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Gold prices spiked higher on Monday, after North Korea's foreign minister said that a tweet from US President Trump amounted to a "declaration of war". The continued intensification in rhetoric may have put the prospect of military conflict back on the investors' radar, leading to a classic risk-off reaction in markets. Nonetheless, gold and other safe haven assets gave back most of their gains during the European morning Tuesday, as markets await the response from the White House. If the President responds in a "fire and fury" manner, then another round of risk aversion appears likely. On the other hand, a more diplomatic approach, such as an official statement, could lower the likelihood of armed conflict and thereby reverse some of the latest market moves.

Looking at the bigger picture, although more fiery rhetoric could keep safe assets supported for a while, we maintain the view that as long as this does not translate into actual war, investors are likely to place less and less emphasis on this crisis moving forward. Escalation in rhetoric alone will probably have a diminishing impact on financial markets.

Gold traded higher on Monday, breaking back above the psychological zone of 1300 (S1). Nevertheless, on Tuesday the price hit resistance near the 1315 (R1) line, and then it retreated to challenge once again the 1300 (S1) barrier, as a support this time. The yellow metal continues to trade below the prior uptrend line taken from the low of the 10th of July, but it also trades above the short-term downside line drawn from the peak of the 8th of September. Having that in mind, we prefer to take the sidelines for now.

If the bulls are strong enough to take the reins near the 1300 (S1) support, then we may see them targeting once again the 1315 (R1) resistance hurdle. A break above that level may open the way for the crossroads of the 1333 (R2) resistance and the prior uptrend line taken from the low of the 10th of July. On the other hand, a dip back below 1300 (S1) could initially aim for the 1290 (S2) line, where another break would confirm a forthcoming lower low on the 4-hour chart and could shift the short-term picture negative.

Zooming out to the daily chart, the fact that the price is currently trading above 1300 (S1) keeps the medium-term outlook cautiously positive. That psychological hurdle acted as the upper bound of the wide sideways range that contained the price action from the 31st of January until the 28th of August. A possible dip back below that obstacle will bring the price back within the aforementioned range and may be a trigger for further declines.

The currency pair has dropped sharply today and resumed the yesterday's bearish candle. Is trading in the red and seems too heavy to be stopped on the short term. However, the pair has touched a dynamic support, which could put the downside on hold.

EUR/USD dropped as the USDX has finally managed to start a bullish momentum. The index is trading right above the 93.00 psychological level, much above the 92.49 static resistance.USDX has also jumped above a dynamic resistance, a valid breakout will signal a reversal and a USD dominance.

The dollar could dominate the currency market on the short term after several months depreciation. The USD still needs support from the United States economy, the CB Consumer Confidence is expected to drop from 122.9 to 119.9 points in September, while the New Home Sales could increase from 571K to 585K in the previous month.

Price extended the bearish momentum and reached the first downside target from the median line (ml) of the minor descending pitchfork. It should reach also the median line (ML) of the ascending pitchfork. I've said in the last days that the rate could be attracted by the confluence area formed between the ML with the minor median line (ml).

A valid breakdown through the confluence area will accelerate the sell-off, which will approach and reach the median line (ML) of the major black ascending pitchfork.

Price drops further on the short term and approaches the first warning line (wl1) of the ascending pitchfork, where he may find support again. GBP/USD decreased as expected, I've said that we may see a minor decrease after the failure to stay above the 150% Fibonacci line and after the false breakout above the upper median line (uml) of the minor descending pitchfork. Technically, it should approach the median line (ml) of the minor red descending pitchfork.

The USD/CHF is fighting hard to stay above the second warning line (WL2) of the major ascending pitchfork. You can see that continues to move in range on the short term, so only a breakout from this range will bring us a clear direction. We'll have a reversal, only after a valid breakout from the descending pitchfork's body.

The pair bounced above 112.00 barrier as risk-off mode over North Korea fades and downside attempts were repeatedly contained by strong support provided by top of thickening daily cloud (111.54) reinforced by rising 10SMA. Near-term techs regained bullish momentum on fresh rally, with probe above important 112.00 resistance zone expected to generate fresh bullish signal on firm break above 112.12/23 pivots (200SMA/Fibo 61.8% of 112.71/111.47 pullback). Situation on daily chart remains constructive while cloud top keeps the downside protected, for renewed attack at 112.80 target (Fibo 76.4% of 114.49/107.31 descend), as previous attempt stalled just ticks below the target. Today's speech from Fed Chief Yellen is expected to provide more clues about dollar's near-term direction. Firmer signals about rate hike in December would accelerate the greenback above 113.00 handle and expose targets at 113.57 (14 July lower top) and 114.00 (round-figure). On the other side, the dollar could come under increased pressure and probe again below cloud top if Yellen's tone will be dovish.

Res: 112.52; 112.80; 113.00; 113.57
Sup: 111.75; 111.54; 111.13; 110.65

• European equities traded listless in an uneventful session. Main indices oscillate around yesterday's closing levels. US stock opened around 0.2% higher with Nasdaq outperforming (+0.5%).
• Oil bulls are back in the driver's seat with $60/barrel in sight, but it could be a short ride. OPEC and Russia are cutting output deeper than ever and demand is surprisingly strong. Global prices have jumped more than 20% since June, with Brent hitting a two-yr high early today at $59.50/barrel before some profit taking kicked in.
• German Chancellor Merkel already faces complex coalition negotiations with at least three other parties. Now French President Macron wants her in on the act. Macron will give an important speech on the future of the euro area later today.
• Hungary edged closer to issuing its first hard-currency bond since 2014, announcing plans to sell in euros and buy back as much as $1.2 billion of existing debt. Debt agency officials will meet investors in Europe from Sept. 27, offering a benchmark-sized 10-year euro bond in its first sale in the currency since 2011
• German Chancellor Merkel signalled further euro-area integration is on hold as she embarks on difficult talks to form a new government, saying any proposals would have to be "sensible" and make Europe more competitive
• Later today, attention still goes to several Fed speakers including Yellen who speaks on inflation, uncertainty and central bank policy.

Rates

Core bonds slightly lower in listless trading

In a dull, low volume session without key economic data, the easing of the risk-off sentiment weighed marginally on core bonds which gave back small part of yesterday's gains. The Bund essentially hovered sideways intra-day, slightly below Monday's close. French business confidence was as expected strong and so was Italian business confidence. The German Schatz auction went reasonably well, but neither had much impact on bond trading. Equities hovered also near yesterday's closing levels and oil was hit by some profit taking after a strong run in past days, but we didn't see any reaction of core bonds on the minor developments in other markets. As our report is published, US consumer confidence and New Home sales will be published, followed by a raft of Fed speakers and a 5-yr Note auction. So, trading may still become livelier than hitherto.

At the time of writing, German yields are flat (2-yr) to 1.4 bp higher, while US yields are 1 to 1.7 bp higher, bear flattening the curve. In the intra-EMU bond market, moves were limited with still no noticeable reaction on the Spanish/Catalonian power struggle. The Italian and Spanish 10-yr yield spreads (versus Germany) are 1 and 2 bps lower, the Portuguese spread shed 4 bps.

Currencies

EUR/USD drops below 1.1823 support

There was not one distinct theme to guide FX trading today. North Korea and other event risk caused some investors caution, but the direct impact on markets ebbed again. The euro extended yesterday's correction and finally dropped below 1.1823 support. At the same time, the dollar was slightly better bid. The traded-weighted dollar tries to move away from the recent lows; USD/JPY rebounds north of 112.

Yesterday's risk-off trade in the US also left some traces in Asia overnight, but the losses remained very modest. USD/JPY hovered in the mid 111 area, near yesterday's low. The yen was again better bid as multiple event risk (North Korea, Kurdistan, Obamacare and US tax debate) countered hope for a stimulating policy. EUR/USD stabilized in the mid 1.18 area.

The overnight price action due to the multiple event risk also caused a negative European equity opening. However, there were no follow-through losses and tensions eased soon. French confidence data were OK, but no issue for the FX market. Changes in US and core European yields were limited. Even so, the euro continued yesterday's gradual decline and finally dropped below the 1.1823 ST range bottom. The move was mainly euro softness, but the rise in the trade-weighted dollar also suggests a cautious bottoming out process in the US currency.

There was also no clear story in the US to guide trading, as was the case in Europe. US equity futures rebounded after yesterday's correction. The easing in global market tensions allowed USD/JPY to regain the 112 big figure. EUR/USD trades in the 1.1790 area. The USD gains on points against a weak single currency.

Sterling short squeeze to slow?

EUR/GBP traded just below 0.88 at the start of the European session. A large order supposedly pushed EUR/GBP below the 0.8775 support/recent low. EUR/GBP filled bids in the 0.8755 area. From there some sterling selling kicked in. EUR/GBP rebounded even as EUR/USD maintained a negative intraday bias. It looks that the recent sterling short-squeeze might be losing some momentum. The UK August lending data were soft, but we doubt they were important for the intraday change in sterling sentiment. EUR/GBP trades in the 0.8775 area, which should be considered a mediocre performance of sterling given the overall decline of the euro. Cable traded with a negative intraday bias and sits currently in the 1.3440 area. The negotiations between the UK and the EU have restarted. Comments from EU's Barnier didn't suggest much progress despite the modestly positive comments after last week's speech of UK PM May.

USD/CHF - 0.9719

Original strategy :

Buy at 0.9675, Target: 0.9775, Stop: 0.9640

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9690, Target: 0.9790, Stop: 0.9655

Position : -

Target :  -

Stop : -

Although the greenback dropped to as low as 0.9642 yesterday, lack of follow through selling on break of previous resistance at 0.9649 and the subsequent rebound suggest consolidation with mild upside bias would be seen, hence gain towards last week’s high at 0.9748 cannot be ruled out, however, break there is needed to retain bullishness and extend recent rise from 0.9421 low to 0.9761-66 (50% Fibonacci retracement of 1.0100-0.9421 and previous resistance), then test of another previous resistance at 0.9773.

In view of this, we are looking to buy dollar on dips. Below said support at 0.9642 would abort and signal the fall from 0.9748 is still in progress, then further weakness to 0.9620-25 would follow but oversold condition should limit downside to indicated support at 0.9589, bring rebound later.

The CAC index is unchanged in the Tuesday session. Currently, the index is at 5,270.75, up 0.07% on the day. There are no eurozone or French indicators. On Wednesday, the Eurozone releases M3 Money Supply and Private Loans.

ECB President Mario Draghi was careful to avoid the headlines on Monday, as he testified before the European Parliament Economic and Monetary Affairs Committee. Draghi was careful not to make any headlines, as he said that the ECB would remain "patient and persistent". Draghi acknowledged that there was uncertainty regarding the inflation outlook, adding that recent volatility in the exchange rate would require monitoring. Draghi remains committed to the ECB's loose monetary policy, saying that "ample" accommodation is still needed in order to raise inflation levels. Some policymakers have come out in favor of tightening monetary policy, with the eurozone economy continuing to grow and unemployment falling. However, inflation remains well below the ECB target of just below 2 percent. Draghi told lawmakers that he is confident that the inflation target will be met, but that would require avoiding any hasty changes to current monetary policy.

European markets are digesting the results of Sunday's German election, and although Angela Merkel won a impressive fourth term as president, the post-election picture is a murky one. Merkel's CDU party has little to celebrate, dropping from 41% of the vote in the last election to just 33% on Sunday. The result has tarnished the image of Europe's most powerful politician and the de facto leader of the European Union. Merkel's most likely coalition partners, the Greens and the FDP, will be looking to extract major concessions as the price for joining a coalition as junior partners. For the time being, Europe's iron woman will need to focus her energies on forming a workable coalition and will have to put other issues on the back burner, at a time when the European Union is locked in difficult negotiations with Britain over the terms of its departure from the EU.

Emmanuel Macron promised during the election campaign to overhaul the French economy, and the French president has signed into law a series of labor reforms in order to boost economic growth. Unsurprisingly, France's largest unions have pledged to fight the move tooth-and-nail, and tens of thousands demonstrated in Paris on the weekend. The government has promised further reforms in unemployment benefits and pensions. Previous governments have tried to implement France's labor laws in the past, but mass strikes and demonstrations by unions have managed to stave off major reforms. Will Macron succeed where his predecessors have failed? The new government appears determined to move full speed ahead, and the markets will be watching closely to see who prevails in this round, the unions or the government.

GBP/USD - 1.3445

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

As cable has fallen again after intra-day initial brief bounce to 1.3514, near term downside risk remains for the erratic fall from 1.3658 top to bring retracement of recent rise, hence weakness to 1.3400-05 (50% Fibonacci retracement of 1.3153-1.3658) and possibly 1.3370–75 would be seen, however, near term oversold condition should limit downside to 1.3345-50 (61.8% Fibonacci retracement), bring rebound later.

In view of this, would not chase this fall here and would be prudent to stand aside in the meantime. Above 1.3475-80 would bring another bounce to 1.3514 but break there is needed to signal an intra-day low is formed, bring further gain to 1.3535-40 and later towards resistance at 1.3571 which is likely to hold from here.

King Dollar flexed its muscles against a basket of major currencies during Tuesday's trading session, as investors positioned ahead of Janet Yellen's hotly anticipated speech in Cleveland later in thetod day.

Dollar bulls seem to be making a return, following hawkish comments from the Federal Reserve's' William Dudley, on Monday. Dudley said that the central bank was still on track to gradually raise interest rates, because since the issues that typically suppress inflation are "fading". This was music to the ears of market players anticipating higher US rates. With last week's hawkish FOMC statement and these recent comments from Dudley, boosting hopes of the central bank taking action this year, the Dollar may remain supported in the short term.

Janet Yellen will be in the spotlight in Cleveland today, with investors closely scrutinizing her speech on Inflation, uncertainty and monetary policy, for further clues on rate hike timings this year. With the Dollar falling into the category of currencies that have become quite sensitive to monetary policy speculation, volatility may be on the cards before and after Yellen's speech.

From a technical standpoint, the bearish trend on the Dollar Index is at risk of coming to an end, if bulls are able to secure control above 93.50.

Brexit season 4 set to punish Sterling

Sterling found itself vulnerable to heavy losses on Tuesday, as the Brexit uncertainty weighed heavily on the currency. A resurgent Dollar also complimented the downside pressure, with the GBPUSD trading towards 1.3430 as of writing. With the EU and Britain resuming entering a the fourth round of the Brexit talks with fresh clashes, things could get messy, and this may punish the British Pound. Although expectations of the Bank of England raising UK interest rates this year have heavily supported Sterling, Brexit developments and ongoing uncertainty are likely to limit upside gains.

From a technical standpoint, the current price action suggests that bulls are exhausted, with bears in control below 1.3500. Sustained weakness below 1.3500 should encourage a further decline towards 1.3350.

Commodity spotlight – Gold

A resurgent Dollar injected bearish investors with enough inspiration to send Gold back towards $1300 during Tuesday's trading session.

The volatile combination of renewed geopolitical tensions and fluctuating rate hike expectations, have made Gold a battle ground for bulls and bears, which can be reflected in the erratic price action. Investors will direct their attention towards Yellen's pending speech in Cleveland which may support rate hike expectations, consequently pressuring the zero-yielding metal further. Sellers seem to be making a move, with a breakdown back below $1300 encouraging a further decline towards $1280.