Key Economic Events: 30 July – 3 August 2018
Source: Admiral Markets' Forex Calendar
Last week the latest attempt of the DAX bulls to make it back above the 200-SMA (purple) succeeded. Even though Mario Draghi did not deliver a particularly dovish stance, and started a clear attempt to down-talk the Euro, the DAX was able to push back above the 200-SMA, and take on some bullish momentum.
The reason for Draghis' defensiveness can probably be attributed to the fact that the meeting between Trump and Juncker on Wednesday already diminished chances of a "Euro down-talk". The EU agreed to import more soybeans, and work on a better deal around liquid natural gas imported from the US, whilst also reducing chances of harsh tariffs for automobiles imported into the US from the EU.
With this announcement, the ECB presser on Thursday was more kind of a reformulation of the status quo from the previous meeting in June, and when taking a closer look, that does not really deliver fundamental sustainability in the move in the DAX.
The thing is, even though the meeting between Trump and Juncker suggests a first de-escalation, tariffs on automobiles from the EU are still on the table, and sooner rather than later, fears concerning escalation could come to the surface again.
Such fears would be bearish for the DAX, and the current push back above the 200-SMA respectively 12,800 could be short lived. On the other hand: as long as the DAX trades above 12,400 points the technical picture is, at least short-term, in favour of the bulls.
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The economic calendar for the US-Dollar is quite packed in the upcoming week, finding its climax with the NFPs on Friday. Chances are still good that there will be another serious attack at the level around 95.00/30 points short-term. After the meeting between Trump and Juncker last Wednesday, the ECB is emphasizing in their recent statement that rate hikes should be expected from the second half of 2019 onwards, the USD is especially long against the Euro, but the Japanese Yen also seems to be a good trade.
In this context it makes definitely sense to recall that the Euro has a weight of 58% against the USD in the basket of the USD Index Future, and when looking at the yield differential between 2-year-EUR-US-bonds (white), it becomes obvious that an attack of the region around 1.1500 in EUR/USD (blue) seems likely:
Source: Sunday 29 July 2018 1pm CEST - Bloomberg & FX Macro
Such a push lower in the EUR/USD should go hand in hand with another attempt to break above 95.00/30 in the USD Index Future, which has been induced by buyers coming into the market, having, nevertheless, already built their Long position to the highest level in 18 months:
Source: Sunday 29 July 2018 1pm CEST - U.S Dollar Index - Weekly Nearest OHLC Chart: Barchart
When looking at these facts, there seems little chance that the USD won't break higher in the short-term, even though one should remember that Donald Trump still has a problem with a strong Greenback, and every aggressive push higher in the USD could be countered with a tweet from the US president to at least a deceleration in bullish USD momentum.
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After reading the lines in the outlook for the USD, the outlook for the Euro becomes quickly obvious: the Euro seems to be a clear short against the USD in the upcoming week(s).
As can be seen in the yield-spread-chart above, the main driver becomes clear, and with the comments from Mario Draghi last Thursday emphasizing that there is still significant stimuli needed, the lines in the ECB statement underline that a rate hike of the ECB shouldn't be expected before the second half of 2019. That being said, an attack of the region around 1.1500 seems likely.
If the EUR/USD breaks below 1.1500 a simple projection of the consolidation area between 1.1500 and 1.1800 suggests a projected price target of around 1.1200 USD:
The selling pressure can and should be expected from the speculative side, the 'Commitment of Traders Report' shows that big speculators are still moderately short positioned in the Euro in what should change once EUR/USD breaks below 1.1500, potentially triggering a cascade of short sellers entering the market:
Source: Sunday 29 July 2018 1pm CEST - Euro FX - Weekly Nearest OHLC Chart: Barchart
The Bank of England delivers the main event for the next trading week and FX market participants. The BoE is expected to hike rates by 0.25%, from 0.5% to 0.75%, and since this seems to be a done deal (swap markets are currently pricing in the chance of a hike of around 80%) the resulting volatility shouldn't be significant. What's more intriguing is what the BoE plans to do on the upcoming meetings in terms of hiking rates.
This is especially true when looking at the current uncertainty around the BREXIT negotiations. The lack of progress in recently has placed Theresa May in a difficult spot, leaving GBP not only vulnerable to short-term political tensions, but also putting the BoE in a difficult spot in regards to the short-term to mid-term outlook of the UK economy. Even though chances of a "Soft" BREXIT are currently higher compared with a "Hard" one, the BoE could go for a more dovish stance in their statement after hiking rates.
In the combination with the bullish breakout in the USD index above, GBP/USD could see a significant drop below 1.3000, targeting for 1.2750/2800. The technical picture might start to brighten once GBP/USD trades are back above 1.3300/3350.
The overall picture in Gold hasn't changed much since last week's market outlook. Facing the potential technical break higher in the USD index future, and knowing about the negative correlation between the USD and Gold, Gold is still a short candidate.
Nevertheless, from a sentiment perspective, when looking at the Commitment of Traders Report, we can still spot big speculators' net Long position being at the lowest level since Gold traded around 1,200 USD the last time and took off from there, it then rallied more than 10% within the next two months:
Source: Sunday 29 July 2018 1pm CEST - Gold - Weekly Nearest OHLC Chart: Barchart
From a technical perspective, the technical key level of the next week can be found around 1,235 USD. A break above that level could trigger a first and sharper push higher, levelling the path up to 1,260/265 USD – a level which needs to be reconquered to at least to interrupt the down sequence on the daily time frame:
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.