Espresso Morning Call: A brief consolidation, for now

What we are looking for

• USD corrective slip has stabilized: USD steadied yesterday and is again trading mixed against major forex.
• GBP recovery has eased off: As political risk has reduced following the relatively quick accession of Rishi Sunak to become Prime Minister, this is easing some of the volatility in GBP. However, a more fiscally prudent Sunak may also stunt the recovery potential of GBP too.
• Indices holding on to gains: After another positive close on Wall Street, US futures are all but flat this morning. This is the busiest week of earnings season for Wall Street, so this may be another calm before further volatility.
• Commodities easing back slightly: Commodities consolidated overnight and are starting to slip lower slightly this morning. 
• Data traders: USD data traders will be watching for Consumer Confidence and the Richmond Fed Manufacturing survey.

Overview

As a fiscally prudent (and relatively safe pair of hands) Rishi Sunak is set to become Prime Minister today, markets may now be able to look past UK political risk. The contagion risk from UK Gilt markets is easing as UK yields are falling. This is adding to a sense of calm that is taking hold in major markets this morning.

With some significant risk events later in the week it may be that this sense of calm is a pause for breath though. The ECB meeting, US Advance GDP and the Bank of Japan will be on traders’ minds. US bond yields stabilising have played into this relative calming of markets. It leaves only minor moves on USD, whilst commodities tick slightly lower and equity markets buzz around the flat line this morning.  

US confidence is key for the economic calendar today. The US Conference Board’s US Consumer Confidence is expected to decline slightly in October. We will also be watching the Richmond Fed’s Manufacturing Index survey which is expected to move back into mild expansion in October.

Today’s news

Market sentiment is mixed/cautious: Little decisive direction on major forex, with commodities slipping lower but equity markets, are a shade higher.

Treasury yields have dropped but are essentially consolidating: Yields steadied yesterday and although they are a shade lower this morning, there is more of a sense of consolidation.

UK Prime Minister Sunak to take office: Rishi Sunak will be formally announced as Prime Minister today. He is seen as fiscally prudent and will help to steady a volatile political situation in the UK that has been present since the fateful mini-budget just over a month ago. GBP is steady, drifting lower yesterday but rebounding slightly early today.

German Ifo steadies: The German Ifo Business Climate for October was 84.3 which was only a shade below the 84.4 from September. This was better than the expected drop to 83.3 with current conditions being a key stabilising factor.

Cryptocurrencies drift slightly lower: Crypto continues to lack decisive direction, with a drift lower this morning. Bitcoin is -0.5% at $19300 and Ethereum is -0.3% at $1346. 

Economic Data:

• US Consumer Confidence (at 14:00 GMT) Confidence is expected to decline slightly to 106.5 in October (from 108.0 in September)
• US Richmond Fed Manufacturing (at 14:00 GMT) The survey is expected to improve slightly to +2 in October from zero in September

Major markets outlook

Broad outlook: A cautious but slightly positive bias to market sentiment. 

Forex: Little real direction. USD is mixed. Currencies deemed to be higher-risk (AUD, NZD and GBP) are gaining slightly. 

• EUR/USD continues to trade around the top of the resistance band around 0.9850/0.9900. This is just shy of the falling 55-day moving average which is a key basis of medium-term resistance at 0.9921 and the 8-month downtrend. The daily RSI is still around 50 where rallies tend to fade. We favour using rallies as a chance to sell. A confirmed move back under 0.9806 would question the recovery with the first key support at 0.9704. 

• GBP/USD has started to fade again in the resistance between 1.1380/1.1495 which has consistently restricted recoveries in recent weeks and seems to be marking the top of what is developing into a month-long range. We continue to favour using strength as a chance to sell. The market has been drifting lower over the past 24 hours, with initial support at 1.1257.
• AUD/USD has decisively broken the downtrend channel with Friday’s bullish engulfing candle. However, the rally unwound from the resistance of overhead supply between 0.6345/0.6390 and has left a high at 0.6410. We still favour selling into strength, but as the pair picks up slightly today, reaction to the resistance band will be important in the coming days.

Commodities: The rebounds may already be falling over.

• Gold has seen a sharp rebound from Friday fading at $1670 and the move is continuing to pull lower this morning. This is strengthening the resistance around $1680/$1700 and the daily RSI is faltering again under 50. We continue to look to sell rallies within the downtrend. A decisive move back under $1643 re-opens the $1615/$1617 support.
• Silver still retains a choppy near-term outlook. Although the market held on to the support band between $18.90/$19.06 yesterday it has dropped back this morning to test again. A close back under $18.90 would be a  mini bull failure and question the recovery. Initial resistance is $19.38 under the reaction high of $19.67. 
• Brent Crude oil remains choppy as the price continues to gravitate around $93 which was an old pivot area from August/September. This comes with the daily RSI settling quietly around 50 and moving averages converging. The outlook is subsequently neutral. We now watch converging support and resistance levels. Support at $89.20 and resistance at $95.15/$95.75 will be gauges.

Indices: Wall Street has rebounded and is testing resistance again. This is helping the German DAX more than FTSE 100 though.

• S&P 500 futures continue to react well with buying into weakness and now a potential base pattern is forming. A close above 3820 is needed to complete the pattern. The daily RSI moving above 50 is encouraging and is leading the market higher. The pattern would imply +250 ticks of further recovery. The next resistance would be 3883. Support is growing between 3736/3777.
• German DAX continues to react well in recent sessions where intraday weakness is seen as a chance to buy. The daily RSI holding well above 50 is encouraging too. Initial support is now a 200 tick band between 12735/12935. The primary downtrend is currently falling at 13215.
• FTSE 100 is lagging behind the recovery of Wall Street and elsewhere in Europe. The market is still unable to test the resistance at 7068/7106, whilst the daily RSI is still struggling under 50. Support at 6865/6918 needs to hold to sustain any hope of recovery.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.