Espresso Morning Call: USD starting to strengthen again

What we are looking for

• USD ticking higher again: The USD is outperforming major forex this morning.
• Indices start the week lower: After a strong end to last week, US futures are unwinding lower this morning. This is weighing on European indices.
• Commodities are tracking lower: A stronger USD and a less risk-positive feel to sentiment is weighing on commodities. This is reflected in silver leading gold lower.
• Data traders: EUR traders will be watching both Eurozone GDP and inflation this morning. 

Overview

There was a strong close to Friday’s session on Wall Street. Markets had shot to multi-week highs. However, this also came as US Treasury yields moved higher and this uptick seems to be continuing on Monday morning. This is in turn helping to drive support for the USD. This all adds up to a risk-averse bias to sentiment at the start of the new trading week. This is weighing on equity markets and commodities.  

Eurozone growth and inflation are key on the economic calendar today. A first look at Q3 Eurozone GDP is expected to show zero growth. However, there are downside risks to this, with the consensus shifting from marginally negative in recent days. Markets will also be watching for flash Eurozone inflation for October. Consensus has also fluctuated, with a tick above 10% expected. The huge leap in Italian inflation on Friday opens the potential for an upside surprise.    

Today’s news

Market sentiment turning sour again: It may be early in Monday’s session, but there is a sense of renewing USD strength taking hold once more. This is weighing on sentiment in equity and commodity markets. 

Treasury yields ticking higher: yields rebounded on Friday and are higher again early today. The 10-year yield is +16bps off Thursday’s low. The 2-year yield is +22bps off Friday’s low.

China PMIs miss expectations and drop into contraction: The official China General PMI dropped to 49.0 in October (from 50.9) which was lower than the 50.5 forecast. Both services and manufacturing have also dropped below 50.

Russia ends grain agreement with Ukraine: Ending the UN-brokered agreement that has allowed shipping of Ukrainian grain exports through the Black Sea has driven grain prices sharply higher this morning.

Lula wins Brazilian election: The left-wing former President Lula has defeated Bolsonaro in the second round run-off. Lula received 50.8% of the votes (versus 49.2% with 98.8% of voting machines having been counted). Bolsonaro has yet to concede defeat and it has been feared that he could still contest the legitimacy of the process.

Cryptocurrencies mixed: The souring of risk sentiment has had a mixed impact on crypto today. Bitcoin is -0.7% at just under $20500. Ethereum is +1.5% at $1582. 

Economic Data:

• Eurozone Flash Q3 GDP (at 09:00 GMT) QoQ growth is expected to be zero in Q3 (down from +0.8% in Q2)
• Eurozone HICP inflation - flash (at 09:00 GMT) Flash inflation is expected to increase to 10.2% (from 9.9%) with core inflation up to 4.9% (from 4.8%).  

Major markets outlook

Broad outlook: Growing caution yesterday has turned into a renewing negative outlook today.

Forex: The USD is starting to recover again across major forex. GBP and AUD are the main underperformers.

• EUR/USD has pulled back into the support band between 0.9900/1.0000. A drift lower towards the bottom of this band over recent sessions leaves a growing sense of renewing USD strength. If the support at 0.9900 gives way the positive outlook is significantly questioned. Subsequent support is 0.9806. Resistance is mounting at 1.0000.  
• GBP/USD has held the breakout support between 1.1380/1.1500 well with consolidation in recent sessions. Moving back under 1.1500 would be a warning, whilst under 1.1380 would renew the downside. The resistance is firming at 1.1645. Holding above 50 on the RSI is also an important gauge near to medium term. 
• AUD/USD has pulled back into the breakout support at 0.6345/0.6390. This is now crucial for any continued recovery as it looks increasingly as though USD strength is once more renewing. The resistance between 0.6425/0.6450 is strengthening and with the failure coming under the 10-week downtrend, this looks to be a failing bear rally.

Commodities: Precious metals are moving decisively lower again, whilst oil is pulling back in its recovery.

• Gold has struggled for upside traction in recovery and is now starting to pull decisively back lower. Resistance has been found at $1670 under the old resistance between $1680/$1690 and also the primary downtrend. Support at $1638 which was a higher low has now given way and this points to a retest of the $1615/$1617 support.
• Silver has turned back lower again. This has left resistance at $19.77 and the support between $18.80/$19.20 is under threat again. This band is a key gauge. The price action in the last few days plays into the uncertain medium-term outlook. A close under $18.80 would turn the near-term outlook more negative again.
• Brent Crude oil has pulled back from $97.60 as the price unwinds within an uptrend over the past month. This leaves the key medium-term resistance around $99.50 intact, for now. Momentum remains with a mild positive bias with the daily RSI above 50. Initial support between $94.50/$95.50 is holding. Support at $91.35 protects $89.20.

Indices: The positive momentum of Wall Street has unwound slightly this morning. Previous early slips have been bought into. Reaction to weakness will be key.

• S&P 500 futures burst higher on Friday with a huge bull candle. This took futures to a one-month high and continued the rally. The base pattern from 3820 implies c. +250 ticks towards 4070 as a target. There is a mini uptrend now around 3800 as a basis of rising support. The early pullback has initial support around 3870. The next resistance is 3935/3980.  

• German DAX moved decisively through the big 10-month downtrend on Friday with a strong bull candle. An early pullback this morning has just put the move on pause, but the technicals suggest a strong recovery is in place. . However, there is still a positive bias to momentum and with a sharp uptrend sitting around 13130 today, the bulls will be looking to post another higher low. Initial resistance is now 13350 before the September high of 13560.
• FTSE 100 has again pulled back from a test of the resistance at 7106/7128. A recovery uptrend at 7020 is now being tested. With the daily RSI hovering around 50 this looks to be an important crossroads. Initial support at 6997 will be a gauge now.

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.