KEY DRIVERS
- Non-farm Payrolls have surely now changed the complexion of the December FOMC meeting. The strong report now means that there is a high possibility of a rate hike at the next FOMC meeting. The financial markets are still pricing this move in, and there have been some significant moves across forex and commodity markets as a result. The Dollar strength now in the markets looks here to stay, and the lack of tier one US data this week should help to underpin the recent gains.
- Although there are still a few weeks until the December meeting (baring a disastrous payrolls on 4th October, or the international economy dramatically nosediving again), the hawks will go into the meeting with a spring in their step. As is usually the case, the markets are now positioned decisively for a rate hike. This is not the first time this has happened this year (June and then September being previous meetings the market was positioned incorrectly), however with the hawkish rhetoric from FOMC members (John Williams the latest to talk up the prospects of a December hike), my long held view that December would be the month the Fed would move, may actually turn out to be correct. Increasingly though now discussion may well turn not to when, but how quickly will the pace of tightening be. Janet Yellen has continually pointed to this as the more important aspect of the tightening cycle and it could quickly take over the discussion.
- In Forex markets, the US dollar has made some big breaks of key levels. Major support levels on EUR/USD (at $1.0810) and GBP/USD (at $1.5105) and key resistance at 121.70 on Dollar/Yen have been breached. Traders now need to decide whether these are false breaks or not. I do not believe that they are as the moves have been so decisive. I would not be surprised now to see a case of buy the dollar on rumour, sell on fact. The “rumour” being a potential rate hike in December should now underpin the dollar in the coming weeks. There will be fluctuations on data releases but unless something drastic happens there should be a degree of dollar strength. I expect the “fact” could be a reaction against the dollar after the Fed makes its move (possibly not immediately though).
- Another factor to watch for this week is China again. It will be interesting to see the impact the key Chinese data has on trading sentiment and risk appetite. The Trade Balance has already been weak, but now other readings on inflation (CPI) and industrial production will be made. Both these two are data points that have produced significant market reaction in recent months. Will this happen again and take the focus off the US rate hike? At this stage it looks as though the market is reacting with far less volatility around the Chinese data, which suggests an expectation that the bad news is priced in now and that it will not impact on the FOMC’s decision.
- Equity markets have not been reacting uniformly with the expectations on the Fed rate hike. The S&P 500 and FTSE 100 seem to be far more restrained than the DAX and CAC. The Eurozone indices are reacting to the euro weakness far more to help the export drive indices.
- Commodities are once again under pressure from the strong dollar (with continued focus on precious metals). The gold price is now close to testing multi-year lows again, which if were broken would open the downside again. Oil is still rangebound with WTI above $42.60/$43.20 key support and Brent Crude above $46. However the stronger dollar has again put these supports under pressure.
- On the data front, the main release is US Retail Sales which will be a key component of volatility on Friday for the dollar as consumption is still around 70% of the US economy and consumer spending is something the Fed will take into consideration. The UK earnings growth data could drive sterling this week, with the pound badly in need of some positive news to give it a boost.
- Watch for: China CPI and Industrial Production, US Retail Sales
MARKETS
EUR/USD – The old range low $1.0810 is now a basis of resistance
- The focus will remain on the Fed rate hike with volatility around US data points this week. The expectations of a hike have soared in recent days and with a lack of tier one US data until Friday this should underpin the dollar this week
- Breaking the $1.0810 support is a key move which could induce weakness in the coming weeks towards the big 2015 floor at $1.0460. Immediate reaction will come in the resistance band now $1.0810/$1.0895 and another failure here on a technical rally would induce the selling pressure once more.
- Watch for: US Retail Sales
GBP/USD – A failed rally into $1.5100/$1.5200 would be a chance to sell
- The UK wage growth component of the employment data this Wednesday will be a mover for Sterling. However the Payrolls report last Friday should mean that any reaction against the dollar will likely to be short lived.
- The break of $1.5100 key floor has opened the downside again. A near term technical rally is possible but I would expect a lower high in the resistance band $1.5100/$1.5200 to be sold into.
- Watch for: UK wage growth, US Retail Sales
USD/JPY – Continue to play the 118/121.70 range with the pivot around 119.60
- The absence of any major US or Japanese data early week should mean a technical reaction on the pair until Friday’s US retail Sales data. The China data could have an impact on risk appetite though and any flight to safety could induce a near term yen rally.
- When the pair breaks out from a trading range it tends to trend strongly. The break above 121.70 could now open the upside towards 125.85. I expect to see any unwinding technical correction to be used as a chance to buy now.
- Watch for: China CPI and Industrial Production, US Retail Sales
Gold – Key support at $1077 is now crucial
- The gold price could be trading off technicals with a lack of key US data (until Friday). The strong dollar looks set now and this should help to be a drag on any technical rally.
- The strength of the sell-off continues to break supports with rallies formed at lower levels. There is now plenty of overhead supply in the initial band $1098/$1104 but then $1111 and $1122.50. The big 2015 low at $1077 is not under serious threat.
- Watch for: China CPI and Industrial Production, US Retail Sales
Indices – The Fed could induce some profit taking for Wall Street
- S&P 500 – The S&P 500 could now come under some profit taking with the resistance band 2115/2133 overhead and the increasing likelihood of a rate hike from the Fed. The support band 2060/2080 needs to hold to prevent a correction setting in.
- DAX Xetra – A weaker euro is supportive of the DAX and this negative correlation is once more on the table as a trade seemingly. Can the DAX finally break free of the shackles of the 38.2% Fibonacci retracement at 10,850 which continues to be a magnet for the DAX on an intraday basis.
- FTSE 100 – Once again the same outlook as last week, with the index stuck in a rut of a range amid concerns over commodities and financials. This means the FTSE 100 continues to struggle to match the performance of the DAX in a rising market. The interesting factor will come as how the FTSE performs in a correcting market as previously it has outperformed the DAX amid selling conditions. Support remains at 6268.
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