short-term

Technical Market Outlook: The EUR/USD pair has been seen bouncing from the local low made at the level of 1.0675 and so far the high of the bounce was made at the level of 1.0732. The intraday technical resistance is seen at 1.0780, so bulls need to break out above this level in order to continue higher. Any breakout below the level of 1.0675 would sustain the bearish outlook and put the level of 1.0636 for a test (swing low). The weak and negative momentum supports the short-term bearish outlook for EUR as the bulls are not able to move above the neutral level of fifty on the RSI indicator.     Weekly Pivot Points: WR3 - 1.07335 WR2 - 1.07121 WR1 - 1.06983 Weekly Pivot - 1.06907 WS1 - 1.06769 WS2 - 1.06693 WS3 - 1.06479   Trading Outlook: Since the beginning of October 2022 the EUR/USD is in the corrective cycle to the upside, but the main, long-term trend remains bearish. This corrective cycle might had been terminated at the level of 1.2080 which is 61% Fibonacci retracement level. The EUR had made a new multi-decade low at the level of 0.9538, so as long as the USD is being bought all across the board, the down trend will continue towards the new lows.  

Stocks tumble on fears monetary tightening will trigger a recession Fed rate hike bets still only pricing in one last rate increase European bond yields plunge on downbeat global sentiment   US stocks are sliding as the global growth outlook continues to deteriorate following soft global PMI readings.  The risk of a sharper economic downturn is greater for Europe than it is for the US, so that could keep the dollar supported over the short-term.  This has been an ugly week for stocks and that is starting to unravel a lot of the mega-cap tech trades. The Nasdaq is getting pummeled as the AI trade is seeing significant profit taking.      Europe Brief: European stocks got rattled after France posted a surprise contraction with their Services PMI.  Almost all the European PMI readings disappointed and that is bursting the euro trade. Stubborn UK inflation is forcing the BOE to become a lot more aggressive with their rate hiking campaign, which will pile on significantly more pain on people with mortgages. UK Chancellor Hunt needed to do something for homeowners and this year-long break before repossessions is a step in the right direction. Over 2 million UK mortgage holders are going to see skyrocketing monthly mortgage bills and right now it seems it will steadily get worse.     Bostic The Fed’s Bostic delivered a dovish message today after favoring no more rate hikes for the rest of the year. Bostic is optimistic that the Fed will bring down inflation without tanking the job market.  Bostic is in the minority as other members will need to see a significant deterioration in the data.  Today, the service sector PMI declined not as much as expected and is still trading near pre-pandemic levels. The June preliminary Services PMI fell from 54.9 to 54.1, a tick higher that 54.0 consensus estimate. The economic resilience for the US will likely keep the majority of Fed officials with a hawkish stance.       

Current impulsive up move of CHF/JPY has cleared above major resistances of 157.98 & 158.45. Short-term momentum remains bullish. 159.90 is the key short-term support to watch.   The CHF/JPY cross has continued to its relentless rally as it broke above key resistance levels; 157.98 (the high obtained right during the EUR/CHF unpegged shock in January 2015) and 158.45 (Oct 1979 major swing high).   Broke above Oct 1979 major swing high of 158.45     Fig 1: CHF/JPY long-term secular trend as of 27 Jun 2023 (Source: TradingView, click to enlarge chart) The next key medium-tern resistance zone stands at 163.20/166.70 defined by a cluster of Fibonacci extension levels (see 3-month chart). The key medium-term support rests at 146.60 defined by the 200-day moving average and the former swing highs of July/October 2022.   The short-term uptrend remains intact     Fig 2: CHF/JPY minor short-term trend as of 27 Jun 2023 (Source: TradingView, click to enlarge chart) The price actions of CHF/JPY have continued to evolve within a minor ascending channel in place since the 13 June 2023 low of 153.37 and traded above the upward-sloping 5-day moving average (see 1-hour chart). The hourly RSI has just staged a bullish breakout which indicates that short-term momentum remains positive. Watch the 159.90 key short-term pivotal support with the next resistances coming in at 162.00 (psychological level) and 163.20 (the intersection between the upper boundaries of both the medium-term and minor ascending channels). However, a break below 159.90 negates the bullish tone to expose the next minor supports at 158.70 and 157.20.

Short-term downside momentum has waned       Fig 2: Gold (XAU/USD) minor short-term uptrend of 25 Jul 2023 (Source: TradingView, click to enlarge chart) As seen on the 1-hour chart of Gold (XAU/USD), its recent slide from its 20 July 2023 high of US$ US$1,987.53 has reached the lower boundary of a minor ascending channel from 6 July 2023 low now acting as near-term support at US$1,952.50. In addition, the hourly RSI oscillator has flashed a bullish divergence signal at its oversold region. These observations suggest that the downside momentum of the 5-day slide from the 20 July 2023 high has started to wane where a potential short-term bullish reversal may take shape. Watch the US$1,939 key short-term pivotal support (also close to the 50-day moving average) with the intermediate resistance at US$1,990, and clearance above it sees US$2,010 next (the upper boundary of the minor ascending channel). However, a break below US$1,939 invalidates the bullish reversal scenario to expose the medium-term support zone of US$1,913/1,896.  

Smaller hawkish repricing potential for short-term swap rates The rewidening of the USD:EUR short-term rate differential in the past few months has been another driver of EUR/USD depreciation. It must be noted that such re-widening has been entirely driven by rising US swap rates, and not by a decline in EUR rates. With US swap rates facing wider volatility on the back of the Fed’s higher starting point to cut rates, we can expect the EUR:USD short-term swap rate differential to continue to be driven predominantly by the dollar leg. Incidentally, the chances of the European Central Bank making a rapid transition to monetary easing appear inconsistent with the lingering hawkish pressure from numerous members of the Governing Council. Once it’s been determined that USD short-term swap rates will remain the key driver, it’s worth investigating whether they have the same potential that our rates team attached to the 10-year Treasury yields. The price action since June can help us in this case. Back then, like now, there was a question of markets not fully trusting the hawkish dot plot in the aftermath of the Fed meeting. Expectations of Fed easing – rather than the level of the terminal rate – have been driving most dollar moves of late, and markets are now attaching a greater weight to the 2024 dot plot projections. We can see in the chart below that the gap between the current end-2024 implied rate (4.68%) and the September median dot plot for 2024 (5.13%) is around 40bp, much less than the 80bp+ after the June meeting.   Market pricing closer to dot plot compared to June   US activity data in the summer months pushed market pricing closer to the median dot plot for 2024, and the same could happen in the fourth quarter. However, the room for a hawkish repricing is now substantially smaller than it was in June. Incidentally, the Fed only has two more meetings to deliver on its “promise” (as per its 2023 dot plot) to hike one last time this year. Should it pause until December, one 25bp hike could theoretically be trimmed off the 2024 projections as well, more than halving the gap with market pricing.   EUR/USD implications While we do see risks of US back-end yields staying high, and cannot exclude a 5.0% scenario for the 10-year tenor, additional bearish pressure at the shorter end of the USD curve may be curbed. A look at recent EUR/USD correlations suggests that the pair has responded to back-end US yields just as much as short-term swaps. All in all, we estimate 1.02 as the most likely bottom for EUR/USD in a scenario where the US bond sell-off continues.   Correlation between EUR/USD and US 10-year yields/2-year swap rate   Our baseline scenario in the medium term, however, signals the opposite. ING’s economics team is expecting a sizeable re-rating in the US activity outlook by the first quarter of next year as excess savings are drawn down and the consumer spending support to the US economy dwindles. We sit on the more dovish end of the spectrum when it comes to Fed expectations and therefore expect a dovish repricing to drive a dollar decline in 2024. In the short-run – i.e. until US data turns negative - the growth differential between the eurozone and the US, a lingering high real USD rate and an unstable risk environment point to a downward-tilted balance of risks for EUR/USD. We think 1.05 may be the bottom for the pair in current conditions, but as discussed, a drop all the way to 1.02 cannot be excluded.

Industrial output in the eurozone fell more than expected, as total production dropped 1.1% on month in September, while forecasts were for output to be down 0.8% on month. However, this report did not lead to any noticeable movements in the foreign exchange market. Investors were clearly waiting for US data, the forecasts for which also carried a negative tone, as they intended to extend the dollar selloff. However, the annual trend in retail sales slowed from 4.1% y/y in September to 2.5% y/y in October, whereas a slowdown from 3.8% to 2.1% was expected. So not only were the actual reports better, but the previous results were also revised for the better. Afterwards, a full-fledged rebound started, and the dollar was able to improve its position. The only thing we can highlight for today is the initial jobless claims in the United States. The total number is expected to increase by 8,000. The changes are extremely insignificant and are unlikely to have a serious impact on the current situation. Considering that the rebound is not yet complete, we expect the dollar to gradually rise further.   The EUR/USD pair has entered a retracement phase due to the high overbought levels. The level of 1.0900 acts as resistance, and we observed a decline in the volume of long positions near this area. On the four-hour chart, the RSI downwardly crossed the 70 line. This technical signal indicates that the euro's overbought conditions have started to ease, given that a retracement phase is being formed. On the same time frame, the Alligator's MAs are headed upwards. The signal corresponds to the upward cycle, ignoring the ongoing retracement. Outlook The ongoing retracement persists, which is why traders are considering a scenario with the pair moving towards the level of 1.0800. The succeeding movement will depend on the price's behavior near this level—whether sellers can keep the quotes below it or if the level will act as support. The complex indicator analysis points to the retracement phase in the short-term and intraday periods.  

EUR: Not easy to pick a bottom Shorting the euro appears to be one of the most popular bets in FX at the moment. Comments by hawkish hardliners like Isabel Schnabel yesterday – who suggested that another hike is now off the table and essentially moved the discussion to rate cuts – have added further pressure on the euro. We continue to point to how the current downward correction in EUR/USD is not out of line with short-term rate differentials; when taking the two-year swap rate gap (-130bp) as a driver, a further leg lower to the 1.06 area would not be an aberration. That makes us reluctant to call for the bottom in EUR/USD just yet, and even more so in EUR-crosses, especially against the likes of AUD and NZD. A catalyst for an idiosyncratic euro rebound is not in sight, at least for today, when there are no scheduled European Central Bank speakers and the eurozone’s data calendar only includes the October retail sales – hardly ever a market mover in the region. The big slump (7.3% YoY) in Germany’s factory orders for October (data released this morning) is likely to keep the negative euro narrative alive at the start of the European session. EUR/USD is now trading very close to the 1.0770 100-day MA support, and a break lower can further fuel the bearish momentum. A test of 1.0700 before the weekend is entirely possible if the dollar remains bid.