Markets Rebound, but confidence remains shaken

The global equity markets steadied yesterday with some solid gains posted in Europe and the US. However, the question for many operators is whether or not this rebound can be sustained and isn’t just a technical correction to what have been quite dramatic falls seen over the past week; falls that saw the likes of the Dow Jones and the S+P 500 shed nearly 10%.

Answering that one isn’t easy right now and I suppose it all depends on how the US/China trade news develops from here. From a personal perspective I have to admit that I am not entirely confident on that front, not least because gold is still above $1500 an ounce as I write this morning. The rebound in WTI looks unconvincing too, despite the ‘whatever it takes’ rhetoric from Saudi Arabia yesterday.

As far as the currency markets are concerned its been a pretty stable 24-36 hours with the dollar going largely nowhere as defined by the USD index trading inside a sideways wedge formation, after falling sharply from a fresh 2year high at 98.93, set on 1st August. To better see what I am talking about please take a look at a chart of the USD index taken a little earlier this morning.

The pennant formation I have outlined in red on this chart should give some indication of both the immediate support and resistance points to be mindful of. From a purely technical perspective the next move after this consolidation to the end of the pennant (if not before) should be to the downside. As such that would probably coincide with a break above 1.1250 on the EURUSD and/or below 1.1170 if that’s not the case.

However, given the current circumstances its probably best to remain somewhat flexible on the s/t outlook.

Yesterday the GBPEUR fell through 1.0800 for the first time in two years, but the move to as low as 1.0793 was very quickly reversed and the price is back around 1.0850 as I write this morning. However, this one isn’t out of the woods by any stretch. The fall yesterday looked in part linked to a relapse, to just below 1.21 again on the GBPUSD, which in turn looked entirely driven by short term stop losses on GBP longs.

Meanwhile, the GBPJPY didn’t really change much and looks like its continuing to tread water, at or very near to its most recent lows. Now, on several occasions recently I have mentioned that this one continues to concern me the most and so I think its high time I shared a chart with you.

The chart below is a 10year weekly snapshot of the price onto which I have drawn a red, rising trend line. Just at this precise time point that red line comes in at around 124.30 and hence an important level to take note of because sooner or later I do think we will see this support level tested.

When looking at this chart you may also note that all the key weekly moving averages are now firmly pointing south which is not a positive for the medium term price direction. However, this is of course equally dependent on what fresh geopolitical news breaks from the UK and how the JPY fares in terms of safe haven demand. By the time this article reaches you, the other immediate news to concern the poundmay have been and gone- the latest UK Q2 GDP print, due for release at 9.30am this morning.

Outside of what befalls the pound or the dollar, the JPY is very much the focus for the markets under the current circumstances. Earlier today the BOJ tweaked slightly their bond buying program which is a sure sign they are concerned,that a sustained move below 105 versus the dollar could spark a deeper downside move.

Clearly they won’t happy to see such a move unfold, but short of direct intervention they maybe powerless to do anything about it. As for most things with the markets right now it largely depends on what Trump’s next twitter salvo delivers.  He’ll be up and about in around 4-5 hours from now, so I guess we will just have to see what side of the bed he decides to roll out of!

Important Economic Releases Due Today

09/08- 9.30am UK Q2 GDP Revision

09/08- 1.30pm Canada July Unemployment Report