Daily analysis | 30 August 2017
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The greenback recovered during the US trading session yesterday as US bond yields moved higher, with the currency erasing notable losses it posted earlier during the European morning. Besides the dollar, risk assets recovered across the board following their tumble after North Korea’s missile launch on Tuesday. US equity indices filled their negative gaps and managed to close in the green, while Asian indices are mostly higher today. Meanwhile, safe haven assets gave back most, if not all, of their missile-related gains.
In terms of fundamental catalysts, there was no obvious trigger behind this reversal. A potential explanation may be the cool-headed response from the US administration. Instead of the President responding to the escalation via twitter, as has happened on many recent occasions, the White House issued an official statement to condemn the action. This may have been interpreted by investors as a sign that the US will approach the situation in a more measured and diplomatic manner, as opposed to raining down “fire and fury”.
Does the latest price action imply that we are out of the woods and that risk sentiment is set to continue recovering? We are not so convinced. North Korean leader Kim Jong-un warned today that more missile drills with the Pacific as the target are needed and that yesterday’s launch was the first step in military action aimed to “contain” the US territory of Guam. This implies that another wave of risk aversion is possible at any time. Meanwhile, Tropical Storm Harvey continues to wreak havoc in Southern US, and the deadline for raising the US debt ceiling is fast approaching (29th September), both of which pose threats to risk appetite as well.
During the European day, Germany’s preliminary CPI rate for August is expected to have risen from the previous month. A pickup in German inflation could raise speculation that Eurozone’s inflation, due out the following day, may also accelerate. Something like that could bring the euro under renewed buying interest. However, we would like to stress that Germany only reports a headline, not a core, inflation rate. Thus, investors may focus primarily on Eurozone’s core CPI in order to gauge the timing of the ECB’s next policy action.
EUR/JPY traded higher yesterday, after it hit support at 129.60 (S3), fractionally above the upper bound of the falling wedge that contained the price action from the 24th of July until the 25th of August. The pair emerged above 130.40 (S2) and subsequently above the resistance (now turned into support) hurdle of 131.30 (S1), marked by the peaks of the 2nd and 3rd of April. In our view, this keeps the short-term picture positive and as such, we expect the break above 131.30 (S1) to open the way for our next obstacle of 132.20 (R1).
Zooming out to longer-term time-frames, we see that the rate continues to trade above the prior long-term downside resistance line drawn from back at the peaks of May 2015. What’s more, the price structure has been higher peaks and higher troughs since the French elections. As such, we consider the bigger picture to be positive as well.
In the US, the ADP employment report for August is due out. The forecast is for the private sector to have added 178k jobs, the same number as in July. Such a solid print could heighten speculation that the NFP print due out on Friday will also meet its forecast of 185k and thereby, help the dollar recover somewhat further. We also get the nation’s 2nd estimate of GDP for Q2, and expectations are for a slight upward revision.
EUR/USD traded higher during the early European morning Tuesday, breaking above the psychological barrier of 1.2000 (R1). Nevertheless, the rate fell short of reaching our next resistance of 1.2100 (R2) and during the afternoon, it retreated to fall back below 1.2000 (R1). Taking a look at our short-term oscillators, we see the case for the latest retreat to continue for a bit more. The RSI exited its above-70 zone and looks to be headed towards 50, while the MACD, although positive, has topped and fallen below its trigger line. The catalyst for further declines may be a strong ADP number later today.
Having said that though, we maintain the view that the medium-term outlook of EUR/USD is positive. The price structure remains higher peaks and higher troughs above the uptrend line taken from the low of the 17th of April. Therefore, we would treat any further declines that stay limited above that line as a corrective move. We expect the bulls to take the reins again soon and if they prove strong enough to overcome once more the 1.2000 (R1) barrier, then we expect them to challenge the 1.2100 (R2) this time.
We have only one speaker on the agenda: Fed Board Governor Jerome Powell. He is a permanent FOMC voting member and as such, his comments are always closely followed. His latest remarks at the Jackson Hole were on the dovish side. He appeared willing to be patient with further rate hikes until inflation is higher.
- Support: 1.1900 (S1), 1.1830 (S2), 1.1730 (S3)
- Resistance: 1.2000 (R1), 1.2100 (R2), 1.2170 (R3)
- Support: 131.30 (S1), 130.40 (S2), 129.60 (S3)
- Resistance: 132.20 (R1), 133.80 (R2), 136.00 (R3)