UK parliament and May's Brexit deal in focus – is the ECB prepared?
This week's weekly market outlook will provide insights for DAX30 CFD, the US Dollar, the Euro, the Pound and Gold. In particular, we will be looking at tomorrow's Brexit vote, and how that might affect the US and European markets.
Source: Economic Events Calendar 10 December – 14 December 2018 - Admiral Markets' Forex Calendar
DAX30 CFD
The DAX30 CFD started the month of December very strong, gaining more than 2% on Monday. The reason could be found in a truce around the trade war between US president Trump and the Chinese prime minister Xi Jingping, made at the G20 summit in Buenos Aires.
The result was also that market participants drew hope out of these developments that the tariffs being imposed on cars imported from the EU were under discussion, which helped to stabilise the DAX30 CFD.
Unfortunately, the "celebrations" of his "successes" from Trump on Twitter were the only reason to believe that the US and China came closer in terms of trade.
On Tuesday, news hit the wire that there were irritations among Chinese officials around these claims, and fears among market participants that another round of escalations of trade tensions between the US and China were around the corner arose.
When on Thursday morning it become clear that the CFO of one of the world's biggest telecommunications, Huawei, was arrested, the DAX30 CFD broke to new yearly lows.
In the lead up to the Brexit vote in the UK parliament on Tuesday, the situation in the DAX30 CFD is very tense and further losses seem very likely, with a first target around 10,500 points.
Every corrective move can and should be considered short-lived, as long as the DAX30 CFD can't reconquer the region around 11,670/700 points, the bears clearly have the advantage on their side. Short-term traders (one hour and below) see the picture slightly brightening up if bulls can make it back above 10,950 points.
Source: Admiral Markets MT5 with MT5SE Add-on DAX30 CFD daily chart (between 07 November 2017 to 07 December 2018). Accessed: 08 December 2018 at 9:00 AM GMT
Please Note: Forecasts such as this are not a reliable indicator of future results, or future performance.
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US dollar
It is very interesting to see that the overall picture for the USD Index Future hasn't changed over the last week of trading. After the drop below 3% in 10-year US Treasury Notes yields, one should usually have expected the US dollar to come under pressure, too.
In this context it is worth remembering the comments from FED chairman Powell about rates being "just below" the neutral range.
The reason why the USD Index Future does not take on any momentum on the downside is not necessarily found in USD strength, but in Euro and GBP weakness resulting out of the Brexit discussions in the UK parliament.
The Euro, which has a weight of 58% against the USD in the basket and can't really profit from the converging yield differential between European and US yields, will very likely suffer (especially Germany, whose fourth biggest trading partner after the US, China and France is the UK) if the Brexit deal May agreed on with the EU falls apart and a "no-deal" risk arises.
When looking at the Commitment of Traders Report and still seeing big speculators holding their highest net long exposure in the USD Index Future in around 18 months, it becomes clear that they hope for such a "no deal" scenario.
Otherwise, and with trade war fears likely to diminish in the days before Christmas, the USD could be prone for a larger setback, which could accelerate with a drop back below 96.00 points.
Source: Saturday 01 December 2018 9am CET - U.S Dollar Index - Weekly Nearest OHLC Chart: Barchart
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Euro
The next week will be really interesting for the Euro, not only due to the decision around the Brexit agreement on Tuesday in the UK parliament.
On Thursday, we also have the last ECB rate decision of 2018. While the decision itself will not differ very much from the last one six weeks ago, what the ECB, and especially Mario Draghi, has to say in regards to the decision of the UK parliament will make it of higher interest.
If May fails to find strong enough support for her Brexit deal and a "no deal" scenario becomes an serious possibility, Draghi could be forced to communicate the first potential measures to reduce an overly negative impact on the European economy, especially due to the tight connections between the UK and the EU's biggest economy, Germany.
In such a scenario, hints toward a zero-interest-rate policy after 2019 could bring the Euro under former pressure, resulting in a push to new yearly lows and below 1.1200.
On the other hand: if May can (even though it is unlikely) convince the UK parliament of her deal, further bullish momentum could be initiated from Draghi, who could point to an earlier-than-expected starting rate hike cycle from the ECB from mid-2019 onwards, pushing EUR/USD up to and above 1.1500 into the yearly close.
Such a push higher could be driven by an unwinding of Short positions of large speculators in the Commitment of Traders Report.
Source: Saturday 01 December 2018 9am CET – EuroFX (E6) - Weekly Nearest OHLC Chart: Barchart
Source: Admiral Markets MT5 with MT5SE Add-on EURUSD Daily chart (between 03 January 2018 to 07 December 2018). Accessed: 08 December 2018 at 9:00 AM GMT
Please Note: Forecasts such as this are not a reliable indicator of future results, or future performance.
GBP
In the upcoming week, all eyes will be on the vote from the UK parliament around the deal Prime minister May negotiated with the EU over the last months and which was signed from the EU on the 25th of November.
So far, chances seem very low that May will convince her parliament. This can especially be seen on the debate last week on Tuesday when the government was found in contempt of the parliament, in a historic move, over the refusal to publish the full Brexit legal advice.
Based on that, another attack of the region around the current yearly lows around 1.2650 and even a push below 1.2600 seems a serious option, from a technical perspective on a daily chart as long as we trade below 1.3270/3300.
Source: Admiral Markets MT5 with MT5SE Add-on USDCAD Daily chart (between 09 November 2017 to 30 November 2018). Accessed: 01 December 2018 at 9:00 AM GMT
Please Note: Forecasts such as this are not a reliable indicator of future results, or future performance.
The reason for that scepticism and bearish outlook can be found in the Commitment of Traders Report and the not very extended net-short exposure of big speculators which has plenty of room to increase – especially if a "no deal" scenario is on the horizon.
Source: Saturday 01 December 2018 9am CET – British Pound (B6) - Weekly Nearest OHLC Chart: Barchart
Gold
In our last weekly market outlook, we drew quite a positive picture for Gold, which played out very well in the last week.
As we wrote:
"A potential driver higher for Gold can still be found in a potential drop in 10-year US Treasury yields below 3%. This would not only push the USD lower, but also pushing Gold higher.
From a technical perspective, the short-term picture for Gold looks positive, as long as the yellow metal trades above 1,180 USD/ounce. A push back above 1,230 USD would activate the region around the October highs around 1,244 USD."
Interesting enough, the main driver seemed to be the Chinese Yuan, while 10-year US Treasury yields played a supportive role.
The CNH profited from the truce around the trade war between US president Trump and the Chinese prime minister Xi Jingping in Buenos Aires, pushing Gold back above 1,230 USD/ounce and activating the next technical target around the October highs around 1,244 USD.
When China presented itself as being irritated about the communication from Trump, and tensions between the US and China started to rise again, the Yuan saw a small pullback, but could stabilise at its elevated level – in our opinion a clear sign of strength.
In combination with the now starting, positive seasonal window for Gold, above 1,244 USD further gains towards 1,300 USD into the yearly close seem likely.
Source: Admiral Markets MT5 with MT5SE Add-on Gold Daily chart (between 11 December 2017 to 30 November 2018). Accessed: 08 December 2018 at 9:00 AM GMT
Please Note: Forecasts such as this are not a reliable indicator of future results, or future performance.
In addition to the technical and fundamental side, the Commitment of Traders Report, with its potential sentiment extreme among large speculators, who are still slightly net short positioned, is another indication pointing to a coming short squeeze in Gold and a significant push higher.
Source: Saturday 01 December 2018 9am CET – Gold Future (GC) - Weekly Nearest OHLC Chart: Barchart
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