Will US yields top out and drive Gold higher after its ‘real-deal’ breakout?

October 15, 2018 10:00

Economic Events: 15 October – 19 October 2018

Source: Admiral Markets' Forex Calendar

DAX30 CFD

In the last week of trading the bears were in full charge of the action in the equity markets. On Tuesday, the DAX pushed below 12,000 points and on Thursday, with the biggest loss in terms of points in the Dow Jones Industrial Average CFD since February 2018, the DAX went for new yearly lows.

As per last week, the bearish price action was a result of rising yields in the US which pushed to their highest levels since 2011.

Even though the overall picture stays bearish on a daily basis in the DAX, it seems as if the risk-reward for short engagements is getting more and more unattractive.

With Wednesday's comments from US president Trump already on Wednesday when news about the sharp drop in US equities hit the wire and Trump blamed the FED and their rate hike cycle, calling them "crazy". US inflation also came in below expectation on Thursday, causing US yields to be pushed lower into the weekly close.

In addition, the S&P 500 gained more than 7% in Q3, something which has occurred another 14 times since then. The 15th case was this year in Q3, which was higher than 13 of those times, with stronger than average returns.

With this in mind, and many market participants seeming to be really worried about a massive crash ahead, it seems as if chances are higher that equities will at least see a short-term bounce, which will also be true for the DAX30 CFD.

So, chances seem good that the DAX will at least stabilise, make it at least back towards 11.880/900 points, with some stronger momentum up to 12,100/130 points.

On the other hand, such a short-term long engagement is clearly anti-cyclical with the overall advantage on a daily basis still to be found on the short side as long as we trade below the simple moving average (200). That said, a drop below 11,400 points could be followed by further losses down to 10,800 points.

Source: Admiral Markets MT5 with MT5SE Add-on, Accessed: 13.10.2018, 9:00 AM CEST

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US Dollar

Even though the US Dollar didn't look very strong with US yields pushing to their highest levels since 2011, it seemed at least possible that another push towards and above 97.00 points could be around the corner.

But, last week on Wednesday and Thursday scepticism started to rise: with the sharp drop in US equities followed by comments from Donald Trump who blamed the FED and rising yields and in combination with below expectation inflation data on Thursday, one should be careful about expecting a too strong US Dollar in the days ahead.

It seems possible that nearly every moment, US president Trump could start to attack the FED, FED chair Powell and/or the ongoing rate hike cycle again, resulting in a sharper drop in the USD Index Future again and leaving the greenback vulnerable to another test of the region around 93,00 points.

This is especially true, since big market speculators would be caught on the wrong food and be most likely to start unloading their biggest net long position since May 2017:

Source: US Dollar Index - Weekly Nearest OHLC Chart: Barchart, Accessed: 13.10.2018 9:00 AM CEST

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Euro

After reading the paragraph around the US Dollar and the obvious scepticism, the Euro could be one of the bigger beneficiaries against the Dollar, especially if tensions between Rome and Brussels around the Italian budget for 2019 calm down a little with Italian bond yields seeing at least a short-term correction.

We shouldn't be overly optimistic and see another attempt to break the region around 1.1800 within the next days, but with a lower US Dollar, chances seem good that there won't be another push lower and significantly below 1.1500 towards the yearly lows around 1.1300.

Source: Admiral Markets MT5 with MT5SE Add-on, 13.10.2018 9:00 AM CEST

Nevertheless, the above paragraph is only true in the short-term. Longer-term, the Euro could face another crucial test of the unity of the European community. Such a test could come with an economic downturn in the EU, while the ECB will end their QE in December.

In this context one should be careful watching the developments in the Commitment of Traders Report and big speculators probably anticipating such a development by building step by step a bigger short position in the Euro.

Source: EuroFX (E6) - Weekly Nearest OHLC Chart: Barchart, Accessed: 13.10.2018 9:00 AM CEST

GBP

As already pointed out in last week's Admiral Markets weekly outlook, GBP traders still find themselves in a potential difficult spot, even though Pound Sterling bulls seem to be in a slightly better position with the comprehensible scepticism around the US Dollar.

When looking at the Commitment of Traders Report, it seems as if the big speculators share this positive outlook since they kept their net short exposure over the last week of trading stable:

Source: British Pound (B6) - Weekly Nearest OHLC Chart: Barchart, Accessed: 13.10.2018 9:00 AM CEST

And also from a technical standpoint, things start to lighten up: if the bulls succeed in pushing Cable back above 1.3300, the technical picture would show a potential bottom forming on a daily chart, making further gains towards 1.3450/3500 USD likely and leaving Pound Sterling with a bullish outlook as long as we trade above 1.2900.

Source: Admiral Markets MT5 with MT5SE Add-on, Accessed: 13.10.2018 9:00 AM CEST

Since the economic docket seems rather light for GBP next week, Sterling bulls hope for positive signs around the Brexit negotiations, hopefully in favour of the United Kingdom and a favourable trade deal between UK and the EU…

Gold

Last Thursday it finally happened: we saw a break out of the trading range between 1,180 and 1,215 USD/ounce – on the upside.

And as expected, it was a significant break with Gold ending the trading day with the biggest green/bullish candle since 2016.

The breakout was, as expected, a potential top forming in 10-year bond yields and the combination of the sentiment extreme in T-Note futures, Gold and the comments from US president Trump, calling the FED because of her ongoing rate hike cycle "crazy", it seems as if this break is the "real deal".

The first target after the breakout can now be found around 1,240 USD, above around 1,260/265 and above that around 1,280/285 USD/ounce:

Source: Admiral Markets MT5 with MT5SE Add-on, Accessed: 13.10.2018 9:00 AM CEST

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.

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