No-deal Brexit

US Session Forex Brief, Jan 14 – Sentiment Turns Sour Again as Stocks Decline While Safe Havens Gain

Posted Monday, January 14, 2019 by
Skerdian Meta • 4 min read

The beginning of this week was expected to be volatile as my colleague Shain explained in one of the last forex updates for last week. His prediction proved to be true as we have already seen volatility in financial markets during the Asian and the European sessions. The market sentiment turned negative during the Asian session and I woke up to find safe havens considerably higher in early European session. USD/JPY had resumed the bearish trend after retracing higher in the last two days of last week, while Gold had surged nearly $10 higher.

On the other hand, risk assets such as stock markets had turned bearish with Nikkei around 300 points lower. That was great for us since we had a long term sell forex signal in this index which we opened last week. Although, the decline seemed to be over for now and we decided to close our signal manually. Right now, indices are crawling higher again, so the sentiment is changing again.

Gold reversed down as the sentiment improved in the last few hours, but it is reversing back up now – talk about volatility. This morning we had the European industrial production report which showed that production declined by 1.7% in November, confirming the trend of the major Eurozone countries that we saw last week. In Britain, the Brexit debate is in full swing today as we head towards the Parliament vote which will take place tomorrow. From what we are hearing, it’s either leaving the EU without a deal or not leaving the EU at all, but we will see what they will eventually decide as hours pass.

The European Session

  • German WPI – The wholesale price index has been growing by 0.3% monthly on average and today’s report which is for November was expected to remain in the same trend. Although, the report showed that the price index fell b y 1.3% that month. That might soften inflation further in the coming months but we will see.
  • ECB Rate Hike Pushed Back Further – Bloomberg’s latest survey on economists conducted between the 4th and 10th of January this year showed that the European Central Bank will postpone the first interest rate hike from Q3 2019 to the Q4. Although, with the economic data we have seen from the Eurozone recently, I think that the ECB will just postpone it for next year.
  • Eurozone Industrial Production – The industrial production was expected to have grown by 0.3% in November in the Eurozone. But, the industrial production and manufacturing numbers for that month from the major Euro countries were pretty bad as we saw last week, so I was expecting a terrible number today and that’s how it was. Industrial production declined by 1.7% that month.
  • Chinese PM Li Concerned About the Economy – The Chinese Premiere Li Keqiang commented in an interview this morning that economic growth is facing increasingly downward pressure. He added that China will not resort to ‘flood-like’ stimulus. As we know now, the Chinese economy has shown signs of weakness this year.
  • EU Letter to Britain is Published – Apparently, the EU says in the letter that they’re not in a position to agree to anything that changes the withdrawal agreement in Brexit backstop letter. EU is committed to speedy work on trade deal by December 2020 to avoid triggering Irish backstop and that even if triggered, backstop would only be temporary and last until a better agreement is found.
  • No Deal or No Brexit for Theresa May If Brexit Deal Is Off – UK PM May commented earlier saying that if the Parliament rejects her Brexit deal, outcomes are no-deal or risk no Brexit at all. A no-deal Brexit would cause significant disruption in the short-term, the more likely outcome is paralysis in Parliament which leads to no Brexit. She added that they have secured valuable assurances from EU on Brexit deal. Letters published today have a legal force but the letters do not go as far as some lawmakers want.

The US Session

  • December Hike Was Probably the Last Hike for Yellen – Ex FED Chair Janet Yellen commented in an interview that it’s possible we’ve seen the last hike of the cycle. She sees low rates for ‘quite a long time’, evidence is that we will be in a low interest rate environment for a long time. She added that the shutdown adds a general sense that the government is not functioning could weigh on consumer sentiment and stock market decline could weigh on consumer spending. Gloomy picture from Yellen, isn’t t?
  • Trump Tweets on China  Donald Trump commented a while ago saying that China wants to negotiate and he believes US will get a deal. He added that he never worked for Russia, allegations are a disgrace, a hoax. Trump also rejected the suggestion from Senator Graham for temporary government reopening.
  • Bank of America Merrill Lynch Predicts Extension of Article 50 – The BAML sees Article 50 extending further and they see no rate hike from the Bank of England. It makes sense with what we are hearing these days.

Trades in Sight

Bearish AUD/USD

  1. The trend is bullish
  2. The retrace lower is complete
  3. The 200 SMA is providing support

AUD/USD finding support at the 200 SMA

AUD/USD has been on a bullish trend since the crash on January 2nd. It has broken above all moving averages during this time on the H4 chart and the last moving average, the 200 SMA (purple), has now turned into support. Stochastic is oversold which means that the retrace lower is complete. So, the chart setup looks set for a bullish continuation.

In Conclusion

Volatility has increased again. Gold is moving up and down in a 70-80 pip range today and Brexit is near the end. Although, chances are high that it might be postponed further down the road, so we have to keep an ear on British politics now.

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