Daily analysis | 28 August 2017
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Speaking at the Jackson Hole on Friday, Fed Chair Janet Yellen avoided the subject of monetary policy altogether. The absence of any signals regarding an imminent balance sheet reduction or the prospect of another rate hike this year probably disappointed investors looking for optimistic hints on these two issues. The result was a weaker dollar. Soon thereafter, the euro surged on ECB President Draghi’s remarks, or the lack thereof, to be more precise. The ECB chief said nothing new regarding changes to QE, nor did he talk down the euro. Given that some market participants may have anticipated a warning about the euro’s appreciation, the absence of any such concern probably gave traders the ‘green light’ to re-enter long-EUR positions.
The broader outlook for EUR/USD remains positive in our view. Fed rate-hike expectations are still subdued, while the ECB could very well provide some hints regarding an eventual reduction in its asset purchases as early as at the upcoming policy meeting next week. Having said that, the economic calendar is packed with critical data releases and events this week, which constitutes a risk to further near-term rallies in the world’s most traded currency pair. Specifically, almost all US data coming out this week are expected to be solid, while President Trump is anticipated to begin pushing for tax reform in speeches. Last but not least, EUR/USD’s proximity to the psychological 1.2000 zone is yet another factor making us hesitant to call for further near-term upside. Therefore, even though the pair’s broader outlook remains positive, we would stay cautious of a potential consolidation or even correction lower during this event-risk heavy week.
EUR/USD rallied on Friday, to break above the key resistance (now turned into support) of 1.1830 (S2) on Yellen’s speech. Subsequently, Draghi’s remarks helped it to overcome the 1.1900 (S1) zone, defined by the peaks of the 2nd, 3rd and 4th of August. Then, the rate retreated somewhat. In our view, the rally signaled the resumption of the prevailing medium-term uptrend and as such, we expect the bulls to regain control at some point soon and aim for a test near the 1.1980 (R1) resistance, or the round number of 1.2000 (R2). A break above that key zone is needed to make us confident on further advances. Such a break is possible to set the stage for extensions towards the 1.2100 (R3) territory.
As for the bigger picture, as we already noted, the medium-term outlook remains positive. EUR/USD has been printing higher peaks and higher troughs above the uptrend line taken from the low of the 17th of April. Even if we get a retreat from near the 1.2000 (R2) zone, as long as such a setback remains limited above the aforementioned uptrend line, we would treat it as providing renewed buying opportunities.
Tropical Storm Harvey intensifies, takes out a chunk of US oil production
Tropical Storm Harvey intensified over the weekend and hit the state of Texas, causing some US oil rigs as well as many refineries to shut down. However, the reaction in the oil market has been relatively muted, at least so far, with market participants not appearing worried that this will lead to a meaningful oil shortage. One reason for the subdued reaction may be that weather factors rarely disrupt supply for very long, implying investors may view this situation as temporary. Another explanation may be the fact that the US Department of Energy stated on Friday it stands ready to release crude oil from the nation’s emergency stockpile (Strategic Petroleum Reserve) if it is deemed necessary. This suggests that even if the storm intensifies and cripples US supply further, the federal government may intervene. Thus, further intensification of Harvey could support prices somewhat, but if the impact is big enough to cause intervention, prices could come back down.
WTI traded in a consolidative manner on Friday, staying slightly above the support of 47.50 (S1). Since the 22nd of August, the price has been trading mostly between that level and the resistance of 48.55 (R1). As such, we consider the short-term outlook to be flat for now. Our view is also supported by our short-term momentum studies, both of which lie near their equilibrium lines, pointing sideways.
Having said that though, given that WTI is still trading above the upper bound of the downside channel that contained the price action from the beginning of February until the 25th of July, we still see a decent possibility for the bulls to take charge again. A break above the resistance of 48.55 (R1) could confirm the case and is possible to initially aim for our next resistance of 49.30 (R2).
As for today’s economic data:
The only major indicators we get are Sweden’s retail sales and the Eurozone’s M3 money supply, both for July.
As for the rest of the week:
On Tuesday, there is nothing major on the economic calendar. On Wednesday, we get Germany’s preliminary CPI and the US ADP employment report, both for August. On Thursday, Eurozone’s preliminary CPIs for August will be closely watched. In the US, personal income and spending data for July as well as the core PCE price index for the same month, are all coming out. We also get Canada’s GDP for Q2. Finally, on Friday, the all-important US employment report for August is due out and expectations are for another strong report.
- Support: 1.1900 (S1), 1.1830 (S2), 1,1730 (S3)
- Resistance: 1.1980 (R1), 1.2000 (R2), 1.2100 (R3)
- Support: 47.50 (S1), 46.85 (S2), 45.50 (S3)
- Resistance: 48.55 (R1), 49.30 (R2), 50.35 (R3)