Early North American trade has been anything but smooth this morning as equity markets from around the globe have been a little tumultuous. China kicked off the pain brigade with a 5.4% drop in a Shanghai Index, but the misery didn’t stop there. While not quite as severe as the Shanghai, the Aussie 200 didn’t fare well, down over 1.5%, and the Hang Seng gave up 2.3% as well. Europe and the US has followed suit thus far with the FTSE down over 2.1%, and the Dow Jones approaching the 1% drop mark before backing off. All of these Debbie Downers pale in comparison though to the Greek stock market which has fallen by over 10% on news of potential new elections for Europe’s most troubled state.
As a consequence of all this negativity in equity markets, the forex market is performing a little strangely; the mostly dominant currency over the last few months, the USD, is taking it on the chin. Traditionally risk valuable currencies like the EUR, GBP, AUD, and NZD are enjoying a bit of renaissance in this uncertain environment despite the strife. The EUR/USD in particular is challenging long held trend lines and the outcome of whether they will be broken could be made during the trading day today.
Another currency pair closely related to the EUR/USD that is bumping up against a trend line of its own is the GBP/USD. The news emanating from the UK this morning wasn’t nearly as contentious as that from greater Europe, but it wasn’t all that good either. Both Manufacturing and Industrial Production declined in the month of October and missed consensus expectations across the board. Regardless, the GBP/USD has rallied right up to, and beyond, the resistance that has attempted to stamp it down.
So is this newfound strength a sign of foolhardy resilience taking shape to squeeze out the shorts, or is this a dramatic change in the narrative that is starting a new trend higher? Based on the old adage in trading that “the trend is your friend until it ends” the decision on whether it ends now is upon us. Additional resistance from previous advances above 1.57 has added an extra layer to this pair which it may find challenging to traverse. All in all, the fundamental story of US economic strength and the struggles of the rest of the world threaten to make this rally short lived. Combined with the technical aspects as well, it may be unwise to call for a changing of the guard.
