Trade optimism was the main theme driving the financial markets last week. Investors seemed to be convinced that US and China are close to signing trade agreement phase one, even though it’s unsure when and where yet after the APEC summit in Chile was cancelled. Additionally, there were increasing expectation of tariffs roll back of some sort. China should be pushing for cancelling the tariffs imposed in September, possibly more. Comments from US on the issue were mixed, but it’s not ruled out. If such roll back is realized, this will be the first real trade war de-escalation, which is significant.

US stocks surged to new record highs, taking global markets up too. US treasury yields also jumped notably at the long end. Together, the developments gave Dollar a strong boost, which ended as the best forming one. Strong risk appetite kept Canadian and Australian Dollar as second and third strongest. Though, New Zealand Dollar was the weakest after poor job data. Euro was the second weakest, followed by Sterling. The Pound suffered a bit after two BoE policymakers surprisingly voted for rate cut on Super Thursday. Nevertheless, loss was relatively limited as the UK politics and Brexit remain the real driving forces.

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Markets increasingly convinced Fed’s done with rate cut

As of now Fed funds futures are pricing in 96.3% chance of Fed standing pat at 1.50-1.75% in December, up from last week’s 88.2%. More importantly, bets on more rate cuts next year also receded notably. Markets are pricing in 67.2% chance of federal funds rate staying at current level after June FOMC meeting. Last week, there was only 43.4% chance.

Such expectations are also reflected in steepening of the yield curve. As Dallas Fed President Robert Kaplan said last week, he felt better with a “normally shaped yield curve”, and it “reinforces to me that we’ve probably got an appropriate setting of the Fed funds rate now.”

10-year yield to should take out 2% as corrective rise extends

Talking about yields, 10-year yield rose strongly to close at 1.933 last week as rebound from 1.429 resumed. Further rise should be seen in near term and break of 2.000 handle is likely. Yet, there real test is from 38.2% retracement of 3.249 to 1.429 at 2.123. It’s close to 55 week EMA at 2.178 too. For, now as we’re seeing price actions from 1.429 as a corrective pattern, we don’t expect a break of this 2.123/178 zone.

S&P 500 extends record run, to test long term channel resistance soon

All three major US indices closed at new record highs last week. From a near term point of view, S&P 500 is clearly picking up upside momentum as seen in daily MACD. Outlook will remain bullish as long as 3027.98 resistance turned support holds. Next target is 100% projection of 2782.81 to 3027.98 from 2855.94 at 3155.11. As SPX would then be pressing long term channel resistance, we’d be cautious on topping there, for at least bring a pull back. But decisive break will be a strong sign of medium term acceleration. SPX could target 100% projection of 1810.10 to 2940.91 from 2346.58 at 3477.39 next year.

Dollar index retains up trend with strong rebound

Dollar index’s strong break of 55 day EMA suggests that pull back from 99.66 has completed at 97.10 already. Once again, DXY defended the rising 55 week EMA and maintained medium term up trend. Further rise should be seen to retest 99.66 first. Whole rise from 88.256 is in progress for 78.6% retracement of 103.82 to 88.26 at 100.49. This will now remain the favored case as long as 97.10 support holds.

EUR/USD Weekly Outlook

EUR/USD’s decline last week suggests that corrective rebound from 1.0879 has completed at 1.1175. Initial bias stays on the downside this week for retesting 1.0879 first. Break will resume larger down trend from 1.2555. On the upside, though, above 1.1092 minor resistance will turn intraday bias neutral first.

In the bigger picture, at this point, rebound from 1.0879 is seen as a corrective move first. in case of another rise, upside should be limited by 38.2% retracement of 1.2555 to 1.0879 at 1.1519. And, down trend from 1.2555 (2018 high) would resume at a later stage. However, sustained break of 1.1519 will dampen this bearish view and bring stronger rise to 61.8% retracement at 1.1915 next.

In the long term picture, outlook remains bearish for now. EUR/USD is held below decade long trend line that started from 1.6039 (2008 high). It was also rejected by 38.2% retracement of 1.6039 to 1.0339 at 1.2516 before. A break of 1.0039 low will remain in favor as long as 55 month EMA (now at 1.1587) holds.

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