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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 the last 24h, the market had to contend by a series of confusing reports about the prospects of a US-China trade deal. We also saw a strong US NFP report, which fortifies the expectations for another Fed rate hike by December this year. Furthermore, at the open of the markets on Monday, participants are trying to come to terms over the latest reports that seem to suggest a Brexit deal is closer than what the market may have thought. Last but certainly not least, the market is not in preparation mode ahead of the US midterm election results, which is by far the most imminent risk event.
Risk model: Structurally ‘risk on’, equity flows capping the upside
As markets open for the US mid-term elections week (due Nov 6th), participants must contend with both renewed optimism surrounding a potential Brexit deal and the preparations in case a surprise outcome, other than a split Congress, eventuates. Heading into Monday, our prop risk sentiment model (hourly charts) communicates the market continues structurally in what I describe as text-book ‘risk on’ mode owed to the most recent active up-cycle in equities, along with a clear up-cycle in US yields and a newly validated down-cycle in the DXY. From an order flow standpoint, on the back of the positive US NFP figures, we are faced with a USD-strength environment, resulting in equity dynamics to determine short-term risk flows as long as the USD strength remains in place. The best case scenario would be to see the re-anchoring of higher equities, which would then lead to order flow matching up the current risk friendly structure. Considering the S&P 500 is testing a key support area, it looks like this is a well-founded expectation. Since US 30-year bond yields appear to be far from reverting the bullish trend, even the invalidation of the down-cycle in the DXY would not negate the underlying ‘risk on’ conditions as long as equities can recovery the upside. If we factor in the recent upside resolution in our prop EM FX index, it strengthens the case for the USD and overall risk flows to remain supportive.
EUR/USD: Deeper setback within hourly up-cycle eyed
Cycles & Levels:From a weekly perspective, we ended up with an indecision candle. A potential double bottom and the establishment of a newly found range in the weekly hinges on the ability of price to recover the mid-point of the 1.13-1.18 delimitations at 1.1550. On the daily, the price has rejected a key resistance area at 1.1430 as part of a developing down-cycle and with a descending trendline still aiding the bearish outlook from a cycles perspective. On the hourly,we have the validation of a new up-cycle, despite the latest impulsive counter-cyclical order flow into the 50 fib retracement of the last cycle high is worrisome. The sharpness of rejection suggests a deeper setback. Sellers should prevent auctions from finding acceptance above the 1.1420-30 level if they are to challenge lower level in the coming 24h of price action.
Correlations & Volumes:In terms of volumes, the sequence of increasing downside tick activity coupled with Friday’s POC trapped above the current price at 1.1420 suggests the risk of a bearish trend resumption are on the rise. It’s a mixed bag when analyzing correlations, as the Italian premium continues to be reduced (EUR positive), while the 5-year German vs US yield spread just made new marginal trend lows (EUR negative).In the very short-term (next 48h), until we get the results of the US mid-term election, the risk is that 1.1420 caps the upside, making a rotation back towards 1.1350.
GBP/USD:Buyers failing to build value above 1.30
Cycles & Levels:In the weekly, we’ve confirmed the establishment of a range by recovering above the midpoint of the 1.3290-1.2675 extremes. On the daily, the down-cycle is still very much valid, with the next key areas of focus coming at 1.30 round number, 1.3080 (midpoint last swing low) ahead of a descending trendline circa 1.32. From an hourly view, barring any Brexit breakthrough, I am expecting 1.30 (100% fib projection) to cap further gains near-term. The market is structurally very bullish of the hourly but faces the risk of trading much more choppy short-term. The pair is a ticking bomb of volatility set to explode on a Brexit deal speculation and US midterm election, hence trading it near term hinges on the current uncertainty of unknown high-risk event outcomes.
Correlations & Volumes: Based on the UK vs US 5-year yield spread, it justifies a lower valuation, but with so much uncertainty, one must account for any Brexit-induced sentiment play to overrule any yield advantage short-term. Based on volumes, last Friday’s bearish candle is far from screaming danger ahead. Control over the 1.30 round number (Friday’s POC), will provide hints over the side most likely to control price action in the very short-term.
USD/JPY: En-route to its next bullish target of 114.40-50
Cycles & Levels: The market remains unambiguously bullish off the weekly, with last Friday’s close at the highs supporting this view. On the daily, price action and the cycle, both constitute an endorsement to engage in buy-side action towards the next target at 114.40/50. On the hourly, not only we are on the cusp of breaking into new highs, but we also see bullish order flow. If we can find acceptance above the previous high without previously having tested the 50% fib retracement, that would be a decisive testament that this market is poised to continue towards the expected daily targets.
Correlations & Volumes:Not only we are emboldened by an environment of USD strength near-term (order flow wise), but if we dig deeper, the pair is only backed up by Friday’s increase in buy-side volume, by the positioning of the POC at 113.00, and a surging bond yield spread between the US and the Japanese 5-year.
AUD/USD: Buy on dips favored after double bottom confirmation
Cycles & Levels:The weekly shows a market in a clear down-cycle but as one takes a closer look, the latest bullish candle suggests more upside might be likely after multiple failures to take out 0.70. On the daily, a descending trendline caps the upside of a developing up-cycle. If buyers can re-group by pushing higher in coming days/weeks, 0.73 is the next 100% fib proj target. On the hourly, the overextension of the price and the latest counter-cyclical order flow warrants caution for a potential retest of the circled support areas between 0.7150 down to 0.71, where value to be a buyer and hence an area set to exhibit demand imbalances may be found.
Correlations & Volumes:Correlated assets argue for an overall bullish momentum in the Aussie. Judging by where most of the volume was exchanged last Friday (~0.72), sellers should now avoid the pair building higher value above the mentioned round number or else the risk of seeing bullish follow-through continuation rises. If we are to be guided by Friday’s price action alone, it’s undeniable that the candle clearly communicates the risk of at least 0.7150 being re-tested but with the EM FX index breaking higher and the market on structurally ‘risk on’ dynamics, it’s hard not to see any setback as an opportunity to be a short-term buyer.