- Risk model: Structure of risk from bad to worse
- EUR/USD: Time for sellers to step in, risk-reward appealing
- GBP/USD: Range established, more Brexit volatility eyed
- USD/JPY: Evidence of a temporary top, sellers control hourly
- AUD/USD: Buy on weakness, next target at 0.73
Fundamentals: Break down of market drivers + key releases
- UK PM May has the backing of her Cabinet on the EU-UK Brexit deal. The situation remains very fluid with calls for a vote of no confidence. Her position is very shaky at this stage.
- US Oct CPI comes in line with expectations, while the UK CPI comes a touch weaker at +0.1% vs 0.2% exp. Both a sideshow.
- The fallout in Oil prices continues to compromise the outlook for inflation expectations around the globe. OPEC is currently discussing an Oil supply cut of nearly 1.4mln barrels.
- Australian jobs report comes very strong. A 9 out of 10.
- Germany’s Q3 flash GDP comes weaker-than-expected.
- An interesting speech was given by Fed’s Chairman Powell, who reiterated the current rude health of the US economy while highlighting that each meeting from now on will be ‘lively’.
- China’s data sets, especially retail sales, came softer, which continues to reflect dubious economic growth.
Risk model: From bad to worse, structure shifts to classic ‘risk off’
What risk bidders may have feared has come to fruition with the break lower in the S&P 500 as the bellwether barometer of the appeal to hang onto equities in the Weste hemisphere. What this means is that the bearish structure on the hourly has now been confirmed, which results in a further deterioration of our risk-model from tier-2 risk-off conditions to tier-1 (classic risk-off). Equities now join lower cycles in US yields and the underlying bullish cycle in the DXY, constituting the worst case scenario for risk from a cycle or structural point of view. In terms of order flow, in the last 24h, the environment has been dominated by USD weakness amid a debilitated state of affairs in stock performances, a context that should still be playing in favor of the Japanese Yen.
If the market were to respect the current market structures, which means we just need to see the re-calibration back into USD longs, make no mistake, this market looks poised to catch risk-off flows. If the scenario materializes, it should be Yen supportive as stated above. Notice, the DXY is fast approaching the 50% Fibonacci retracement of its latest buy-side campaign, which should reinforce the notion of greater appeal towards the Greenback. I am not placing much hope on a market recovery in the US yields given the fact that buyers have failed miserably at the retest of the daily resistance as depicted by the chart above. What about the S&P 500? I am not getting much inspiration out of the hourly outlook, as the breakout of the structure occurred on the heels of a poor magnitude last leg-up, which communicates buyers run out of steam.
As the RWI (Risk Weighted Index) chart above shows, the value has been on a sharp decline, yet JPY crosses are yet to catch up. Proof of that is the major divergence seen in the AUD/JPY, even if this pair may have some more justification to still hold stronger given the AUD-specific buy flows on the back of the Aus jobs report. Short USD/JPY, EUR/JPY or CAD/JPY appear to be a great proposition.
EUR/USD: Time for sellers to step in, risk-reward appealing
Sellers have a clear task in the next 48h, and that is, to fix the slight trouble they find themselves in by approaching the second half of the week with the price back above 1.13. On a weekly basis, sellers must re-take the upper hand and close below to keep the unambiguous bearish bias. On the daily chart, the downcycle is clear, acceptance sub 1.13 was found even if the extension fell short in magnitude from the previous leg down (for now). This market must soon find sellers willing to engage at the next levels of high interest at 1.1353 and 1.1395, which would make for some great risk-reward as the horizontal level aligns with the dominant cycle. The latest 2 corrective legs up have come amid a smart-money acceleration based on the increase of tick volume as the first stage out of many hurdles in the Brexit deal has gone through. With regards to correlations, we’ve seen a pick up in German vs US yield spreads but further deterioration in the German vs Italian spread. Watch the interaction of price at the key decision areas 1.1350 & 1.1395/1.14 as that will give us the next clues for a directional move.
GBP/USD: Range established, more Brexit volatility eyed
I am not going to extend too long on the Sterling analysis as erratic volatility looks set to still dominate. On the hourly, the market has carved out a range between 1.2887 and 1.3037, which makes the mid-point at 1.2962. Look for clues around these levels, especially at the edges of the range for maximum risk-reward exposure. Note, the tick volume indicates back-to-back smart money acceleration moves as per the increase in price updates activity. Heading into early Europe, it looks as though the upside might be threatened given the failure to rotate by sell-side accounts off 1.3037.
USD/JPY: Evidence of a temporary top, sellers control hourly flows
We are starting to get clear signs that this market wants to roll-over by rejection, yet again, the massive weekly resistance between 114.00 and 115.00. The pullback we are seeing is still within the context of an up-cycle on both the weekly and daily, but the first red flags are starting to pop up. Firstly, the expected 100% projection to 114.40/50 is not complete. Secondly, as we dissect the hourly, we can see the ascending trend line has been violated amid an increase in sell-side volume, which tends to be a continuation leg. Additionally, both the US vs JP 5-year yield spread and the risk sentiment index are both hinting further downside. The next key support levels, as highlighted in the chart above, stand at 113.35 ahead of the psychological 113.00 round number.
AUD/USD: Buy on weakness, next target at 0.73
The Aussie continues to defy the risk-off flows by appreciating further on the back of positive fundamentals (Aus jobs). The breach of the 2018 descending trendline is undoubtedly also supporting the technical picture, as it’s the fact that sellers appear unlikely to achieve much out of the rotation seen off 0.73 last week. The daily structure continues to scream ‘buy-me’ on weakness, while the hourly chart is also looking very appealing to engage in buy action. As usual, I’ve drawn for readers of my report the key areas of interest if you are looking to be a buyer today. On the topside, I wouldn’t count on much resistance to be found until 0.73 round number. If on a daily basis this market can close above 0.7315, that’s going to be more fuel for technicians to support the trend. When looking at the volumes, we can also see that Wednesday’s push came on increasing volume, which reinforces the narrative of buy on weakness for at least a re-test of 0.73 if not higher. It’s also worth noting that the Aussie vs US 5-year yield spreads are trading at the highest levels since early Sept, so watch that space too.
Bonus chart: What are you missing?
The chart that I want to bring to your attention is the Aussie vs the Japanese Yen.The divergence vs the risk-weighted index is unlike anything I’ve seen in months. If the pair can make it all the way up towards the 83.00 round number or near-by, all else being equal, it represents a compelling short from a risk perspective but also from a value standpoint (see AU-JP yield spread).
- Risk sentiment model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the following tutorial How to Unpack Risk Sentiment Profiles
- Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. To understand the principles applied in the assessment of cycles, refer to the following tutorial How To Read Market Structures In Forex
- POC: It refers to the point of control. It is depicted by a red line on the bottom right side chart for each candle. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the following tutorial How to Read Volume Profile Structures
- Tick Volume:Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement.Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
- Horizontal Support/Resistance: Unlikelevels of dynamic support or resistance such as Fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor.
- Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
- Correlations: Each forex pair has a series of highly correlated assets that can add an edge to your trading. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
- Fundamentals: It’s important to highlight that this outlook is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
- Projection Targets: The usefulness of the100% Fibonacci projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% Fibonacci projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection