Attention will be on the ECB next week – how will Trump react to a super-dovish ECB?

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  • 10.09.2019
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Economic Events September 9 – 13, 2019

Source: Economic Events Calendar September 9 – 13, 2019 – Admiral Markets’ Forex Calendar

DAX30 CFD

In our last weekly market outlook we wrote:

[…]On the other hand, recapturing 12,000 points leaves the index with potential as high as 12,180/200 points[…]

The main driver for the German index to sustainably recapture 12,000 points and re-testing 12,180/200 points came from a headline last Thursday which stated that the US and Chinese envoys will meet in early October for more talks aiming at ending the tariff war that threatens global economic growth.

As long as we don’t get to see any new trade war escalation (e.g. US president Trump tweeting something like “Sure, we aim at a favourable deal – for the US! China will pay!” which would certainly dampen the hopes and speculation that the US and China will agree on a deal anytime soon) and with the hopes of the ECB delivering a massive monetary stimulus package on Thursday (rate cut and relaunch QE e.g.), the downside in the DAX30 CFD seems limited in our opinion.

But even though we consider the picture in the DAX30 CFD currently bullish, it has a clear neutral touch on a daily time-frame as long as we trade below 12,650 points (a region which could be reachable in the days to come with the help of the European Central Bank…).

Technically, short-term corrective moves should be solidly supported around 11,800/850 points:

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between May 31, 2018, to September 6, 2019). Accessed: September 6, 2019, at 10:00 PM GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the DAX30 CFD increased by 2.65%, in 2015, it increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, meaning that after five years, it was up by 10.5%.

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US Dollar

While the outlook for the US dollar hasn’t significantly changed over the last week of trading, in the upcoming days all eyes will primarily be on the Euro and ECB.

Since we expect the ECB to deliver an enormous monetary stimulus package (for details please read the paragraph below), and see the European currency drop, we expect the USD Index Future to (initially) rise (reason: the Euro having a weight of 58% in the USD Index Future).

That could mean, that the USD Index goes for a stint up to 100.00 points, the highest levels since May 2017.

Still, we remain very cautious in regards to US dollar Long-engagements. Especially if the ECB cuts interest rates into negative territory, we could realistically see a next round of tweets from the US president attacking the Fed for not acting and probably more than that.

It could be that Trump points to an potential outright currency market intervention from the US or at least a statement from the US Secretary of the Treasury Mnuchin, saying that the US no longer has a strong US dollar policy (e.g. a tweet ending with a note like “Then I’ll take care of bringing the US dollar myself!”).

While such a thought stays highly speculative, we think that the higher the US dollar rises in the current market environment, the more likely such a step from US president Trump becomes, provoking a massive US dollar Sell-Off:

Source: Barchart – U.S Dollar Index – Weekly Nearest OHLC Chart (between May 2016 to September 2019). Accessed: September 6, 2019, at 10:00pm GMT

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Euro

In the next few days, all eyes will be on the ECB rate decision on Thursday. Volatility will likely be subdued, even though every trader should be aware that any rumours and chatter of the ECB in one or the other direction leaves the Euro vulnerable to sharp spikes on the up- respectively downside.

Over the last weeks signs intensified that the ECB will deliver an enormous monetary stimulus package, especially after the remarks from Finnish ECB member Olli Rehn, who said in an interview with the Wallstreet Journal on August 15, that “it is important that we (the ECB) come up with a significant and impactful policy package in September”.

As a result, the EUR/USD dropped below 1.1000 for the first time since July 2017, but bounced back after disappointing US economic data, bringing up again speculation of further Fed rate cuts of 0.75% till December 2019.

Our take: we think that the ECB will deliver a rate cut and a relaunch of QE which will likely result in heavier Euro selling with a first target around 1.0750 in our opinion.

Still, the EUR/USD Short is no ‘no-brainer’ trade, reason: there is still given speculation of an outright currency market intervention from the US, which US president Trump could bring on the table in a Tweet if the ECB delivers as expected above, leaving the EUR/USD vulnerable to a sharp reversal after an initial bearish spike:

Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between July 16, 2018, to September 16, 2019). Accessed: September 6, 2019, at 10:00, GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the EUR/USD fell by 11.9%, in 2015, it fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, meaning that after five years, it was down by 16.5%.

JPY

After the NFPs Into the last weekly close came in mixed (130k vs 160k expected, but Average Hourly Earnings (MoM) were 0.4% against 0.3%) and Tuesday’s weak ISM Manufacturing PMI reading (the data set came at 49.1 in August 2019 from 51.2 in July, missing market expectations of 51.1 and pointing to the first month of contraction in the manufacturing sector since January 2016 with new orders and especially employment declining, amid concerns about a further escalation in US-Chinese trade conflict) the picture in the USD/JPY became very interesting again.

With the headlines on Thursday that US and Chinese envoys will meet in early October for more talks aiming on ending the tariff war that threatens global economic growth and the ongoing stabilisation of 10-year US yields, the USD/JPY went for an attack of the region around 106.80/107.00, but failed to sustainably break higher so far.

But after disappointing NFPs, the USD/JPY bulls started to fight, holding the currency pair next to the crucial region around 106.80/107. If the attempt to recapture 107.00 is rather sooner than later successful, a further stint up to 108.50/109.00 is an option, especially if speculation of a favourable trade deal between the US and China for both sides start to manifest over the next days and weeks.

On the other hand: any new “Twitter escalation” from US president Trump, like: “Sure, we aim on a favourable deal – for the US! China will pay!” could dampen the hopes and speculation that the US and China will agree on a deal and likely see a harder bounce against the region around 106.80/107.00.

A drop below 105.80 could trigger here a wave of further selling and quickly activate the region around 105.00 again:

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between June 7, 2018, to September 5, 2019). Accessed: September 5, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the USD/JPY increased by 13.7%, in 2015, it increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, meaning that after five years, it was up by 4.1%.

Gold

All in all, the picture in Gold hasn’t changed over the last week of trading: the picture in Gold stays clearly bullish from a technical perspective and above 1,490 USD with an overall potential target around 1,650/700 USD in the weeks to come.

But after headlines on Thursday that US and Chinese envoys will meet in early October for more talks aiming at ending the tariff war that threatens global economic growth and the ongoing stabilisation of 10-year US yields, bullish momentum in the precious metal stalled.

Still and even if we don’t see Gold taking on significant bullish momentum again in the days to come and as long as speculations stay elevated that the US and China will finally find a trade deal: on the other hand we don’t see a significant relaxation, too (at least not yet).

That means, that uncertainty in financial markets should remain high and that said reduce the downside potential in Gold.

In fact, any new “Twitter escalation” from US president Trump, like: “Sure, we aim on a favourable deal – for the US! China will pay!” could dampen any short-lived hopes and Gold would likely see another dynamic push higher to new multi-year highs.

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between June 1, 2018, to September 6, 2019). Accessed: September 6, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of Gold fell by 1.7%, in 2015, it fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, meaning that after five years, it was up by 6.4%.

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