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Friday's FX Outlook

Published 09/19/2014, 06:27 AM
Updated 12/18/2019, 06:45 AM

Scotland appears to go for “no” The pound rose in early European trading as the first results from Scotland showed the “no” vote against independence taking the lead. GBP surged, as was to be expected. It’s reached our initial target of 1.6500. Now it remains to be seen if the bulls have enough strength to push it to 1.6645. I would be hesitant to try to ride this one further. (See technical section for details.)

Longer term, a “no” vote does not mean no change. The UK political establishment has promised a variety of new measures of autonomy for the Scottish people if they vote no. Wales and Northern Ireland are bound to demand similar rights. And then there’s the major contradiction in UK politics: why do the Scots get to vote on all English affairs when the English don’t get to vote on some Scottish affairs? England may also ask for some measure of self-government. Longer-term, this decentralization could boost the growth rate of the UK and thereby support the currency. On the other hand, the only age group in Scotland that has consistently supported the “no” side is the over-65s. As these people die and the pro-independence youth cohort grows, pressure for another poll may increase. Remember that in Quebec, there were two polls separated by 15 years. That possibility might give the pound some risk premium, although to be fair, financial markets in general have notoriously short memories.

The ECB’s targeted long-term refinancing operation (TLTRO) program got off to a poor start yesterday. Banks took up just EUR 82.6bn of the approximately EUR 400bn that was available. On the plus side, it seems that e peripheral European banks took up most of the funds, which may help their beleaguered economies. On the other hand, the total amount taken up doesn’t even offset the EUR 132bn fall in lending to companies and households throughout the Eurozone over the last year. However, there are various technical factors that hampered yesterday’s exercise. These factors will not be such a big impediment when the next TLTRO takes place in December. But for now, it appears the ECB may have problems jump-starting the economy and moving inflation expectations. The 5yr/5yr inflation swap, ECB President Draghi’s favorite gauge of inflation expectations, is now a few basis points lower than it was at the time of his Jackson Hole speech, when he said that the ECB Council would have to take action to deal with the decline. The combination may increase the pressure on the ECB to boost its asset purchases. It certainly increases the expectations for the October ECB meeting.

Inflation Expectations

The Swiss National Bank kept its interest rate target unchanged even though it said “the economic outlook has deteriorated considerably” and the risk of deflation has increased. It doesn’t see inflation coming back to its target level for the entire forecast period. The SNB reaffirmed its “utmost determination” to maintain the EUR/CHF floor, and I believe them. Negative rates remain a strong possibility, because for those who can access the interbank markets, being short EUR/CHF is a positive carry trade, which is the opposite of what the SNB wants.

Today’s indicators: During the European day, German PPI for August is expected to fall at the same pace as in July. This show that the German recovery is losing momentum and the risk of deflation in the Eurozone is growing.

From Canada, the CPI for August is released. The market consensus is for the headline figure to show an unchanged reading from July, while core CPI is expected to accelerate, which could prove a bit CAD-supportive. The country’s wholesale trade sales for July are also coming out.

In the US, we get the Conference Board leading index for June.

The Market

EUR/USD rebounds from near 1.2860

EUR/USD

EUR/USD moved higher on Thursday after finding support once again near the 1.2680 (S1) barrier. The rate remains within the range between that hurdle and the psychological resistance of 1.3000 (R1), thus I would consider the short-term bias to be neutral. However, taking a look on the daily chart, I think the overall picture remains negative. The price structure remains lower highs and lower lows below both the 50- and the 200-day moving averages. I would expect a decisive dip below the 1.2860 (S1) line in the near future to open the way for the key support zone of 1.2760 (S2).

• Support: 1.2860 (S1), 1.2760 (S2), 1.2660 (S3)

• Resistance: 1.3000 (R1), 1.3100 (R2), 1.3160 (R3)

GBP/USD rallies on bets that Scotland will stay a part of the UK

GBP/USD

GBP/USD surged during the Asian morning, gaining support from the initial results of the Scottish independence referendum, which are pointing towards a “no” vote. The pair rallied, violating the blue downtrend line drawn from back at the 15th of July and reached the psychological resistance line of 1.6500 (R1), near the 200-period moving average. Zooming-out on the daily chart, the 14-day RSI crossed above its 50 line and is pointing up, while the MACD has crossed above its trigger, confirming the recent bullish momentum. I would like to see a clear move above 1.6500 (R1) before getting more confident about further bullish extensions. Such a move is likely to find resistance near the area of 1.6645 (R2), which coincides with the 80-day exponential moving average.

• Support: 1.6345 (S1), 1.6160 (S2), 1.6070 (S3)

• Resistance: 1.6500 (R1), 1.6645 (R2), 1.6740 (R3)

AUD/USD heading towards 0.8920

AUD/USD

AUD/USD declined during the Asian morning Friday, after finding resistance at the psychological line of 0.9000 (R1). During the early European morning the pair is heading towards our support line of 0.8920 (S1), the low of the 12th of March, where a dip is likely to find support at 0.8890 (S2) determined by the low of the 4th of March. The dip below the latter line is the move that could trigger larger bearish extensions and could pave the way towards the resistance-turned-into support line of 0.8835 (S3). As long as the price structure remains lower highs and lower lows below both the moving averages, I still consider the short-term picture to be negative.

• Support: 0.8920 (S1), 0.8890 (S2), 0.8835 (S3)

• Resistance: 0.9000 (R1), 0.9112 (R2), 0.9200 (R3)

Gold reaches 1215 and rebounds somewhat

Gold Vs. USD

Gold moved marginally higher yesterday, after finding support at 1215 (S1). The precious metal is now trading back near the 1225 (R1) line. Having a look at our momentum indicators, I would be cautious of a move above that line. The RSI moved higher after finding support near its 30 line, while the MACD appears willing to move above its signal line. Nevertheless, As long as the 1240 (R2) resistance holds, I still see negative technical picture and I would stick to the view that we are likely to see the metal challenging the psychological area of 1200 (S2) in the close future

• Support: 1215 (S1), 1200 (S2), 1180 (S3)

• Resistance: 1225 (R1), 1240 (R2), 1260 (R3)

WTI dips back below 93.35

WTI

WTI declined after finding resistance at the 200-period moving average and fell back below the 93.95 barrier. Nonetheless, the decline was halted by the upper boundary of the purple downside channel that contained the price action since the end of June. Taking into account that the possibility for a higher low still exists and that, on the daily chart, I still see positive divergence between our daily oscillators and the price action, I would see a cautiously positive picture.

• Support: 90.70 (S1), 90.00 (S2), 87.65 (S3)

• Resistance: 93.35 (R1), 96.00 (R2), 96.70 (R3)

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

CURRENCY RATES

MARKETS SUMMARY

Global Price Points

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