Thursday, November 21, 2019

US-China tension set to escalate; will the ECB’s meeting impact the euro?

Tags
  • Dollar
  • Euro
  • European Central Bank
  • AUD

 

Market recap: Fed signals there’s a lower chance of future rate cuts

Global stocks fell on Wednesday, as tensions between the US and China seemed to escalate once again. US President Donald Trump said late on Tuesday that the US will hike tariffs if no deal is agreed with China. On Wednesday, bill S.1838 was passed unanimously by the US Senate, which requires annual reviews of Hong Kong's special trade status under US law, along with officials that are deemed responsible for human rights abuses and undermining the city's autonomy. Trump is expected to sign the legislation at a time where the two superpowers are trying to come to a consensus on a partial trade deal. The DJIA fell 0.40%, the S&P 500 retreated 0.38% and the Nasdaq lost 0.51%.

Meanwhile, US treasuries gained across the board on increased risk. Benchmark 10-year yields fell 4bps to 1.74%. The greenback gained against major currencies, while the Dollar Index gained 0.08%. Gold and yen fell slightly as the dollar gained, with gold inching 0.06% lower and the yen weakening 0.06% against the greenback.

In Asia, the Nikkei, Hang Seng and the Straits Times Index started Thursday's trading session 0.33%, 1.12% and 0.89% lower, as the superpower spat rattled investors in Asia.

October's monetary policy meeting minutes from the Fed indicate that officials continue to be cautious regarding the potential for increased risk surrounding the US economy, and claimed that its monetary policy is at an appropriate level following its latest easing.

 

Today’s analysis: Christine Lagarde’s first major speech likely to be the focus for investors

The European Central Bank (ECB) will release the minutes from October’s meeting today at 4.30pm (GMT +4). Also, ECB President Christine Lagarde’s first major speech since she stepped into her role is set for Friday, November 22nd, at 12.30pm (GMT +4).

The ECB kept its monetary policy unchanged as expected at its October’s monetary policy meeting; most likely because the central bank only cut rates at September’s meeting and restarted its asset purchase program. September's meeting revealed that more than a third of ECB officials opposed the decision to restart its quantitative easing program, although all policymakers agreed on the need for more stimulus in the European economy. October's meeting minutes are likely to continue to only show the divide within the ECB, and will likely offer little information on the direction of future monetary policy.

Lagarde's speech on Friday at Frankfurt during the Euro Finance Week is more important, though. The new ECB president has yet to comment on monetary policy since she has taken over, resulting in a more cautious approach from the markets, with the probability of a rate cut by September 2020 falling from around 80% on November 1st to roughly 50% as of November 20th. Lagarde's view on monetary policy is expected to be less aggressive than Draghi’s, and has previously signalled she may want to review the central bank's monetary policy framework. It is also possible that Lagarde will avoid commenting on monetary policy, with recent economic data on the EU being better than expected (one clear indicator was Germany’s economy narrowly avoiding a recession).

GDP in both Eurozone and Germany for Q3 has beaten economists’ expectations

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If October's meeting minutes shows that ECB officials are dovish on future monetary policy, or if Lagarde supports an aggressive monetary policy even though the ECB seems to have exhausted its monetary easing tools, then the euro is likely to weaken. EUR/USD may then possibly fall past 1.1064 to range between 1.1038 and 1.1064. But if October's minutes reveal that ECB officials are still divided or hawkish on monetary policy in the near term, then the euro will likely strengthen slightly against the dollar past 1.1081 to range between 1.1081 and 1.1100. The euro is likely to also rise if Lagarde hints at a possible review of monetary policy.*Source: ADSS, Bloomberg

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Technical Analysis:

EUR/USD

The bulls and bears are in a close fight for possession of the euro. Expect the bears to be watching for any signs of dovishness from the European Central Bank’s (ECB) October monetary policy meeting minutes today or Lagarde’s speech on Friday. If that does happen, then expect the bears to break the 1.1064 resistance to range between 1.1038 and 1.1064. But if the bulls win possession, then EUR/USD may possibly break past the upper bound of the Bollinger band to rise towards 1.1100.

Support: 1.1064 / 1.1038 / 1.10176

Resistance: 1.1081 / 1.100 / 1.1121

EUR/USD Chart (H4)

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*Source: ADSS, TradingView

AUD/USD

The world’s stock and forex markets suffered yesterday and this morning, as a US media report claimed the US-China trade deal may not be completed this year. Trade-related currencies including the Chinese yuan, Australia and New Zealand dollars suffered the most among major currencies - the Aussie dropped 0.4% and broke 0.68 level yesterday, topping the highest losses in the G10. Fundamentally speaking, there is some market pessimism regarding the prospects for the Aussie if the trade deal is cancelled, because the Australian economy is closely linked to China’s. Technically speaking, the recent drop of AUD/USD boosted the bearish trendline that has formed since last December. The trendline is derived from swing highs in December 2018, followed by April’s and July’s this year, and the month-high of November which successfully plotted the clear downtrend. The clear bearish trendline indicates there are still chances for AUD/USD to test the previous low at 0.6680’s range. Bears obviously take the lead now and the next level will be heading towards 0.6780, 0.6769. Bulls therefore need to protect and try to retreat from 0.6769 level, the previous low in November. Should AUD/USD break 0.6769, the next supporting level will be at 0.6723.

Support: 0.6784, 0.6769, 0.6723

Resistance: 0.6835, 0.6846

 

AUD/USD Chart (Daily)

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*Source: ADSS MT4 Platform