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ECB, US growth and the Fed chair will be key


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Markets are consolidating ahead of some major risk events throughout the next seven days. The ECB monetary policy is highly likely to be an historic event which could drive the outlook for the euro in the coming months. We also see US growth on the agenda, but we will also see what sort of vision Donald Trump has for the FOMC as he identifies the next Fed chair. We look at how the outlook for forex, equities and commodities are impacted.

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ECB, US growth and the Fed chair will be key

  1. 1. Weekly Outlook Tuesday 24th October by Richard Perry, Market Analyst Forex and CFDs are high risk leveraged products that can result in losses greater than your initial deposit and you should therefore only speculate with money you can afford to lose. FX and CFD trading are not suitable for everyone. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. You should first carefully consider your investment objectives, level of experience, and risk appetite and only invest funds you are prepared to lose entirely. For our full risk warning, please go to the end of this report. WHEN: Thursday 26th October at 1245BST LAST: 0.0% refi, -0.4% dep, €60bn APP FORECAST: 0.0% refi, -0.4% dep, €30bn APP Impact: The ECB announcement is expected to lay out changes to monetary policy for the coming months. No change to the main refinancing rate or the negative deposit rate are anticipated however the current asset purchase programme runs out in at the end of 2017 and is likely to be extended. The details of this extension will be the volatility factor. A taper from the current €60bn to €30bn is expected and an extension until perhaps September 2018. If the ECB tapers less or does not include an end date it would be dovish. Moves on Bund yields and the euro will be watched Key Economic Events Date Time Country Indicator Consensus Last Tue 24th Oct 1445BST US Flash PMIs (Manufacturing / Services) 53.6 / 55.6 53.0 / 55.1 Wed 25th Oct 0130BST Australia CPI (YoY) +2.0% +1.9% Wed 25th Oct 0930BST UK Q3 GDP (Prelim QoQ / YoY) +0.3% / +1.4% +0.3% / +1.7% Wed 25th Oct 1330BST US Durable Goods Orders (ex-transport) +0.5% +0.2% Wed 25th Oct 1500BST Canada Bank of Canada monetary policy +1.0% +1.0% Wed 25th Oct 1500BST US New Home Sales 556,000 560,000 Wed 25th Oct 1530BST US EIA crude oil inventories -5.7m Thu 26th Oct 1245BST Eurozone ECB monetary policy (1330BST press conf) -0.4% -0.4% Fri 27th Oct 1330BST US Q3 GDP (Advance annualised) +2.6% +3.1% Fri 27th Oct 1500BST US Michigan Sentiment (revised) 100.9 101.1 T: +44 (0) 20 7036 0850 │ E: │ W: 1N.B. Please note all times are British Summer Time BST (GMT+1), data source Reuters Macro Commentary Having started the year around $1.05, the euro is now over 12 big figures higher against the US dollar, strengthening just under 12% in 2017. This has come as the prospects for the Eurozone economic activity have improved significantly (avoiding an almost annual Greek crisis seems to have helped) with inflation expectations also having improved. With rhetoric from the ECB having become significantly less dovish in recent months markets have been speculating over whether the Governing Council would start to significantly step away from its ultra loose monetary policy. The ECB policy normalisation would come in a series of steps: End the Asset Purchase Programme (APP, i.e. quantitative easing), end the negative rates policy (with the deposit rate currently at -0.4%), raise the main refinancing rate from zero and then begin to reduce the balance sheet. We are edging closer to step one of normalisation. The current APP of €60bn per month ends at the end of this year, however, is expected to be extended. At the ECB meeting this week, markets are expected to hear that this extension will be tapered to €30bn per month. How long for is the key. The middle of 2018 would be considered hawkish, with September being a consensus (€270bn over 9 months). The euro be pressured if the ECB cuts the APP by less than expected to €40bn per month and does not specify an end date. With the dovish Mario Draghi at the helm this is a risk. Must Watch for: ECB monetary policy German Bund Yield The German 2 year Shatz is in the process of turning around, but the -0.57 2017 high is a significant barrier
  2. 2. Weekly Outlook Tuesday 24th October by Richard Perry, Market Analyst Foreign Exchange Moves on the euro and the dollar will be key in forex this week. The ECB monetary policy meeting will be key for the euro and consensus expects the APP to be cut to €30bn ending in September 2018. However the euro is selling off in front of the meeting suggesting the market is possibly preparing for a disappointment. Would this mean a mild strengthening on hitting consensus? The key support for EUR/USD remains in place at $1.1660 but would come under pressure on a dovish ECB. $1.1880 has become a near term barrier but a hawkish lean from the ECB would likely send the euro above $1.2000 again with $1.2092 being the high dating back to January 2015. The US dollar remains a key currency to watch. Focus is on the progress of Trump’s tax plans which has given the dollar a boost moving into this week. However, also look for the identity of the next Fed chair to be a market mover. Trump is due to announce his decision for the next Fed chair before he goes on his 11 day trip to Asia on 3rd November. The betting suggests that Jerome Powell (centrist) is still the front runner, with John Taylor (leans slightly hawkish) another possibility. The UK government stance on Brexit and the amount of the divorce bill is also key for sterling. This is the gateway for the start of trade negotiations, seemingly key for avoiding a unwarranted “no deal” and a softer form of Brexit. Despite the dollar strength, it still seems that Brexit has the power to be the real market mover of Cable. WATCH FOR: The ECB being key for EUR, first reading of GDP for UK and US impacting GBP and USD T: +44 (0) 20 7036 0850 │ E: │ W: 2 FX Outlook USD/JPY Watch for: The move to three month highs re- opens key range resistance at 114.50 Outlook: The May/July highs around 114.50 have provided the ceiling for a trading range above 107.50 in the past seven months. A near term breakout above 113.45 has subsequently re-opened the 114.50 range highs which could be tested if dollar strength continues this week. Near term momentum is positioned positively for the test, but could the bulls drive a decisive breakout? It would take significant effort but there is upside potential on the RSI and Stochastics. The subsequent resistance at 115.60 would then need to be negotiated. The higher lows around 111.50 are now an increasingly important medium term floor too. EUR/USD Watch for: The support at $1.1660 remains key in front of the ECB Outlook: The market has been increasingly running a consolidation in the past few weeks as traders look ahead to the ECB on Thursday and key US factors such as Trump’s tax reform and the announcement of the next Fed chair. Technically there is the prospect that a dovish ECB could drive a move below $1.1660 that would complete a 12 week head and shoulders top pattern. This would then open for over 400 pips of further downside. The alternative is a hawkish ECB which would rally the euro sharply and drive EUR/USD above $1.2000 again. Momentum indicators have a slight negative bias but little to suggest decisive market positioning.
  3. 3. Weekly Outlook Tuesday 24th October by Richard Perry, Market Analyst Equity Markets US markets are storming higher. Corrections are being bought into and the move is accelerating now. Donald Trump is proposing cutting corporation tax from 35% to “no more than 20%” and this would be a real boon for corporate America. This is clearly a key driving factor as earnings season has been relatively underwhelming so far. FactSet expected earnings for Q3 to ultimately improve from 2.8% from before the announcements began to 6% by the end of reporting season. However, the numbers last week have dragged the blended earnings (reported and non reported expectations) back to just +1.7%. Tax reform is clearly a big driver of the market and should therefore be watched closely for progress in the coming weeks. All time high ground on the Dow Jones Industrial Average was certainly helped by the abnormally large impact of a high priced IBM (due to the intricacies of calculating the Dow), whilst the move to all-time highs on the S&P 500 have been equally strong but more broad based. This is reflected in the fact that European markets are still stalling and seem unable to generate bullish traction in the last few weeks. The technical signals are increasingly flash warning signals on the DAX which is pushing through the psychological 13,000 level like a bicycle riding through treacle. Despite this though the market is holding above 12,900 support and whilst this remains the case the bulls will be reasonably well positioned still. The FTSE 100 has stumbled in the past couple of weeks with 7565 and is failing to test the 7599 all time high. Brexit progress is a driver of sterling and the negative correlation play between FTSE 100 and sterling remains an issue. WATCH FOR: Progress on Trump Tax reform to drive Wall Street, earnings season also key T: +44 (0) 20 7036 0850 │ E: │ W: 3 DAX Xetra Watch for: A breakout of the consolidation between 12,910/13,095 Outlook: The European markets have run themselves to a standstill, and the DAX is no different. The market has now spent the past few weeks consolidating sideways in a 185 tick band around 13,000. The concern is that momentum indicators are looking increasingly corrective and the prospect of a near term decline is growing. The bulls need to breakout above last week’s high of 13,095 to re-energize their push into further all-time highs. The support at 12,900 is preventing a top pattern formation. The ECB will be key for the market moves. FTSE 100 Watch for: The bulls have lost momentum and the market is increasingly consolidating. Outlook: Consolidation continues on FTSE 100 as an 80 tick trading band of the past two weeks takes hold. This is coming as the momentum indicators of the really tail off with the MACD lines crossing lower and Stochastics also giving a corrective signal. The bulls will though still be relatively content above the 7450 support and if support continues to build then a retest of the all- time high at 7599 cannot be ruled out. It is notable that the bulls have been unable to sustain traction in a rally for several months now and the shaping corrective technicals do not bode especially well once more. Resistance at 7565. Index Outlook
  4. 4. Weekly Outlook Tuesday 24th October by Richard Perry, Market Analyst Other Assets: Commodities & Bonds The rejuvenated strength of the dollar is a big drag on gold. Coming with the improved prospects of Trump’s tax reform, Treasury yields are climbing and this is negative for precious metals. This is pulling gold back towards the early October low of $1260 and could mean further downside and means a test of the band $1240/$1260 could be seen. This move has also meant that the previous technical buy signals have been aborted however the bulls have in their favour the fact that the gold market has been posting higher key lows with a trend of lows coming in around $1250 this week. Oil remains supported and the market is looking at the reduction in Iraqi exports as a positive factor. Oil exports from southern Iraq have fallen by 110,000 per day adding to the supply issues in Northern Iraq. This is helping to underpin Brent Crude above $55. Treasury yields have been pushing higher once more in the wake of the Senate passing the budget which improves the prospects for Trump’s tax reform. However there yield curve continues to flatten on a longer term basis. The identity of the next Fed chair could have an impact on this though. The shorter end of the curve would be further boosted (thus flattening the curve) in the event of a more hawkish John Taylor becoming Fed chair, whilst Jerome Taylor is more Yellen-esque and this would pull back the shorter end. The longer end continues to be driven by inflation/growth expectations and therefore GDP on Friday will be watched. WATCH FOR: US GDP impacting on yields and across commodities. Tax reform progress is also key. T: +44 (0) 20 7036 0850 │ E: │ W: 4 Gold Watch for: A test of the $250/$1260 support could be seen this week if selling pressure grows Outlook: The long term trend of higher lows that has supported gold throughout 2017 comes in around $1250 this week. There is a band of support between $1250/$1260 which is subsequently taking on increased importance for the medium term basis. Interestingly also the 144 day moving average which has historically been a strong gauge for gold comes in at $1270 too. Near term momentum remains corrective and the sellers are selling into strength under the long term pivot $1300/$1310 but the market is increasingly approaching a key crossroads. Markets Outlook Brent Crude oil Watch for: Continue to buy into weakness above $54.70 Outlook: Brent Crude continues to be supported above the key $54.70 breakout and corrections are being bought into. The next move for the bulls will be to generate lasting support above $57.45 with the flanked support of the four month uptrend. Technical momentum indicators remain supportive with the RSI consistently finding lows around 50 and the MACD lines above neutral. This all points towards a continuation of buying into weakness. The bulls will be eyeing the resistance at $58.55 with a push above opening the key multi-month high at $59.50.
  5. 5. Weekly Outlook Tuesday 24th October by Richard Perry, Market Analyst T: +44 (0) 20 7036 0850 │ E: │ W: 5 Risk Warning for Financial Promotions This report is issued by Hantec Markets Limited, who is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, No. 502635. The report is prepared and distributed for information purposes only. Trading in Foreign Exchange (FX), Bullion and Contracts for Differences (CFDs) is not be suitable for all investors due to the high risk nature of these products. Forex, Bullion and CFDs are leveraged products that can result in losses greater than your initial deposit. The value of an FX, Bullion or CFD position may be affected by a variety of factors, including but not limited to, price volatility, market volume, foreign exchange rates and liquidity. You may lose your entire initial stake and you may be required to make additional payments. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. Before deciding to enter into FX, Bullion and/or CFD trading, you should carefully consider your investment objectives, level of experience, and risk appetite. You should only invest in FX, Bullion and/or CFD trading with funds you are prepared to lose entirely. Therefore, only your excess funds should be placed at risk and anyone who does not have such excess funds should completely refrain from engaging in FX and/or CFD trading. Do not rely on past performance figures. If you are in any doubt, please seek further independent advice. This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such. All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability. Trust Through Transparency Hantec House, 12-14 Wilfred Street, London SW1E 6PL T: +44 (0) 20 7036 0850 F: +44 (0) 20 7036 0899 E: W: