Espresso Morning Call: Risk rally continues to weigh on USD

What we are looking for

• USD on the back foot still: USD is continuing to slip against major forex however, with key levels being tested, we still expect the medium-term trend of USD strength to prevail.
• GBP spiked higher but is slipping today: The path of UK Gilt yields and GBP have been volatile on UK political developments. A sharp move lower on yields helped to support GBP yesterday. Yields are more steady this morning, with GBP dropping slightly.
• Indices bounce strongly: A decent start to the US earnings season has allowed a strong rebound on Wall Street last night. This is continuing this morning and is helping European markets higher too.
• Commodities trying to recover: Precious metals rebounded yesterday and have tried to continue into this morning. Silver remains more volatile than gold. Oil is more of struggle though.
• Data traders: EUR traders will be watching the German ZEW this morning. For USD data traders, the focus will be on US Industrial Production.

Overview

We are seeing a more risk-positive bias to market sentiment now. The UK political turmoil may not be over quite yet (Prime Minister Truss remains on extremely precarious footing) however, some of the immediate risks to UK Gilt markets have eased. A new Chancellor of the Exchequer (finance minister) has torn up “almost all” of the uncosted fiscal pledges of the mini-budget. Markets seem to like what they are hearing, with UK Gilt yields falling and GBP has rebounded. This immediate risk of contagion from UK bond markets has been contained. There are also suggestions that the Bank of England is to delay its planned quantitative tightening. This is all helping to settle major bond markets and improve sentiment. Add in a decent start to the US earnings season and the result is a continued rebound in sentiment.

This is helping US futures and European indices to continue to recover this morning. There is a more positive feel to precious metals near-term. The USD was corrective yesterday and is still showing signs of near-term correction today. However, it will be interesting to see how far this improvement in risk can take. There is just a consolidation on US bond yields, whilst there are some key levels already coming into play for USD positions. We continue to favour a stronger USD in due course.

German and US economic activity is on the economic calendar today. The German ZEW Economic Sentiment is expected to deteriorate to record lows. The current conditions component is the big driver. US Industrial Production is expected to recover to show slight growth in September, after a slight decline in August.

Today’s news

Market sentiment continues on a positive path: USD underperformance (even though GBP is slipping back), with commodities, supported and indices rebounding.

Treasury yields are slightly lower: It has been more of a consolidation than an unwind on US bond yields. There is a marginal tick lower this morning.

UK Gilt yields drop: With a decision to change the finance minister and a move to reverse “almost all” of the mini-budget, UK Gilt yields have dropped sharply in the past couple of sessions. The 10-year yield was around 4.50% about a week ago. It has dropped 50bps to under 4.00% yesterday. The easing of pressure on UK Gilts is helping to settle nerves on major bond markets.

BoE set to delay QT: The Bank of England is reported to be set to delay the beginning of its quantitative tightening (selling the bonds from its balance sheet). This was due to begin at the end of October. Delaying QT sends a signal that the BoE is reacting to market conditions and will help to stabilise Gilt markets. 

New Zealand Q3 inflation higher than expected: Inflation fell slightly in Q3 to 7.2% YoY (down from 7.3% in Q2). This was significantly higher than the 6.6% forecast. NZD is strong this morning. 

Cryptocurrencies tick higher again: Bitcoin has risen for two days and is up slightly again today by +0.4% at $19600. Ethereum is +0.1% at $1333.

Economic Data:

• German ZEW Economic Sentiment (at 09:00 GMT) The ZEW survey is expected to show continued deterioration in October, with sentiment falling to -66.0 (from -61.9 in September).
• US Industrial Production (at 13:15 GMT) Production is expected to rebound slightly by -0.1% in September (after a decline of -0.2% in August). Capacity Utilization is expected to remain at 80.0%.

Major markets outlook

Broad outlook: A risk recovery continues. Rallies have tended to be short-lived. 

Forex: The USD remains corrective, also the GBP rebound could be stalling. NZD is a big outperformer. 

• EUR/USD has rallied into a band of resistance between 0.9800/0.9900. This is a barrier to gains but there is still room to run into the 55-day moving average and the primary downtrend. However, RSI is again around 50/55 which is where other rallies have faltered. We continue to see near-term strength as a chance to sell. Initial support is at 0.9800/0.9820.
• GBP/USD rallied to break a 9-week downtrend yesterday but is now into the resistance between 1.1380/1.1490. Technically we continue to favour selling into strength, with the RSI again around 50/60 where rallies tend to fade in recent months. Initial support is at 1.1150 above the 1.0925 key support. 
• AUD/USD has been choppy in recent sessions and rebounded again yesterday. However, this is still playing out under the strengthened resistance at 0.6345/0.6390 within the downtrend channel. We continue to see near-term rallies as a chance to sell. The initial support is around 0.6235 and then the low at 0.6170.

Commodities: A near-term rebound within a run of lower highs.

• Gold has found support around $1640 but is struggling to generate the momentum for a decisive recovery and this is likely to give another opportunity to sell. Resistance initially around $1660./$1670. A continuation of the lower highs (under $1682) would point to a test of the $1615 low in due course. 
• Silver has rebounded in the past couple of sessions to break a nearly two-week run of strong bear candles. Big swings in the silver price are a feature of the trading in recent months, so how the market reacts to this rebound will be important. A failure under $18.86/$19.30 resistance will suggest the recent run lower is likely to continue. Initial support is at $18.58 protecting the $18.08 low.
• Brent Crude oil has continued to trade around an old pivot in the $93 area in recent days as the outlook is neutralised. The RSI hovering around 50 reflects this too. The near-term significance of resistance at $95.75/$95.90  is growing. A consistent move below $93 would sour the outlook and put pressure on support around $88/$90.

Indices: A big rebound on Wall Street is translating well through to European indices too.

• S&P 500 futures have fluctuated in recent sessions, but a strong run of gains yesterday has continued into this morning. Taking that market above 3733 is improving the outlook for a potential test of the key lower high at 3735. Momentum is improving, with the RSI back around 50 this is an important moment. Initial support at 3700/3710.
• German DAX is arguably leading the technical recovery of the major indices. The sharp gains of Monday have continued today to burst through the resistance at 12692. A decisive closing breakout with the RSI moving into the high 50s would be a strong signal for further recovery. The primary downtrend of the 2022 bear market is at 13300. The initial resistance is 12930. 

• FTSE 100 Is positive again this morning to follow up on yesterday’s strong candle. Moving above 6979 now needs to hold the break for a sustainable test of 7105 key near-term resistance. Momentum is improving. Holding on to initial support around 6930/6980 is important.

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.