Weekly Analysis September 14th

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The last couple of weeks have been eventful for global markets as we witnessed a sudden uptick in volatility measured by VIX index. VIX, also known as the Fear Index, started showing signs of restlessness on August 27th, right before the annual Jackson Hole conference. This spike culminated in VIX breaking through 200-day moving average resistance level on Thursday, September 3rd, when VIX increased 27%. Movements in VIX have a strong negative correlation with US stock markets, meaning that stock markets tend to tank when VIX spikes. However, given the interlinked nature of markets, such volatility events echo through the entire financial ecosystem – last week USD strengthened 1%, measured against US main trading partners, on the back of a sudden flight for safety.

 

Stock markets have started to gain momentum since Tuesday and are expected to hit new all-time highs soon enough. What could have caused such market event? Stock markets have been extended, measured by S&P500 and Nasdaq both hitting continuously new records. As such, a slight correction, whilst traders catch their breath, is only healthy.

 

European Central Bank announced on Thursday that it’s keeping Euro interest rates unchanged and that no new measures will be implemented to stimulate the economy and elevate inflation. August core inflation reading stood at -0.2%, indicating a deflationary environment that has proven to be extremely hard to reverse as consumers will choose to hoard their savings and not spend any money – just ask the Japanese! This announcement was riveting given that major central banks have engaged in currency wars with a focus to push their own currencies lower in order to boost economy through exports. A great example is the Federal Reserve Bank of the US whose Chair Jay Powell revealed a new inflation policy called Average Inflation Target during Jackson Hole conference 2 weeks ago. This policy allows inflation temporarily to overshoot the 2% level that has been in place as a target since 2012. After the announcement, USD immediately shed 1% as increased inflation generally has a bearish effect on the currency. We are yet to hear from Bank of Japan Governor, Kuroda, about their latest projections and policies. Both the Fed and BoJ are scheduled to meet and release their monetary policy statements and interest rate decisions next week.

 

Please find more details on the events this week below with a commentary about potential currency effects.

 

Have a great trading week ahead!

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In The Spotlight

 

Date Currency Event Previous  Consensus 
September 15th CNY China Retail Sales (YoY) -1.1% -1.4% 
September 15th GBP UK 3-month Unemployment Rate 3.9% 3.9% 
September 15th USD  US Retail Sales (MoM) 1.2% 1.1% 
September 16th GBP  UK Consumer Price Index (YoY) 1.0% 1.3% 
September 16th USD FOMC Economic Projections; Fed’s Monetary Policy Statement
September 16th USD Fed Interest Rate Policy Decision 0.25% 0.25% 
September 17th JPY BoJ Monetary Policy Statement  
September 17th JPY BoJ Interest Rate Decision -0.10%  -0.10% 
September 17th GBP BoE Monetary Policy Decision  
September 17th GBP BoE Interest Rate Decision 0.10%  0.10% 
September 17th CHF US Initial Jobless Claims 881K*  850K* 
September 18th USD Michigan Consumer Sentiment Index 74.1  76.0 

*In USD millions

Impact

•US Retail Sales and Michigan Consumer Sentiment Index
The US economy, being very consumer driven, is heavily impacted by retail sales and consumer sentiment. Up to 70% of the GDP is related to consumer spending, meaning all data points related to retail are heavily scrutinized, and have the potential to move markets. Increased retail sales and growing consumer sentiment is considered bullish for USD, whereas lower or below expectations read is generally considered bearish.

• FOMC Economic Projections and the Fed’s Monetary Policy Statement with Interest Rate Decision
There are no major surprises expected in the announcement from the Fed in regards to FOMC economic projections and interest rate levels. The Chair of the Fed, Jay Powell, had already revealed during Jackson Hole their plan to allow inflation to temporarily overshoot. However, market participants cling on to every word from Powell, hoping to decipher whether the Fed is taking more dovish or hawkish stance. Dovish stance tends to be bearish for USD as market projects unfavorable economic data in the future, based on the Fed’s projections.

Market Sentiment

EURAUD has been showing signs of consolidation by trading in the range of 1.6075 to 1.6553 since May, testing both the support and resistance a number of times. It should be noted that both resistance and support were established In December 2019. EUR downtrend is supported by 200-day moving average (purple line) as the price dropped below this threshold on June 2nd and it has become a key resistance point since. This week 50-day moving average (green line) has also set a ceiling to EURAUD short-term trading range.


Support: 1.6075
Resistance: 1.6553

 

The price has hit a support level of 1.3030 levels that was established a year ago and was last tested in January (albeit it briefly broke out). Strong downward trend with moving averages (namely, 8, 21, 34, 50, 200-day MA-s) stacked, indicating that momentum is forcing the pair to trade lower. However, on Tuesday the price broke through descending triangle resistance level at 1.3161, indicating a potential move higher. Since then, the price has found resistance in 34-day moving average at 1.3228

Support: 1.3030
Resistance: 1.3228

This pair has gained 13% since March lows and on the 1st of September hit this cycle intra-day high of 1.2011. Last time the pair traded near 1.20 was in April 2018, hence 1.20 is a strong resistance level to break. The price seems to have found a resistance at 1.1759 which currently coincides with 34-day moving average. Most likely we will see continued sideways trading as EURUSD seems to be consolidating to gather strength for a breakout.

Support: 1.1759
Resistance: 1.1935

This pair is showing signs of consolidation as the monthly price is forming a pennant which can fire in both directions. The resistance from the pennant was tested on September 1st when price was unable to climb higher than 1.3491. This pair seems to be oversold as slow stochastic indicator has dropped to 10.68 level and RSI is at 11.75. Moving averages are still stacked but 8-day MA just crossed below 34-day MA which signals the end of short-term upward trend.

Support: 1.2735
Resistance: 1.3480

Kaia Parv, CFA, is an experienced Portfolio and Investment Manager with exposure to both public and private markets. Before joining FXPRIMUS, Kaia was a Senior Investment Associate at EFA Group and a Vice President in Bank of America Merrill Lynch.

Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

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