including Jens Klatt, every Monday, Wednesday and Friday at 2pm London time! It's your opportunity to follow Jens and others as they explore the weekly market outlook in detail, so don't miss out!


Euro

Some of you might recall our bullish take in one of our last Admiral Markets weekly market outlooks in 2019.

Here, we pointed out that:

[…]EUR/USD could see a significant push higher with the Euro finding a first target around 1.1280/1300, while a breakthrough levels the path up to 1.1400 in the weeks to come and as long as we trade above 1.1000[…].

And in fact, the EUR/USD closed the year 2019 above 1.1200, with the Euro still having an increased chance to see further gains into the start of 2020 and as long as we trade above 1.1070.

The solid Euro performance despite 10-year US-Treasury yields stabilising slightly below 2.00% since October is a primary cause for our optimism, while the EUR/USD made it back above 1.1000 and held above that level during the same period.

And if speculations around fiscal stimulus and additional public investment (especially from Germany) continue (probably as a potential counter-measure after White House advisor Navarro mentioned during his CNBC interview last week that the US is "going to try to get something going [in regards to a trade deal] with Great Britain, Vietnam, Europe and anybody else who wants to fairly trade with the United States of America", making especially Europe a potential target for a tariff announcement from US president Trump in the days, weeks, and months ahead), after a short push lower, the Euro and thus EURUSD could see a significant push higher with the Euro finding a first target around 1.1400 in the weeks to come and as long as we trade above 1.1000:

Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between November 6, 2018, to January 3, 2020). Accessed: January 3, 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

Some of our readers may recall some lines from the last JPY weekly market outlook. Here, we wrote:

[…]After the announcement of a "deal" between the US and China and markets being "hit" by a Risk-On-tendency, USDJPY pushed back above 109 in the last weekly close – but we remain cautious in regards to the sustainability.[…]

The main reason for us was not only the Fed flooding markets with billions in liquidity to avoid a funding crisis especially in the repo market.

But also, that after the Fed didn't deliver (as expected) a rate cut at her December meeting and presented herself 'balanced' in her statement, with the Fed dot plot signalling no interest-rate changes in 2020, the Fed Watch Tool increased to an expectation of over 60% of at least one 25 basis point cut in 2020, so the yearly close below 109.00 doesn't come as a big surprise (at least not for us).

And with the recent developments in the Middle East last Friday when the Pentagon launched an airstrike that killed Iranian commander Soleimani, letting fears arise that a war between the US and Iran could be about to start, letting the JPY profit from a broad risk-off mode and also the still to be expected sizable impact from the economic package from Japanese prime minister Shinzo Abe which could leave speculations around the BoJ come up that she could scale back at least some of her monetary stimulus, USDJPY stays, from a risk-reward perspective midterm, an attractive Short candidate.

Technically, the main focus stays on 106.80/107.00, where, from a technical perspective, a break lower could result in a drop as low as 105.00 and probably even lower:

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between October 24, 2018, to January 3, 2020). Accessed: January 3, 2020, at 10:00pm GMT

In 2015, the value of the 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

And once again, Gold presents itself strong during our mentioned bullish seasonal window from Mid-December till Mid-January (orange).

As pointed out in our last weekly market outlook in 2019, a yearly close above 1,500 USD became a serious option and was achieved.

Technically, a sustainable break back above 1,520 USD levels the path up to the 2019 yearly highs around 1,557 USD with this outlook staying true as long as we trade above 1,440/450.

And also from a fundamental perspective, the outlook for Gold seems favourable.

Despite 10-year US-Treasury yields keep on stabilising slightly below 2.00% since October and present themselves stable in general, Gold was capable of taking on bullish momentum and closing 2019 above 1,500 USD – in our opinion a clear sign of strength.

With the outlook of the Fed to keep on flooding markets with liquidity to avoid a funding crisis especially in the repo market (and will thus extend the Fed balance sheet to new record highs by mid-January), the outlook for Gold stays positive.

This is especially true with the Fed Watch Tool now pointing to market participants expecting the Fed to cut rates by December 2020 by 25 basis points with a likelihood of over 60% and despite the latest Fed dot plot signalling no interest-rate changes in 2020.

And then there are also the recent developments in the Middle East last Friday when the Pentagon launched an airstrike that killed Iranian commander Soleimani, letting fears arise that a war between the US and Iran could be about to start and Gold profit from a broad risk-off mode

With that in mind, technically our picture switches to Long again with Gold breaking back above 1,520 USD which would level the path up to the current yearly highs around 1,557 USD:

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between October 3, 2018, to January 3, 2020). Accessed: January 3, 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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