British Pound: USD/GBP (GBP=X) downside may be limited
Fundamental Forecast for EUR/USD: Neutral
– Both Italian politicians and European policymakers in Brussels remain entrenched in their respective negotiating positions, and now the European Commission is ready to punish Italy.
– EUR/USD downside may be somewhat limited, particularly after the US Dollar’s fundamental backdrop eroded last week thanks to the Federal Reserve.
A broad rebound in risk appetite propelled higher yielding currencies and risk-correlated assets higher at the end of November, leaving the Euro decidedly mixed by the end of last week. EUR/NZD and EUR/AUD led the way lower, dropping by -1.52% and -1.19%, respectively, while EUR/JPY was the top performing EUR-cross, adding +0.36%. Meanwhile, with concerns about Brexit persisting, EUR/GBP was able to edge higher by +0.33%.
Data released on Friday was particularly concerning for the Euro, as the most important data release of the week also proved to be the most disappointing. The preliminary November Eurozone CPI came in at +2.0% from +2.2% (y/y), while the core CPI reading registered +1.0% versus +1.1% expected (y/y). These data have mirrored the decline in inflation expectations in recent weeks, with the 5-year, 5-year inflation swap forwards dropping from 1.679% to 1.625% over the past four-weeks.
Put into context of the recent drop in energy prices (Brent Oil is down by -19.4% over the past month) and the relative elevation of the trade-weighted Euro (+1.42% y/y thanks largely due to EUR/GBP) it would seem that a soft patch of inflation is due ahead. These facts may very well give the European Central Bank another reason to push back its timeline for its first rate hike, even if it does follow through with ending its QE program later this month. After all, in recent meetings policymakers have openly riffed on another TLTRO (in lieu of continuing the QE program).
The coming week will offer very little on the economic calendar, at least in terms of information that will be as important as the preliminary inflation data seen at the end of last week. The final Q3’18 Eurozone GDP release may garner some attention, but given that this is second revision, odds of a significant change (and thus, market reaction) to the headline print are thus limited. In general, Eurozone economic data has been largely disappointing, with the Eurozone Citi Economic Surprise Index having further eroded from -56.7 on November 2 to -62.9 on November 30.
Otherwise, the festering Italian debt crisis will return to forefront for market participants. From the perspective of Italian politicians in Rome, there is a desire fulfill key campaign promises, which will lead to increased deficit spending in the near-term. For European policymakers in Brussels, the concern is that large deficits will raise the odds of a larger-scale Greece-style crisis (Italy’s debt-to-GDP ratio is 130%) for the Eurozone’s third-largest economy.
With the European Commission moving towards a debt-based excessive deficit procedure which could culminate in a fine worth 0.5% of GDP – roughly €9 billion – it seems more tension is destined in the near-term. The vote on the excessive debt procedure would take place in late-January 2019, so there is still time for negotiation and de-escalation; the clock is ticking.
Lastly, in terms of positioning, according to the CFTC’s COT for the week ended November 27, speculators increased their net-short Euro positions to 55.1K contracts, an increase from the 47.2K net-short contracts held in the week prior. Positioning has started to become interesting once more, but still remains on the historically light side and thus the risk of capitulation (short covering that would send the Euro sharply higher) remains low.
Overall, the bias in prices is: Downwards.
By the way, prices are vulnerable to a correction towards 1.30.
The projected upper bound is: 1.30.
The projected lower bound is: 1.25.
The projected closing price is: 1.28.
A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 3 white candles and 7 black candles for a net of 4 black candles. During the past 50 bars, there have been 24 white candles and 26 black candles for a net of 2 black candles.
A spinning top occurred (a spinning top is a candle with a small real body). Spinning tops identify a session in which there is little price action (as defined by the difference between the open and the close). During a rally or near new highs, a spinning top can be a sign that prices are losing momentum and the bulls may be in trouble.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 34.2722. This is not an overbought or oversold reading. The last signal was a buy 14 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 43.92. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a buy 75 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is -90. This is not a topping or bottoming area. The last signal was a buy 0 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 12 period(s) ago.
Rex Takasugi – TD Profile
FOREX GBP= closed up 0.002 at 1.277. Volume was 98% below average (consolidating) and Bollinger Bands were 5% wider than normal.
Open High Low Close Volume___
1.277 1.279 1.276 1.277 3,668
Short Term: Neutral
Intermediate Term: Bearish
Long Term: Bearish
Moving Averages: 10-period 50-period 200-period
Close: 1.28 1.30 1.33
Volatility: 9 12 9
Volume: 188,706 193,280 174,641
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
FOREX GBP= is currently 4.0% below its 200-period moving average and is in an downward trend. Volatility is extremely low when compared to the average volatility over the last 10 periods. There is a good possibility that there will be an increase in volatility along with sharp price fluctuations in the near future. Our volume indicators reflect volume flowing into and out of GBP= at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bearish on GBP= and have had this outlook for the last 12 periods.