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Authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of these institutional-level chart studies is to provide an assessment of the market conditions for the next 24h of trading in order to assist one’s decisions on a regular basis.
Fundamentals: Break down of market drivers + key releases
In terms of economic data, we had a vacant calendar on Monday. The United States and Canada went through public holidays but will be back to business as usual on Tuesday. Looking ahead, the UK employment report and the German ZEW economic sentiment are the next key data releases of note.
There is a case to be made to buy up the Sterling ahead of the jobs report as average eaings are expected to come much higher than the previous reading, unfortunately, the Brexit cloud keep casting a shadow on the Sterling’s performance, so if one looks to engage in a short-term sentiment play in favor of the Sterling, it will have to be with a bucket of salt and the currency performance is largely dependable on Brexit headlines risk.
On the Brexit conundrum, the next 48 hours are set to be absolutely critical for the fate of Brexit. As Robert Peston, ITV’s political editor notes: “The next 48 hours shaping up to be among biggest days in Brexit history. Either we get a deal, in which case there will be 500 pages of Withdrawal Agreement and a five-page Outline Political Declaration on the future of UK’s relationship with EU to digest and assess. Or talks fail to clear impasse, in which eventuality there will be no November EU council to ratify the deal and it will be full steam ahead to preparation for a no-deal Brexit. Oof. Knife-edge.”
The impasse in the Italian budget saga is another source of major conce for investors, aiding the rationale to sell Euros on Monday, even if the breakout of the 1.13 weekly support is still seen as the major accelerant that led to the USD boost across the board.
Risk model: Conditions deteriorate further
Our risk-weighted index (sp500+us30y-dxy) has seen a further collapse in value, driven by the combination of a higher DXY and falling equities, not accounting for US yields as the market was closed due to public holidays in the United States.
In terms of order flow, we continue to be caught in a classic ‘risk-off’ environment as marked in purple above. Even structurally wise, we are not far from shifting into a classic ‘risk-off’ structure too. It will take a break and acceptance sub 2,700.00 in the S&P 500 and the validation of a new down-cycle in US yields, which looks poised to be the case considering the most recent order flow seen.
It’s also worth noting that the impulsive order flow witnessed in buying up the US Dollar or selling equities has been decisive. A strengthening US Dollar at such pace leaves little room for risk conditions to show much life unless both equities and yields both revert the current downward momentum, which as I mentioned, based on the conviction of the order flow is unlikely.
EUR/USD: Hammered post 1.13 resolution, more pain ahead
Cycles & Levels:We have entered new unchartered territory in 2018 by breaking through the weekly support of 1.13. This activates the next projection target of 1.0863. On the daily, the pair is about to make it to its minimum magnitude extension of 1.1185, which should be perceived as a milestone that sellers must achieve to keep the developing down-cycles in a strong grade. The 100% projection target that I am looking at stands at 1.1129. On the hourly, it could be argued that based on the measurement of a 100% projection off the 1.1353 breakout point, we may have reached a temporary exhaustion area circa 1.1215, although the current conviction in order flow, its relevance should be more questionable.
Correlations & Volumes:The five-year German vs US yield spread keeps bleeding into new year lows, while the German vs Italian is quickly moving to revisit its most recent lows, currently at 3.03%. The close of the daily candle, with absolutely no interest to take profits off the table, and with the POC at 1.1267 above the close by5pmNY are all signs that suggest more pain ahead.
GBP/USD: More downside to exploit, Brexit headlines risk
Cycles & Levels: Following the failureto test the weekly range high at 1.3250/60, the pair looks poised to have another go to the bottom of the range at 1.2730. On the daily, the down-cycle is firmly in control with no significant area of support found until the test of the mentioned weekly range low, which reinforces the notion of further sharp falls if Brexit headlines carry more negative news. On the hourly, with the establishment of a new down-cycle now in place, the price has landed to the expected next target of circa 1.2850. There are an additional 140/150 pips of a void area to exploit by momentum players/algos & other types of players amid an absence of clear static areas of support.
Correlations & Volumes: Correlations are moving sharply lower, which adds an insurmountable amount of pressure to an already debilitated Sterling. The close near the lows of the day does not bode well for the interest of bottom pickers. Sellers now have the task of keeping the follow-through selling, which judging by where the POC stands (1.2850), plenty of interest is being accumulated at the present lows for what might be further declines. Remember, Sterling’s performance will be subject to Brexit headlines.
USD/JPY: Failure to find equilibrium above 114.00
Cycles & Levels:From a weekly perspective, we’ve come to a key juncture between 114.00/115.00. On the daily, while the up-cycle remains active, the price is having difficulties finding equilibrium above 114.00. In case of any setback, 112.85/113.00 is the next key area of support as highlighted above. On the hourly, the up-cycle remains in place with the risk of entering a potential range as marked by the black box (we’ll need a double bottom + 50% midpoint retrace). Even if the pair starts breaking lower, sellers will be faced with frequent intervals of intraday support as depicted. The key area of confluence to the downside remains 113.35/40 (static + dynamic support in the form of an ascending trendline).
Correlations & Volumes:The decline in the US vs JP yield spread, the ‘risk-off’ conditions firmly present, along with the 114.00 candle rejection on Monday, are all factors that heighten the risk of a setback in the developing bullish run. However, I am expecting any down-plays to be faced with far strong hurdles to see progress as players will have to fight the trend and battle through intraday supports. A break sub-Monday’s low will be the first sign of trouble.
AUD/USD: Area of high interest from 0.7150 approached
Cycles & Levels:The chart in the weekly remains in a firm down-cycle but the breakout of the 2018 descending trendline does raise red flags of a longer-term bottom found ahead of 0.70. On the daily, we are getting into close proximity of a key area of support at 0.7150/55, where I am expecting much more interest to be a buyer in line with the current up-cycle. On the hourly, I am closely monitoring the test of an ascending trendline (3rd touch) with 0.7150 and 0.7120 the key static supports the market will use as a reference. From a structural view, the clearance off 0.7185 strengthens the bearish structure, but remember that it’s in contradiction with the daily.
Correlations & Volumes: Correlations paint a gloomy picture for the Aussie, as all the related market valuation are currently falling (gold, yuan, yield spread, 1/dxy). Monday’s POC can be found at 0.72, above the close of the price by5pmNY, which as in the case of the rest of FX majors, has seen no profit-taking.