There were strong equity market gains across the board Wednesday with some capitulation in short positions as perceived negative developments for markets failed to push equities lower. The latest event that failed to trigger downward pressure was the weekend Italian referendum, and Donald Trump’s election victory is still an important factor as well.
The Dax index advanced 1.98% on the day to the strongest level seen in 12 months while the FTSE gained 1.8%. European markets were boosted by hopes that the European Central Bank would extend its bond-buying programme. There was further relief surrounding the Italian outlook with fresh elections likely to be delayed, although uncertainty remains a key factor.
Wall Street also maintained a notably robust tone with fresh record highs despite a decline in healthcare stocks. US equities gained support from expectations that there would be a pro-growth Administration and a policy of tax cuts with the S&P index gaining 1.3% as records were broken. Better-than-expected Chinese trade data maintained the optimistic tone on Thursday with the Nikkei index advancing close to 1.5% on the day.
The ECB policy meeting later today will be the next test for equity markets with high volatility inevitable.
The US JOLTS job-opening data was in line with expectations at 5.53 million for October while September’s data was revised up to 5.63m which maintained confidence in the labour market.
US yields edged lower on the day which curbed potential dollar support and the currency remained prone to an underlying correction.
The Italian PM's resignation was again rejected by the president and talks will continue over the next few days. Moody’s downgraded the Italian credit rating outlook to negative from neutral.
EURUSD found support on approach to the 1.0700 area and rallied above 1.0750 with underlying short covering still a feature ahead of the very important ECB policy announcement on today.
USDJPY was unable to make a serious test of the 114.50 level on Wednesday and there was a small decline in US yields which sapped dollar support. The strength in risk appetite was important in limiting potential yen support with moves dominated by dollar moves. The dollar declined to lows near 113.10.
There was no significant negative reaction to the $69.1 billion in Chinese reserves for November, the sharpest decline for 10 months.
China’s trade data was better than expected with exports gaining 5.9% in the year to November while imports rose 13%. The data increased confidence in the outlook for Chinese and global demand which supported overall risk conditions.
UK industrial production data was weaker than expected with a 1.3% October decline compared with an expected 0.4% decline. Although there was an impact from lower oil production, manufacturing output was also weak.
GBPUSD dipped below the 1.2600 level before finding support while EUR/GBP hit resistance at 0.8550.
The NIESR data recorded 0.4% growth in the three months to November, unchanged from the previous month. The RICS house-price index rose to a seven-month high of 30 from 23 previously, although buying interest was limited. GBPUSD edged towards 1.2650 on a wider US correction.
EURCHF was blocked below 1.0850 on Wednesday, although it held a firm tone on solid risk appetite while the dollar hit resistance above 1.0100.
The latest data on Swiss currency reserves recorded an increase to CHF648bn for November from CHF630bn the previous month which suggested that the National Bank had been intervening consistently to prevent franc appreciation.
AUDUSD recovered from the GDP shock to trade higher on the day. There was support from stronger commodity prices and a generally weaker US currency. China’s trade data maintained the positive risk trend on Thursday with AUDUSD testing the 0.7500 area.
As expected, the Bank of Canada left interest rates on hold at 0.50% at the latest council meeting. There was a broadly neutral stance, although with concerns surrounding weak non-oil exports. The inflation risks were still described as balanced and there were no hints over forward guidance.
USDCAD dipped below 1.3250, primarily due to a generally weaker US currency.
Major events for the day ahead:
- ECB policy decision (1245 GMT)
- ECB President Draghi press conference (1330 GMT)
Monthly – After posting a 12-year high in January 2016, we formed a slightly disjointed bearish Gartley pattern. A low close this month will form bearish Evening Doji Star (three-candle pattern) and should lead to further losses (after a corrective bounce).
Weekly – Sellers emerged close to the 50% pullback level of 1.3574 (from 1.4688-1.2459). Although price action has been mixed we have continued the move to the downside. Channel support is at 1.3100. We should also note the Ichimoku Cloud base at 1.3198.
Daily – Bearish Outside Day on November 28 kick-started the move to the downside. Cloud base is located close to the channel base and should be a substantial barrier.
Intraday (six hours) – We look to be reversing the Elliott Wave count (last five up, now five down). The 261.8% extension level is seen at 1.3092, just below channel support. This will be our main focus.
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Source: Saxo Bank
Management and risk description
A move through 1.3200 and stop to be placed at entry.
Entry: selling at the market.
Time horizon: this week.
— Edited by Michael McKenna
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