Sample Category Title

GBP still overvalued considering coming events

European elections results published on Sunday are most likely to cause torments on the marketplace while market holidays in the US and the UK on Monday should have an impact on liquidity. The recent bounce in GBP/USD from 1.2657 low is above all a technical correction since the outlook for British pound remains gloomy. The results from EU elections, PM May’s resignation announcement and dragging trade discords between China and the US stay major concerns.

Theresa May plan to submit a fourth vote on its Withdrawal Agreement to UK MPs is fading as investors are anticipating her departure in 7 June 2019, opening the door to supporters of a harder Brexit deal. Boris Johnson who initiated the Brexit campaign in 2016, is perceived as favorite in the 6-weeks run that should start following US President Donald Trump visit in the UK in early June 2019. Furthermore, with the support of British voters to Nigel Farage newly formed Brexit Party, the turmoil has probably just begun. Considering upcoming events, we consider the recent up-move in GBP/USD as unjustified and continue to favor further downside risk. The recent releases of April retail sales of 0% (prior: 1.10%) and ex. auto fuel 4.90% (prior: 6.20%) is not particularly bright either.

Currently trading at 1.2689 (-0.51 year-to-date), GBP/USD is heading along major support at 1.2607 (02/01/2019 low).

Financial markets stabilise after a bloody Thursday

World equities recovered slowly on Friday morning amid hopes that Donald Trump and Xi Jinping find common ground on and move forward with trade negotiations. By forcing Google to restrict Huawei’s access to Android and by putting them on an export blacklist list, the decision rattled financial markets as fears spread. European equities bore the brunt of the sell-off yesterday as investors anticipated that the US President could use similar methods in the EU-US trade negotiations. The DAX erased 1.75%, the EuroSTOXX 600 slid 1.40% while the S&P 500 gave up only 1.20%. In the FX market, the reaction was similar with investors buying safe-haven currencies such as the Swissy and the Japanese yen. USD/CHF tumbled to 1.0024 while USD/JPY reached 109.46.

This morning the confidence has returned partially as Trump said that Huawei could be in included as part of a trade deal. Global equites trimmed substantially yesterday losses with the DAX jumping 1% and the EuroSTOXX 600 rising 0.80%. US futures are also better bid with front month contracts climbing 0.60%. In the FX market, the story is much different, as risk aversion remained quite high. Investors are reluctant to load on risky asset. After dipping to a two-year low, the single currency bounced back toward the 1.12 threshold. The pound sterling has been on a roller-coaster ride over the last few day amid Brexit uncertainties. GBP/USD slid as low as 1.2606 before returning above the 1.27 level. Overall, we are not convinced that the global situation would change much in the short-term as US/China trade war is in full swing. Cautions is still warranted, especially for directional trading; however, given the market turmoil, volatility trades are quite appealing.

The single European currency depreciated about 85 base points against the Japanese Yen on Thursday. The currency pair tested the lower boundary of a descending channel pattern at 122.20 during yesterday's trading session.

The junior descending channel pattern is gradually guiding the exchange rate towards the weekly S1 at 122.09.

However, given that the currency exchange rate is trading near the upper boundary of the channel pattern, a breakout could be expected during the following trading session.

The Australian Dollar appreciated about 40 base points against the US Dollar on Thursday. The currency pair tested a resistance level formed by the 200-hour SMA at 0.6903 during the Asian session on Friday.

If the 200-hour simple moving average holds, a decline towards the monthly pivot point at 0.6864 could be expected within this session.

On the other hand, if the exchange rate reverses from the current price level at 0.6901 and dashes through the moving average, the currency exchange rate could end this week's trading sessions on bullish momentum.

The US Dollar appreciated about 58 base points against the Canadian Dollar on Thursday. The currency pair dashed through the 61.80% Fibonacci retracement level during yesterday's trading session.

The exchange rate tested a support cluster formed by the 50– and 200-hour SMAs at 1.3445 during the European trading session on Friday.

If the USD/CAD exchange rate passes the support cluster as mentioned above, the next targets for bullish traders will be at near the 23.60% Fibo at 1.3394.

However, if the 50– and 200-hour SMAs holds, a surge towards the monthly R1 at 1.3519 is likely today.

Bullish sentiment dominated the New Zealand Dollar versus the US Dollar on Thursday. As a result, a breakout occurred through the upper boundary of a descending trendline during the morning hours of today's trading session.

Given that a breakout had occurred, it is likely that the currency pair continues its bullish movement within this session. The potential upside swing could be at the 0.6579 area.

However, a resistance level formed by the 200-hour simple moving average at 0.6534 could hinder such movement today.

During yesterday's trading, the greenback weakened against a basket of world currencies. The dollar index (#DX) moved away from two-year highs and closed the trading session in the negative zone (-0.16%). Investors began to partially fix positions after a continuous rally of the US currency. The threat of economic consequences from the trade war with China raised expectations for the Fed to cut interest rates this year. The US currency is under pressure due to a fall in the 10-year US government bonds yield.

Elections to the European Parliament, as well as the situation concerning Brexit, are still in the focus of attention. The resignation of the leader of the House of Commons, Andrea Leadsom, raises the pressure on the British Prime Minister. At the moment, most experts agree that Theresa May may announce her resignation in the near future. Today, financial market participants will assess important economic releases from the UK and the US.

The "black gold" prices have been recovering after a sharp collapse the day before (more than 5%). At the moment, futures for the WTI crude oil are testing $58.50 per barrel.

Market Indicators

• Yesterday, the major US stock indices closed in the negative zone again: #SPY (-1.22%), #DIA (-1.10%), #QQQ (-1.53%).
• The 10-year US government bonds yield continues to show negative dynamics. Currently, the indicator is at the level of 2.31-2.32%.

The news feed on 2019.05.24:

• Report on retail sales in the UK at 11:30 (GMT+3:00);
• Core durable goods orders in the US at 15:30 (GMT+3:00).

May admitted that despite having done her best, she has "not been able" to deliver Brexit. And announces to resign as leader of the Conservative party on Friday June 7. The process for electing the new leader will start the following week. May will stay as caretaker Prime Minister until a new leader is found.

She quote British humanitarian Nicholas Winton that "compromise is not a dirty word". And she urged that consensus on Brexit can only be reached if all sides are willing to compromise.

Reaction in GBP/USD is rather muted as May's departure is well priced in.

The Euro extends recovery above 1.1200 barrier on Friday, following previous day's strong bounce from new 2019 low at 1.1107 (vs previous at 1.1111, posted on 26 Apr). Bears faced strong headwinds here and subsequent bounce that left long-tailed bullish daily candle adds to positive signals. North-heading momentum approaches the centerline and supports scenario which sees a minimum requirement on close above broken 10SMA (1.1180) for confirmation. Extension above 30SMA (1.1201) would add to positive signals for further recovery, but overall bearish picture will remain intact while the action stays below 1.1263 (13 May lower top). Only firm break here would confirm double-bottom and signal stronger recovery.

Res: 1.1201, 1.1237, 1.1263, 1.1297
Sup: 1.1180, 1.1169, 1.1142, 1.1111

UK April retail sales data came in better than expected:

• Retail sales include auto & fuel rose 0.0% mom versus expectation of -0.4% mom.
• Retail sales include auto & fuel rose 5.2% yoy versus expectation of 4.5% yoy.
• Retail sales exclude auto & fuel dropped -0.2% mom versus expectation of -0.5% mom.
• Retail sales exclude auto & fuel rose 4.9% yoy versus expectation of 4.3% yoy.

The details, though, are not too impressive and fuel stores and non-store retailing were the only positive contributors to the quantity bought in April.

Full release here.

Due to sanctions on Iran and Venezuela, attacks on Saudi- and UAE-owned oil tankers and US/China trade talks, the WTI had a big drop.

The POC zone 60.00-60.80 could be a turning point for the WTI after a possible correction. However, traders should also pay attention to 59.27 and 59.81 as the price could also stall there. If the rejection happens watch for 58.15, 57.84 and 57.03. However, the correction is needed so the POC zone should ideally be the best zone for new sellers. Have in mind that today is Friday so we will probably see the limited profit taking around London noon and around London close that might spur additional momentum in the pair.