EUR/USD: Sell on Rallies Set to Yield Most Bang for Buck
The outlook in the pair has turned substantially more bearish as technicals and fundamentals align in favour of further sell-side campaigns. The rise in wage growth in the US above the 2.8% ceiling (held for the last 2y), coupled with a decent US NFP payrolls number of 201k was enough ammunition to see aggressive USD buying. The late Friday remarks by Trump that even further tariffs on China could be imposed led to re-ignite risk-off flows, adding fuel to the USD rocket.
The improved outlook for a more aggressive tightening cycle by the Fed, something the market might not have been prepared for, was well portrayed via the German vs US yield spread, falling to the lowest levels in Sept. At the same time, Italian vs German yield spreads came up further. We have a marked improvement in US fundamentals, accompanied by lower German vs US yield spreads and higher Italians, which should be seen, from a valuation perspective, as the perfect bearish storm to keep the rate under pressure.
What levels look most attractive to reinstate positions? Looking at the price action in early Monday, the compressive nature of the pair amid decreasing vol suggest that a possible rebound might be expected. However, as long as the yield spreads remain at such depressed levels, Friday’s POC around 1.1570-1580 may act as a wall of offers too strong to overcome and keep the bounce fairly shallow.
Should a breach of the area eventuate, a pristine area to consider engaging in sell-side action for what be a potentially much more appealing risk-reward is the range 1.16-1.1620, a juncture where the 50% fibretrac juxtaposes with a series of horizontal resistances as per the sequence of lows printed last Thur/Frid.
GBP/USD: Fully-Retraced Rally Puts Trapped Buyers Most at Risk
Checking the Sterling vs US Dollar 0.11% chart is to admire a story of recent fortitude by the two best-performing currencies in FX in recent days. At the same time, is about a story of a market plagued with minefields with participants trapped in both sides of the market.
To start with, one must understand the state of play in GBP first, with the 25-delta 3m -0.08% RR + large net short position in GBP futures , suggesting a lot of pessimism has been priced in, which essentially means that any positive Brexit news run the risks, as seen, of having a far greater effect to the upside vs negative headlines to the downside, as perma bears get trapped wrong-sided.
In the USD, it’s now all about the re-pricing of Fed hikes, with the market starting to consider that the ed may continue the pace of rate hikes of one every 2-3 months until mid-2019, as the data seems to justify up until this point. The surge in wage growth in the US to 2.9% y/y was a watershed moment, as it means that the tightness of the labour market, after all, is starting to be filtered into higher salaries.Thusday’s US CPI 0.00% may be the stroke that breaks the camel’s back for a new belief in higher US inflation, which should be interpreted as the icing on the cake and a precursor of more USD strength in H2. For now, the hammering of the UK vs US yield spreads communicates that the market risk is skewed towards the downside.
The characteristics of an inverse V-shape reversal, as the one seen in the pair, is that it leaves the side caught wrong-footed vulnerable and more often than not, they tend to close positions to limit further risks, which only increases the short-side pressure. Therefore, in the scenario that the pair were to find enough traction to see a bounce towards 1.2950, one can find up to 3 horizontal levels of reference to engage in short-side selling. It’s always a balancing act to decide which level to engage in the first place.
Large institutions tend to scale into a position at various price levels, which in this particular case, would be from lighter into a heavier sell-side commitment from 1.2950 up to 1.2990/1.30. If price were to find equilibrium above the 1.30 area, it would most a sign that buyers have regained strength and are ready to resume the uptrend in prices. Remember, trading GBP carries heightened risks of being whipsawed by Brexit headlines, so one must exercise extra caution.
AUD/USD: Sellers in Complete Control, No Signs of Tide Turning
The Australian Dollar -1.29% has been one of the most fragile currencies in Sept, which when combined with the resumption of the USD strength, makes for some clearly definable directional move, taking the rate to its lowest levels in years.
Judging by the close on Friday, there is no indication whatsoever that sellers are willing to take profits off the table just yet, while few buyers have the courage to get in the way of the current imbalance in supply dynamics.
The area 7125 and 7150 should present attractive points of engagement for the most aggressive sellers, while the 7170 area is another area of resistance that if re-tested and assuming the market drivers remain equal, should offer a solid proposition. In between these 2 areas just mentioned, sellers could also findFridya’sPOC as a point to anchor their short views against.