Espresso Morning Call: A brief pause amid huge USD selling

What we are looking for

• USD selling eases: The massive selling pressure on the USD against major forex. However, recent days have started with an attempt at a USD rally but that has been demolished in the US session.
• Indices slip back slightly: Equities are just unwinding recent gains this morning. US futures are consolidating with minor gains, whilst European markets are mixed.
• Commodities consolidating: Massive breakouts on precious metals are holding ground and even a shade higher this morning. Oil has slipped slightly lower after yesterday’s selling.
• Crypto plummeting again: Massive withdrawals from crypto exchange FTX is leading to a huge sell-off on cryptos. This is continuing today. 
• Data traders: It is a quiet day for forex traders. Oil traders will be keeping an eye out for the weekly EIA oil inventories.

Overview

For months, there has been a consistent theme that near-term USD weakness is seen as a chance to buy. However, this strategy is having to be re-visited after another wave of selling pressure in recent days. The sensitivity to any pull lower in Treasury yields is enormous as the USD has been hit hard. However, yields are not decisively lower, whilst Fed Funds futures are still pointing to a terminal rate above 5% for US interest rates. This leaves an element of uncertainty to the USD selling. The key will be how markets react to renewed USD buying. If it is short-lived then there could be a decisive shift in sentiment forming.

As part of the USD selling, we have also seen a massive jump in precious metals. Equity markets have also been higher. The move higher in silver continues, whilst gold is more in consolidation this morning. US futures are also consolidating, with little real reaction to what is seen as an expected outcome from the US midterm elections.

Once more, it is another quiet day on the economic calendar. There is no major economic data due today aside from the EIA oil inventories. Crude oil stocks are expected to increase by +1.1m barrels (after falling by -3.1m barrels last week).

Today’s news

Market sentiment is sustaining improvement: The USD selling has eased, but there is no recovery yet. Equity markets are consolidating.

Treasury yields very slightly lower: An intraday pull lower into the close yesterday helped the USD sell-off. Yields are a shade lower again early today.

US midterms with an uncertain result: The Republicans are set to take control of the House of Representatives (as expected), whilst the Senate seems to be too close to call. Broadly this is all playing out as expected in the run-up. There has not been a “red wave” of support for the Republicans and candidates backed by Donald Trump have had mixed results. The Senate race in Georgia (a key swing state) is set to go to a December runoff (as no candidate has over 50%)

Chinese inflation falls more than expected: Inflation has fallen to 2.1% in October (from 2.8% in September. This was a larger decline than the expected fall to 2.4%. The PPI has fallen to -1.3% (versus +0.9% previously).

Support for beleaguered Chinese property sector: A big sell-off on the Chinese property sector shares has been supported amid a regulatory financing programme. This should help to support risk appetite.

Crypto plummets amid FTX woes: One of the largest crypto exchanges FTX, is on the brink of collapse. There has been $6bn of withdrawals in the past three days, leading to a liquidity crisis. This has driven a massive sell-off on cryptos. 

Cryptocurrencies continue to fall sharply: Massive falls yesterday across crypto (Bitcoin -10%, Ethereum -15%) are continuing today but so far less aggressively. Bitcoin is down another -3% at $18180 with Ethereum -5% at $1266.

Fed speakers: Just the one to look out for today. Thomas Barkin (2024 voter, hawkish) speaks at 16:00 GMT.

Economic Data:

• There are no major economic data due today

Major markets outlook

Broad outlook: is an edge back towards USD strength and negative risk appetite. This is weighing on commodities and indices.

Forex: The corrective pressure on USD is sustaining with little sign of recovery yet. Moves are slightly more contained through today.

• EUR/USD a huge swing higher is holding on to a move decisively above parity resistance. There are two aspects now to consider. First of all, can a breakout above 1.0093 resistance no decisive break above 1.0093 resistance hold? Secondly, will a pullback hold above parity which is now supportive? If the answer is yes to these, then a significant change in outlook is taking hold. Support at 0.9970 is a higher low.
• GBP/USD has rallied through the resistance band between 1.1380/1.1500 and is testing the seven-month downtrend. The key October reaction high at 1.1645 is the big barrier. A breakout with the RSI into the 60s would be a big shift in the medium-term outlook. We put our strategy of selling into strength on review with the market at such a key crossroads. 
• AUD/USD continues to test the three-month downtrend and the key price resistance band is around 0.6520/0.6545. This is an important crossroads, but interestingly, the RSI momentum is starting to pick up above 50. If this continues it would be a good sign for further recovery. There is initial support at 0.6405/0.6445.

Commodities: Precious metals have massively broken higher. Oil is consolidating in the uptrend.

• Gold has smashed through the key medium-term resistance of $1670/$1690. It has also broken a six-month downtrend and moved decisively above the 55-day moving average which has been a strong gauge of resistance. This changes the outlook and the old resistance is now supportive between $1670/$1690. A test of the key resistance at $1735 is next for the recovery.

• Silver has broken through the top of the medium-term trading range at $21.23 to a three-month high. With the strength shown in the RSI momentum, this is a big move. However, now the bulls need to build support around the breakout to validate and sustain the recovery. This means forming support between $20.85/$21.25. The next resistance is at $21.95.
• Brent Crude oil has pulled back following the move above $100 last week. The retreat towards the support of a six-week uptrend is important now, with the price support around $96.00 being an important test. The daily RSI holding above 50 will also be a signal to suggest weakness remains a chance to buy. Initial resistance is at $99.40 with $101.20 now key.

Indices: Wall Street is tentatively set up for recovery. The DAX is leading European indices in recovery, with the FTSE lagging a little now.

• S&P 500 futures have recovered well in the past few sessions, but the move started to look more tentative yesterday. Closing well off the session highs this is still under what is effectively a three-month downtrend. The resistance between 3883/3935 will be the crucial test for the bulls. There is a ranging feel to the daily RSI (between 45/60 for the past four weeks). Initial support at 3792 needs to hold for continued recovery to build. Support at 3705 is key.
• German DAX has continued to use early session weakness as a chance to buy with the continuation of the one-month uptrend recovery. Moving through the resistance of the September high at 13560 has been another strong development and given the trend in place, weakness remains a chance to buy. There is good initial support at 13390/13440. The August high of 13971 is the next big upside test.
• FTSE 100 has been consolidating for much of this week. However, this is still a pullback and a pause for breath within what is a near four-week uptrend. With the RSI still solidly above 50, holding above near-term support between 7179/7228 will help to maintain the improving outlook. Initial resistance is at 7383.

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.

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