The Technical Chart for this Index Points to More Losses for Equities

Major global equity indices carry a strong enough correlation to warrant keeping an eye on them for potential signals for the overall markets. The UK FTSE 100 (UKX) has made a notable downside technical break that signals a bigger shift might be taking place in the markets after an already unusually large decline in the last week of February.

Technical Outlook for the FTSE 100

Specifically, the index has broken down from a rising trend channel that had encompassed price action over the last 11 years.

FTSE 100 (UKX) Monthly Chart

The monthly chart above shows the rising trend channel and the downside break as a result of this week’s price action. Further, the index shows two distinct sequences of lower highs and lower lows.

FTSE 100 (UKX) Weekly Chart

The above weekly chart shows one series of lower highs and lower lows from the peak posted in July last year. A second series, of a larger degree, can be seen from the peak printed in 2018 near the 7900 price point.

To sum up there are four things that have caught my attention from these charts. The two distinct sequences of lower highs and lower lows, the downside channel break, and lastly, the downward momentum as a result of the price action in the last week of February.

Fundamental Outlook

UK fundamentals don’t necessarily support a sharp decline in the British index. Major economic data as of late has surprised to the upside which allowed the Bank of England to remain on hold in February after having considered cutting interest rates.

At the same time, the recent escalation in Coronavirus fears might shift the central bank back towards the prospect of monetary policy easing which generally would be supportive for equities.

But the Coronavirus itself presents a tremendous amount of uncertainty, especially after it became apparent in the past week that China is not doing well to contain it.

Members of the European Central Bank and the Federal Reserve this week did not appear to see the urgency in the virus threat this week in the same manner that the markets have. Comments from officials followed mostly the same rhetoric, that it was too soon to assess if a monetary policy adjustment will be required. Meanwhile, the Fed Funds futures show that the markets have fully priced in a US rate cut in March and are starting to price in a potentially larger 50 basis point cut.

Bank of England Governor Mark Carney took a more cautious approach in an interview with Sky News and acknowledged that the virus has led to a decline in tourism and is impacting businesses that rely on supply chains originating from China. However, he did not discuss whether UK policymakers were considering monetary policy easing.

Correlations in the Global Markets

Correlations in Major Equity Indices

The above charts show that the major indices – FTSE 100, Euro Stoxx 50, Dax 30, Nikkei 225, and the S&P 500 have a fairly strong correlation with each other. It can be argued the US index is much stronger compared to the others and the correlation is not as strong.

It is very much possible that a divergence takes place, considering that the UK is about to begin trade negotiations with the EU, although this is not something I would personally count on.

As a result of these correlations, my view is that the bearish signal in the FTSE 100 is pointing to more downside to come for the global equity markets.

Bottom Line

While it could be entirely possible that the UK index is forming a bear trap, I’m taking a much more cautious approach when it comes to equities. I think it is a dangerous time to try and catch the falling knife in stocks, even though it may have worked for some in the past. Rather, I think it’s best to sit on the sidelines and let things develop and revisit getting long equities once there is more clarity surrounding the virus and its potential impacts.

GBP/USD Daily Forecast – Exchange Rate Little Changed in Week of Volatile Trading

GBP/USD saw some downside pressure around the middle of the week but momentum in the decline has slowed as buyers have held the pair above important support.

The bigger development for the UK this week has been in the equity markets rather than the exchange rate. The UK FTSE declined to fresh lows now seen since the summer of 2016 earlier today and is down more than 11% this week. The equity index is weighed by a global shift to risk aversion after it became apparent earlier in the week that the Coronavirus has started to spread at a more rapid pace outside of China.

In the currency markets, more meaningful moves are seen in commodity currencies and safe-haven currencies. The former tend to sell-off when investors turn risk-averse while the latter typically gain.

The dollar has been under pressure which seems to have limited the decline GBP/USD this week. Investors have become increasingly certain that the Federal Reserve will deliver a rate cut to combat the negative impacts the Coronavirus will have on the US economy. The CME FedWatch Tool, which tracks pricing in the Fed Fund Futures markets to determine market probabilities of interest rate changes, shows a rate cut is fully priced in for next month’s Fed meeting. The data further shows a one in five chance of the Fed delivering a 50 basis point cut rather than the typical 25 basis points.

The UK will start official trade negotiations with the EU next week which could lead to an increase in volatility in the exchange rate. The pound to dollar currency pair trades at an important technical inflection point and the direction from here will likely be driven by developments in trade negotiations.

Technical Analysis

Support at 1.2859 has held the exchange rate higher on two attempts now since yesterday. Beyond the level, there is further support near 1.2820 which stems from the lower bound of a declining trend channel.

GBPUSD 4-Hour Chart

GBP/USD appears to be on the verge of a breakdown as it continues to hold below a major horizontal level at 1.2961. Further, the pair has also been holding below its 200-week moving average since dropping below it in the early month. The technical outlook suggests the pair is reversing trend from the bullish run that began in September.

Over the near-term, resistance is seen at 1.2924 followed by 1.2961.

A weaker dollar is helping to keep Sterling supported. In this context, any communication from the Fed regarding a potential upcoming rate cut will be important in addition to developments in EU trade negotiations.

Bottom Line

  • GBP/USD bulls are holding the pair above technical support at 1.2859 which continues to be a hurdle for bears over the near-term.
  • Volatility is likely to increase next week once trade negotiations with the EU commence.

EUR/USD Daily Forecast – February Losses Nearly Wiped in Six-Day Rally

The week started with a decline of 3.3% in the S&P 500 (SPY), but unlike other times the index dropped sharply, buyers have failed to step in to support the index. Rather, the downside momentum has been accelerating and risk sentiment has been deteriorating across the markets on concerns that the Coronavirus has become a real threat this week for countries aside from China.

Gold has been an exception to the shift in sentiment as the yellow metal peaked after a notable rally to start the week. In the Forex market, however, currencies are showing a textbook shift to risk aversion. The Japanese yen, known as a safe-haven currency, has advanced nearly 3% against the greenback in the week thus far. The Swiss franc also falls into this category and has made notable gains.

The euro showed a somewhat delayed reaction to the recent shift but has advanced as market participants wind down risky trades for which the single currency is often used for funding. Further aiding EUR/USD is a weaker dollar after the futures market signaled that a US rate cut might come as soon as next month.

At the start of the week, the CME FedWatch Tool indicated a roughly 50% chance of a rate cut in June. The data now shows a quarter basis point fully priced in for the March meeting and a roughly one in five chance of a 50 basis point cut.

Meanwhile, European Central Bank President Christine Lagarde downplayed the potential impact of the virus on Thursday. Lagarde commented that policymakers need to determine if the virus will become a “long-lasting shock” and further said, “we are certainly not at that point yet.” Her view was confirmed by ECB member Vasiliauskas earlier today who added that the ECB could set an extraordinary meeting if need be.

Technical Analysis

EURUSD Daily Chart

Two things stand out in the current rally in EUR/USD. First, there is a lot of momentum behind the move, and second, the rally follows a momentum-driven decline that dominated most of the month.

Implied volatility is at a one-year high and the fact that most of the losses from the first three weeks of the month have been wiped out suggests there is a strong conviction behind the upward move. Combine that with developments in other markets, and the general shift to risk aversion, and there is little reason to step in the way of the current bullish trend in the currency pair.

Having said that, there are some notable technical hurdles that bulls may face in the session ahead. The 100-day moving average comes into play at 1.1052 and the 200-day moving average currently falls at 1.1098. In between the two moving averages, a horizontal level is seen at 1.1075.

To the downside, support is found at 1.1000 which is a level that acted as major support between November and January.

Bottom Line

  • Developments in other markets point to an acceleration in risk aversion while EUR/USD implied volatility has reached a one-year high. This type of scenario favors trend continuation strategies rather than mean reversion strategies.
  • Several areas of technical resistance come into play in the session ahead, buyers might look to step in at 1.1000 if the resistance areas trigger a pullback.

GBP/USD Daily Forecast – Sterling Struggles to Gain Despite US Rate Cut Expectations Weighing on the Dollar

The Federal Reserve is expected to respond to the escalation in Coronavirus fears this week with a rate cut, possibly as soon as April.

The CME FedWatch Tool, which tracks Fed Fund Futures prices to calculate market odds of policy adjustments, shows a striking increase in expectations for a rate cut. At the start of the week, the data showed probabilities leaning towards a rate cut in June, the latest figures show an 80% chance of policy easing in April, up from a probability of 30% last week.

In a correlated manner, the trade-weighted US dollar index (DXY) has eased lower after posting a nearly three-year high last week. The index was last seen down a third of a percent for the day and trading nearly 1% lower for the week thus far.

Fed member Kashkari will be speaking later today and may shed some light on how the Fed views the Coronavirus outbreak and if it plans to implement monetary easing to support the economy from negative impacts.

In addition to Kashkari’s speech, several US data releases stand to bring volatility to the FX Markets during the North American session including US GDP, durable goods orders, and home sales.

Technical Analysis

Shortly after the European open, the British pound is seen as the only major currency unable to gain against the dollar. The price action emphasizes Sterling’s weakness and a bearish bias remains intact for the currency pair.

GBPUSD 4-Hour Chart

GBP/USD has mostly been contained within a range in February and is quickly approaching range support. A downside break is likely to accompany increased bearish momentum. On the other hand, if bulls step in, the pair could continue trading within the broader range.

For the session ahead, near-term resistance is seen close to 1.2900 while support is seen at 1.2850 which is a level that held the exchange rate higher last week.

Bottom Line

  • GBP/USD is under pressure despite a notable decline in the dollar in the early day.
  • Major range support is found nearby, the reaction from it will tend to set the near-term tone for the pair.

EUR/USD Daily Forecast -Recovery Rally Fueled by Increasing US Rate Cut Expectations

The escalation in Coronavirus fears this week has prompted a rise in expectations for a rate cut from the Federal Reserve to provide support for negative impacts the virus will have on the economy.

Just last week, the CME FedWatch Tool indicated a 50-50 chance of a rate cut in June. This probability has been rising steadily and now points to a 90% probability. The CME data also suggests that a rate cut will come sooner than later as the money markets are pricing in an 80% chance of a cut at the April Fed meeting versus a mere 30% possibility a week ago.

Speeches from different Fed members in the early week suggested that the central bank is not seriously considering a rate cut as it was still too early to judge if a monetary policy adjustment was needed.

Investors certainly see a cause for concern and the S&P 500 has reacted accordingly. The US index is down just over 7% for the week thus far and has erased gains since early December.

Fed member Kashkari will speak later today and his view may offer a more recent take on the situation considering the out sized price swings in risk assets over the last couple of days. Kashkari has held a dovish view for quite some time and advocated for the Fed to remain on hold when it started its rate hike cycle a few years ago.

Spanish CPI was reported to rise 0.8% in the year to February which was in line with expectations. On a month over month basis, the index declined 0.1%. In the North American session, US durable goods and GDP figures will be released.

Technical Analysis

EURUSD Daily Chart

EUR/USD showed signs of exhaustion after printing a doji candle on Wednesday but displays renewed upward momentum in early trading today. The pair has crossed over its 20-day moving average, and if it holds by the end of the day, it will be the first daily close above the indicator since the middle of January.

Some bears may be trapped considering the 20-day moving average was not tested during the decline that dominated most of the month. Often, this indicator triggers at least a short-term reaction.

For this reason, major support for the session ahead is seen at the 20 DMA, currently at 1.0905.

Upside resistance is seen at 1.0956 followed by the psychological 1.1000 handle. The latter had held the exchange rate higher on several attempts since November ahead of the breakdown at the start of the month.

Bottom Line

  • The momentum is shifting for the greenback as investors expect the Federal Reserve to respond to Coronavirus worries with further monetary policy easing.
  • EUR/USD is on pace to close above its 20-day moving average for the first time this month and remains bullish over the near-term.

GBP/USD Daily Forecast – Failed Rally Above 1.3000 Triggers Downside Pressure

GBP/USD rallied yesterday to nearly break to a fresh one-week high before sellers stepped in to drive the pair lower. The currency pair trades relatively flat on the week thus far and has been mostly confined to a range in February.

Rate cut expectations in the US have triggered a pullback in the trade-weighted dollar index (DXY). The futures markets are showing a roughly 80% probability of a cut in June, up from 50% just a week ago.

Fed member Kaplan offered a different view yesterday and said it was too soon to determine if the recent escalation in Coronvirus outbreaks warrants a policy adjustment.

DXY rallied to highs not seen since May 2017 last week and turned lower after falling slightly short of testing the 100.00 level. The index is down about one percent from recent highs.

Brexit developments are likely to lead to elevated volatility for the pound to dollar exchange rate. The UK will begin formal negotiations with the EU on Monday which will pave the way for trade terms between the two economies. UK PM Johnson has taken a hard stance on negotiations by stating that he will not permit any extensions beyond the year-end deadline.

Technical Analysis

The drop in GBP/USD in early day trading today has momentum behind it although it might be too soon to confirm that the pair has turned lower in the downtrend that has dominated since shortly after the UK election.

GBP/USD 4-Hour Chart
GBP/USD 4-Hour Chart

The currency pair shows some support at 1.2924 and is currently testing its 20 moving average on a 4-hour chart. A failure to hold above this area builds towards a bearish case.

On the other hand, the pair has been trading in an uptrend on the shorter time frames. GBP/USD found a bottom on Thursday and has been attempting to recover since. While above support, the pair continues to show potential for another push higher.

The daily close will be important considering the pair closed above its 100-day moving average yesterday. The indicator currently falls at 1.2962 and failure to rally above it by the end of the day would be seen as a bearish development.

Bottom Line

  • GBP/USD has come under pressure in the early day although it might be too soon to call a reversal.
  • A daily close below the 100-day moving average at 1.2962 may draw sellers.

EUR/USD Daily Forecast – 20-Day Moving Average Resistance in Sight

EUR/USD continues to push higher in a recovery that began last week and has erased about a third of the losses from the decline that began at the start of the month.

The pair has been posting a bulk of its gains during North American trading hours as of late and yesterday’s gain was attributed to a weaker dollar following US data.

The Conference Board reported a slight improvement in its confidence index for February, although figures were fell short of the analyst estimate. The report indicated that the number of people optimistic about the short-term outlook increased while those expecting conditions to worsen decreased. There was no specific mention of the Coronavirus and whether it played a role in consumer views of business conditions.

Federal Reserve member Kaplan commented yesterday that it might be too soon to decide if the Coronavirus warrants a rate cut in the United States. The futures markets have been more aggressive in pricing in a rate cut and show a roughly 80% probability of a rate cut in June. This is up significantly from the 50% probability priced in last week.

Technical Analysis

EUR/USD is approaching resistance from its 20-day moving average, an indicator it has not tested since the start of the month. It currently falls at 1.0910 and is likely to draw some sellers.

To the downside, the 1.0833 level held a decline yesterday and remains an important support level for the currency pair.

EURUSD Daily Chart

A break above moving average resistance shows further barriers at 1.0956 followed by the psychological 1.1000.

While the short-term direction has certainly shifted to the upside for EUR/USD, upward momentum has been lacking in the recovery. Sellers will likely look for areas to enter and the 20-day moving average might be one of them.

On a weekly chart, the currency pair posted a doji pattern which signals exhaustion from the prior downward move and stands to keep the pair bid in the week ahead. It might take a drop back below 1.0800 to turn the near-term sentiment to bearish.

Bottom Line

  • EUR/USD is attempting to close higher for a fourth consecutive day.
  • The 20-day moving average offers resistance at 1.0910 for the session ahead.

GBP/USD Daily Forecast – Sterling Regains Upward Momentum, Crosses Major Resistance

GBP/USD eased lower on Monday, hinting of a bearish continuation, but has seen fresh bids in early trading on Tuesday. The pair has crossed above a notable technical area and is trading near the psychological 1.3000 level.

British parliament returned from recess and the focus for GBP/USD traders will soon shift to Brexit once again. Parliament is expected to start formal negotiation talks with the EU on Monday which can trigger a rise in volatility for the Sterling pairs.

New fears arising from China’s inability to contain the Coronavirus shook investors on Monday. The S&P 500 posted the largest single-day decline in two years. The UK FTSE erased gains for the year and last traded at levels not seen since early October.

Expectations for a rate cut have risen on the back of the Coronavirus escalation. The CME FedWatch tool shows a two in three chance of a cut in June versus the roughly 50% chance priced in last week. The shift in expectations can trigger some further downside in the dollar which had otherwise risen steadily for most of February.

The economic calendar is relatively light, the Conference Board is expected to release consumer confidence figures later in the North American Session.

Technical Analysis

The British pound is leading the majors in early trading today and the upward move in GBP/USD is significant. The pair has crossed over a major technical level at 1.2961 which has acted as both resistance and support since the fourth quarter.

GBPUSD 4-Hour Chart

Further, the pair is currently trading above its 100-day moving average, which falls near the horizontal level. Although how the pair closes in relation to it at the end of the day will be important.

On a 4-hour chart, GBP/USD has posted a sequence of higher highs and higher lows, building towards the case for further near-term strength.

Channel resistance for the pair comes into play around 1.3030 with further resistance from a horizontal level at 1.3050.

To the downside, the reaction around 1.2961 will be important for short-term price swings. A break below yesterday’s low near 1.2900 will invalidate the near-term bullish view.

Bottom Line

  • GBP/USD is seeing renewed upside momentum although a daily close above the 100 DMA will be important for bulls.
  • Sterling volatility is expected to rise as formal negotiations with the EU begin on Monday.

EUR/USD Daily Forecast – Recovery Slows With Resistance in Play

Volatility jumped higher at the start of the week in several markets although currencies have continued to trade in their typical ranges. The S&P 500 posted the largest daily decline in two years yesterday while the price of gold rallied to a seven year high.

EUR/USD rallied firmly higher at the North American open on Monday but has since fallen into a range with horizontal resistance at 1.0865 drawing buyers.

GDP figures out of Germany today showed no growth in the fourth quarter and an overall growth rate of 0.6% for the year. The data did not have a significant impact on the exchange rate.

The Conference Board will report confidence figures later in the North American session.

The US dollar index (DXY) has eased lower from highs not seen since May 2017 but continues to hold on to a bulk of its gains for the month thus far. Considering that the recent spark of Coronavirus fears has not had a significant impact on the foreign exchange markets, it appears likely that the greenback will be bid on dips.

The euro had shown recovery potential but has started to come under pressure once again against some of its major counterparts. After the first hour of European trading today, bearish reversal candlestick patterns have printed for EUR/GBP and EUR/CHF.

Technical Analysis

EUR/USD has run into a hurdle at 1.0865 which is a level that provided support around the middle of the month.

EURUSD 4-Hour Chart

The current short-term momentum remains to the upside and levels to watch below include 1.0833 followed by 1.0800. A drop below the latter would suggest that the pair has resumed to the downside, in line with the bearish trend that has dominated in February.

To the upside, a break above 1.0865 is likely to see some sellers at the 20-day moving average, currently near 1.0900. Beyond that, further resistance is seen at 1.0956.

Bottom Line

  • The EUR/USD recovery is hindered by resistance and a few cross rates point to euro weakness
  • Consumer confidence figures to be released by the Conference Board later today.

GBP/USD Daily Forecast – Sterling Reverses Lower From Major Resistance

Volatility was heightened in the global markets at the European open as investors fled from risky assets in favor of safe-haven assets like gold and bonds. The currency markets appear to be little impacted by the shift to risk aversion as the major currencies trade within typical price ranges.

The S&P 500 is down about two and a half percent shortly after the European open while the UK FTSE has shed about three percent. Most media outlets are attributing the decline in equity markets today to an escalation in fears over the Coronavirus.

The week ahead is a quiet one in terms of economic data pertaining to GBP/USD. The highlight will be US consumer confidence figures on Tuesday and then US GDP and durable goods orders on Thursday. Several members of the Bank of England are scheduled to speak throughout the week.

There were three major economic releases from the UK last week and all came in ahead of analyst expectations. Nevertheless, Sterling posted a weekly loss against the dollar. The lack of buying last week could be signaling more losses to come for the British pound.

Technical Analysis

GBP/USD has been trading around a major level at 1.2961. This level served as a notable barrier in the fourth quarter and then acted as support earlier this year. The pair reversed lower after briefly scaling above it on Friday and the momentum is once again to the downside.

GBPUSD Daily Chart

The exchange rate is on pace to post a bearish engulfing candle on a daily chart which also builds towards a bearish case over the near-term. On a monthly chart, the pair is also set to print a reversal candle.

For the session ahead, resistance is seen at 1.2924. Bulls will want to see a rally above it to lift the near-term bearish tone. On the downside, 1.2880 has held the pair higher twice in February on a daily close basis. Beyond that, further support is found at 1.2859.

Bottom Line

  • GBP/USD is seeing renewed bearish pressure in the early week. If the pair closes near current levels, or lower, it could be signaling a bearish continuation.
  • The global equity markets are seeing an abrupt shift to risk aversion as investors become increasingly concerned about the Coronavirus.

EUR/USD Daily Forecast – Euro Little Changed As Equities Plunge

An escalation in Coronavirus fears has led to a plunge in the global equity markets while safe-haven assets such as gold and bonds are firmly bid. The currency market is not reacting all that much to the sudden shift to risk aversion and volatility in FX is certainly subdued in comparison.

The S&P 500 is down just over two and a half percent in the pre-market and has nearly fully wiped out the gain for the month thus far in the decline that began on Thursday. The German DAX has fared worse and is down nearly 4% shortly after the European open. Meanwhile, gold prices have reached seven-year highs.

German ifo business climate index figures somewhat contradicted what the market is signaling today as sentiment among German managers improved slightly in February. The index climbed to 96.1 from 95.9 in the past reading which was ahead of analyst expectations. The report went on to say that the German economy does not seem to be affected by Coronavirus developments.

Technical Analysis

The euro stands to rally if the current shift to risk aversion is here to stay as the single currency is often used as a funding currency. At the moment, the pair appears to be little impacted by recent developments.

EURUSD 4-Hour Chart

EUR/USD displayed unusual downside momentum in the past few weeks but a rally late last week has lifted the tone for the pair. The late-week price action led to a candlestick print on a weekly chart that suggests exhaustion from the prior downtrend.

Further, the pair has broken upward from a declining trend channel that had encompassed it for most of February. Although it should be noted that upward momentum on the break has been lacking.

The 1.08 level is viewed as support in the early week, and while above it, the pair stands to extend on the recovery that began late last week. A drop below it, however, is likely to signal a bearish continuation which could see the pair break to fresh multi-year lows.

Technical Analysis

  • Equity markets are selling off aggressively in the early day on a rapid deterioration of risk sentiment.
  • EUR/USD volatility is slowed considerably and there are signs of a potential recovery.

GBP/USD Daily Forecast – Sterling Recovers on Positive UK PMI Report

Purchasing managers in the UK showed optimism post-election with survey data continuing to point to an economic expansion.

While the upward momentum in the services sector eased this month, manufacturing output accelerated to a 10 month high. As a result, the composite index held at 53.3, unchanged from the prior month.

Tim Moore, Associate Director at IHS Markit commented that while the PMI data is encouraging, the latest survey data highlighted concerns that stem from the Coronavirus. Service providers reported reduced tourist-related bookings and cancellations from some overseas markets. Manufacturers dealt with supply shortages from China and a sharp decline in delivery times.

Economic data from the United Kingdom has been positive this week although has failed to keep the exchange rate from declining. Earlier in the week, retail sales was reported to rise 0.9% in January after falling in the prior three months. The consumer price index rebounded sharply higher last month to levels not seen since the summer.

GBP/USD briefly declined to a nearly three-month low yesterday but has since recovered to entirely erase Thursday’s loss. Nevertheless, for the week thus far, the pair is down nearly 1%, wiping out last week’s gain.

Later in the North American session, US housing and PMI data will be released and two Fed members will be speaking.

Technical Analysis

Recent price action in GBP/USD and the dollar index suggests the pair is in the process of reversing trends after a notable rally in the second half of 2019.

Economic data has been positive which has underpinned the exchange rate somewhat. Especially compared to other major currency pairs, such as EUR/USD, which trades at lows not seen in nearly three years.

GBPUSD Daily Chart

On a weekly chart, the pound to dollar exchange rate has held below its 200 moving average which currently falls at 1.3033. This area will be important for the exchange rate on any recovery attempts over the next week or two.

The smaller time frames show somewhat of a mixed signal. GBP/USD is on pace to post a reversal daily chart if it manages to hold on to early-day gains, which could set up a further recovery early next week.

There is a major resistance level that falls at 1.2961 and near-term price action in relation to the level should be important. This price point held the exchange rate higher last month and was a major hurdle for most of the fourth-quarter. The 100-day moving average is currently converging towards the level to create a confluence.

Bottom Line

  • GBP/USD has advanced in the early day after posting losses every day in the week thus far.
  • The technical outlook suggests that sellers will continue taking advantage of near-term rallies even though data from the UK has been positive as of late.

EUR/USD Daily Forecast – Euro Lifted by PMI Beat

The downside momentum in EUR/USD subsided yesterday and the pair is recovering higher today after purchasing manager survey data came in ahead of analyst expectations.

PMI data for the eurozone rose to a six month high with the services sector continuing to expand. Manufacturing continued to contract, the data showed, although the rate of contraction has slowed.

Chris Williamson, Chief Business Economist at IHS Markit commented that the expansion is being welcomed amongst fears of economic growth led by the Coronavirus. He added, however, that the full impact of the virus may not yet be apparent.

The US dollar index (DXY) has eased lower on the back of the euro area PMI data releases today and is set to close the day in the red to snap a prior four consecutive day bullish streak. The greenback has been on a tear as of late and has rallied in 12 out of the past 14 sessions.

CPI data out of Europe will be released next followed by US PMI data in the North American sessions. US housing data will be released as well and two Fed members will be speaking.

Technical Analysis

EUR/USD has advanced firmly higher in the early day although remains confined withing a range that began on Tuesday.

Upside resistance for the pair is seen at 1.0833 which marks a level that acted as support late last week and early this week. Further, the 50 moving average on a 4-hour chart is converging towards the level to create a confluence.

EURUSD 4-Hour Chart

The momentum has been firm to the downside in the month thus far. At the same time, the pair is oversold and today’s positive PMI report might provide the catalyst for a further recovery.

A break above 1.0833 shows the next level of resistance at 1.0865. To the downside, the 1.0800 handle acts as the first level of support.

The gains in the single currency on the back of the PMI report have not been broad-based. The euro has made notable gains against the commodity currencies but has struggled against some of the other major currencies. Against the Swiss franc, for example, the euro continues to hold near a four and a half year low.

Bottom Line

  • EUR/USD is seeing some reprieve after a sharp fall as eurozone PMI data continues to show positive momentum.
  • The dollar is poised to close the day at a loss after posting gains every day in the week thus far.

GBP/USD Daily Forecast – Downturn Gains Momentum as Dollar Index Breaks to 21-Month High

After another failed attempt at 1.3050 resistance this week, GBP/USD has reversed lower and is on the verge of breaking to lows not seen since late November.

The dollar continued to gain against its major counterparts with the dollar index (DXY) breaking to fresh highs not seen since May 2017.

Retail sales out of the UK came in better than expected, rising 0.9% in January. The positive upside surprise followed three consecutive monthly declines in UK sales. The Office for National Statistics attributed the rebound mainly to growth in sales for food stores and non-food stores.

While GBP/USD has fallen under pressure once again, the positive data stands to underpin the exchange rate. In this context, traders looking to take advantage of a stronger dollar might look to other currency pairs.

Equity markets have rebounded and a rally in the FTSE 100 yesterday served to wipe out the sharp loss from Tuesday. The price action signals a bullish reversal and buyers are likely to keep the UK index bought on dips.

Technical Analysis

GBP/USD has fallen below the 1.2900 handle which signals weakness. However, the pair managed to bounce higher from this same area earlier in the month which should keep bears on guard.

Where the pair closes by the end of the day will be important. A sustained drop below the 1.2900 handle could lead to a further decline towards the 1.2788 area.

GBPUSD Daily Chart

On a daily chart, GBP/USD has fallen below its 100-day moving average. This same indicator had held the pair higher earlier this month to trigger a nearly 1.5% rally.

Several other currencies have come under renewed pressure in the second half of the week as the dollar continues to dominate the major currencies. The Japanese yen and antipodean currencies have broken to notable lows over the last 24-hours weighed by a combination of a stronger dollar and a rebound in risk appetite.

Bottom Line

  • GBP/USD has reversed back into a bearish trend, despite positive data this week, after a recovery was capped at 1.3050 resistance.
  • The dollar index extended gains to fresh highs not seen since May 2017.

EUR/USD Daily Forecast – Euro Clings to 1.08 Level

The downside momentum in EUR/USD has subsided somewhat and the pair posted a small gain yesterday after declining for the five consecutive sessions before it. Over the last thirteen sessions, the exchange has declined in 11.

While Euro weakness has subsided, the greenback has continued to march higher. The trade-weighted dollar index (DXY) has rallied in the early day to fresh highs not seen since May 2017.

Data from Europe was somewhat mixed with French CPI declining 0.4% last month while German sentiment was better than expected. Survey data revealed that consumers expect the economy to make a slow recovery, yet income expectations declined moderately.

Earlier this week, ZEW economic sentiment showed a downturn in expectations for the German economy as investors and analysts grew concerned over the economic impact of the Coronavirus.

The European Central Bank will release minutes from its latest monetary policy meeting later in the day. The impact might be limited as the view has likely changed with the Coronavirus developments that followed the meeting.

Technical Analysis

EUR/USD has seen an unusual level of downside momentum over the past few weeks. Momentum indicators and correlations point to a clear bearish trend. There is some support lower from here but trying to play the pair to the upside at this point does not appear to be favorable.

At the same time, this does not appear to be a place where investors will get excited shorting EUR/USD or getting long the dollar, speaking strictly from a risk to reward perspective.

EURUSD 4-Hour Chart

A declining trend channel had encompassed price action since the start of the month but bears have failed to protect the upside. Resistance at the 1.08 level is currently holding the exchange rate lower.

The dollar index can offer an early signal for direction in EUR/USD. Often, instruments pullback after breaking to fresh highs which could be supportive for the currency pair. However, it’s important to note, at this point, DXY has not shown any signs of correcting.

Other major currency pairs are showing fresh weakness. The antipodean currencies and Japanese yen have broken to fresh lows versus the greenback over the last 24 hours. The British pound failed to hold above the 1.30 handle despite positive inflation data yesterday.

Bottom Line

  • EUR/USD has fallen into a consolidation since yesterday, however, other major currencies have shown signs of renewed weakness during the same time.
  • The ECB will release minutes from the last meeting. A low impact is expected as Coronavirus developments that followed their last meeting may have altered the outlook.

GBP/USD Daily Forecast – UK Inflation Rates Rebound Sharply Higher in January

Consumer prices in the UK rose sharply on an annual basis while declining 0.2% on a month over month basis. CPIH, which includes owner occupier’s housing costs, rose 1.8% in the year to January, up from 1.4% in the prior reading. The largest contribution to the annual rise came from housing and household services.

GBP/USD ran into resistance yesterday at 1.3050 and has retreated back towards the 1.3000 handle. The upside inflation data surprise provided a momentary reprieve for the exchange rate but the pair appears to be struggling to hold above the psychological 1.3000 handle.

A stronger US dollar is one component weighing on the pair. The US Dollar index has only shown losses in two out of the last 12 sessions and is nearing its 2019 high.

Later in the North American session, PPI and housing data will be released from the US and Fed members Mester and Kashkari are expected to speak.

The decline in equities on the back of Apple’s earnings warning might have been a short one. Most of the global indices are recovering in the early day to wipe out a bulk of Tuesday’s decline. The UK FTSE 100 is outperforming in the early day and has entered positive territory for the week.

Technical Analysis

A barrier at 1.3050 has held GBP/USD lower on several attempts since last week. The horizontal level carries confluence with the 50-day moving average and bears have done a good job of defending it.

GBPUSD 4-Hour Chart

While below the level, bears will be encouraged, especially considering the bearish engulfing weekly candle printed early in the month.

In the near-term, the focus will tend to be on the 1.3000 level. The pair is currently struggling to hold above it despite today’s positive data which builds towards a bearish case. A recovery back above today’s high near 1.3020 will tend to shift the momentum.

Further support for the pair is seen at 1.2961. This level acted as major support last month and was also a notable barrier for most of the fourth quarter.

Bottom Line

  • UK inflation rebounded sharply higher in the year to January, however, Sterling has struggled to gain following the report.
  • The dollar continues to show strength and is nearing its 2019 high.

EUR/USD Daily Forecast – Euro Decline Pauses as DXY Nears 2019 High

The euro has been under a significant amount of pressure in the month thus far and has declined over two and a half percent against the greenback. EUR/USD has only posted one positive session over the last 12 and trades at lows not seen since early 2017.

Economic sentiment in Germany was reported to turn sharply lower. The ZEW indicator fell 18 points to a reading of 8.7, well below analysts estimates. Concerns over the Coronavirus weighed on sentiment and ZEW President Professor Achim Wambach commented: “economic development is rather fragile at the moment.”

The US dollar has advanced in the month thus far, although the strength has not been broad-based. Three of the major currencies have made small gains against the greenback since the start of February while the Euro shows the biggest loss among the majors.

Apple’s Coronavirus warning triggered a sharp fall in the global equity markets on Tuesday although most of the global indices are seen recovering in the early day. The German DAX is up about half a percent shortly after the European open, recovering two-thirds of Tuesday’s loss.

The sudden shift to risk aversion provided a catalyst for a rally in gold prices towards highs not seen since the US-Iran escalation in early January. The yellow metal has extended the upward momentum in the early day and trades firmly above $1600. Gold is up about 4% against the euro and broke to a fresh record high last week.

Technical Analysis

The downside momentum continues to remain strong for EUR/USD. The slight pause at 1.0800 is not providing any reason to believe the pair will recover from here.

EURUSD 4-Hour Chart

Technical traders will be focused on a horizontal level at 1.0729. This level reflects resistance in early 2017 ahead of the notable gap up as a result of the French election.

The currency pair reached oversold territory last week and the RSI reading on a daily chart is at levels not seen since May of 2018.

A downward trend channel has encompassed the decline thus far and EUR/USD is currently seen hovering around the upper bound of the channel.

Bottom Line

  • EUR/USD has fallen nearly every day this month and the momentum remains firmly to the downside, despite a slight consolidation in the early day.
  • Sentiment deteriorated in Germany over concerns of the Coronavirus.
  • The next downside target for EUR/USD falls at 1.0729.

GBP/USD Daily Forecast – Sterling Recovers on Positive UK Jobs Data Following Dip Below 1.3000

After running into resistance late last week, GBP/USD eased back on Monday. However, the UK jobs report has drawn fresh buyers in early trading on Tuesday after a brief drop below the psychological 1.3000 handle.

The employment rate in the UK reached a record high of 76.5%, prompting a move higher in Sterling. Employment was up 0.6% on the year and 0.4% on the quarter. The unemployment rate held steady at 3.8% for a third consecutive reading.

Averages wages were lower compared to the previous year and quarter. However, when adjusted for inflation, wages were estimated to grow 1.4% annually and 1.8% on a quarterly basis.

The British pound was the strongest major currency last week and GBP/USD made a notable recovery after turning higher from its 100-day moving average. The near-term trend is bullish and the pair shows signs that it might extend higher in the recovery after the jobs report.

The markets are expected to pick up later today as US traders return to their desks after a holiday on Monday. Early day volatility is seen in oil prices and the global equity markets which have fallen under pressure after Apple released a warning that it will miss on earnings.

Technical Analysis

GBP/USD is set to post a bullish reversal candle on a 4-hour chart which could be signaling that a near-term bottom is in place for GBP/USD after the decline yesterday.

GBPUSD 4-Hour Chart

The positive jobs report should put rate cut expectations at bay which will also tend to underpin Sterling.

Last week, a horizontal level at 1.3050 and the 50-day moving average capped the upside in the exchange rate. The same area remains a near-term target if GBP/USD can extend on the early day momentum.

In the event the pair turns lower, support is found at 1.2962.

Bottom Line

  • After a brief move lower, GBP/USD is showing renewed upside momentum as the UK jobs report showed the employment rate rising to a fresh record high.
  • The markets are expected to pick up later in the day as US traders return after a holiday on Monday.

EUR/USD Daily Forecast – Euro Remains Confined to a Range

A narrow range has developed in the EUR/USD exchange rate in the early week but the markets are likely to pick up later in the day once North American traders return from the long weekend.

Germany’s ZEW will release its indicator of economic sentiment prior to the US open which may cause short-time volatility in EUR/USD. Analysts expect the indicator to slow yet continue to show optimism towards the economy.

Equity markets have fallen under pressure around the globe after tech giant Apple said its earnings will fall short due to the Coronavirus. Oil prices have followed equities lower while the price of gold advanced towards highs not seen since the early month.

The US dollar index briefly pierced to a fresh four-month high in the early day but has eased back to trade flat on the day thus far. Meanwhile, EUR/USD lingered around lows not seen since the French election of 2017. While the pair trades at fairly important support, it has not shown any signs of recovery as of yet.

Technical Analysis

Support for EUR/USD at 1.0830 is significant. It served to hold EUR/USD lower in the first quarter of 2017, and then higher on dips after the gap up that followed the French election.

EURUSD 4-Hour Chart

The pair entered oversold territory last week and a bounce higher from current levels certainly seems like a possibility. At the same time, the momentum is firm to the downside and technical traders will likely want to see evidence of upward movement before getting involved in a long position.

In the event the pair continues lower, the next level of interest to the downside falls at 1.0800.

Among the cross rates, the single currency is showing bullish signs against the commodity currencies. A pair to keep an eye out on is EUR/CAD as the pair looks on pace to post a daily reversal candle after declining for ten straight sessions.

Bottom Line

  • EUR/USD has been confined to a range in the early week as a result of the US holiday today and the light data thus far.
  • Important support is in play at 1.0830 although the pair has not shown any signs of a recovery at his point.

GBP/USD Daily Forecast – Recovery Rally Blocked at 1.3050 Resistance

GBP/USD was lifted higher last week after testing its 100-day moving average. The pair has made a notable recovery although the bearish momentum from earlier in the month stands to hinder further gains.

The dollar index (DXY), while posting a second consecutive weekly gain, has shown signs of weakness. The greenback declined against all of the major commodity currencies as well as Sterling last week which might be offering an early signal for a pullback.

The euro was the weakest of the bunch last week, and as the highest weighted currency in the dollar index, it was responsible for a bulk of the weekly gain in DXY. As a result, EUR/GBP declined to a fresh yearly low and is on the verge of breaking to lows not seen since shortly after the Brexit vote.

The week is expected to have a slow start with US banks on holiday and light economic data. UK jobs data will be reported on Tuesday and the Fed will release minutes from their last meeting on Wednesday. Inflation data out of Britain will also be released on Wednesday. CPI is forecast to rise by 1.7% in the year to January versus a rise of 1.3% in the prior reading.

Equity markets shrugged off Coronavirus fears and the S&P 500 rose for a second consecutive week to close at a fresh record high. The UK FTSE diverged from the global markets and ended last week with a small loss.

Technical Analysis

The smaller time frames for GBP/USD point to an uptrend. The weekly chart, however, suggests the upside might be limited in the week ahead as a result of the bearish candle posted in the first week of the month.

GBPUSD 4-Hour Chart

The pair gave up nearly two and a half percent that week and remains in the red for the month as a result of it.

Resistance is in play from a horizontal level at 1.3050 and the upward momentum has slowed since the approach to the level late last week. Further resistance is also in play from the 50-day moving average, currently residing at 1.3067.

To the downside, the level to watch is 1.3000. A break below it might shift the near-term outlook back to bearish.

Bottom Line

  • GBP/USD gained every day last week and the short-term trend is bullish.
  • Technical indicators on the larger time frames suggests sellers will take advantage of the current recovery. Resistance is in play from a horizontal level at 1.3050 and the 50-day moving average.