• GBP/USD holds lower ground after printing the heaviest daily fall in a month.
  • Clear break of 50-DMA, monthly ascending trend line favor sellers.
  • Key Fibonacci retracements, October’s high add to the upside filters.

GBP/USD remains depressed around a fortnight low, despite refraining to break Friday’s low surrounding 1.3670. In doing so, the cable pair keeps the previous day’s downside break of 50-DMA, as well as 50% Fibonacci retracement (Fibo.) of July-September downside, during the initial Asian session on Monday.

In addition to the 50-DMA break, a clear south-run past an ascending trend line from late September and MACD conditions also keep the pair sellers hopeful.

Hence, the quote’s further weakness towards early October levels surrounding 1.3650 becomes imminent. However, August month’s low around the 1.3600 round figure and the mid-October’s swing bottom near 1.3570 may challenge the GBP/USD bears afterward.

Should the quote drop past 1.3570, 23.6% Fibo. near 1.3545 will be in the spotlight.

Meanwhile, 50% Fibonacci retracement level and 50-DMA, respectively around 1.3700 and 1.3715, question the GBP/USD pair’s corrective pullback.

Following that, the 61.8% Fibo. and the support-turned-resistance line, 1.3765 and 1.3825 in that order, will precede the last month’s peak of 1.3833 to stop the pair buyers.

To sum up, GBP/USD bears tighten the grips after Friday’s firmer signal towards the south.

GBP/USD: Daily chart

Trend: Further weakness expected

 

“He is concerned the (UK) Government will refuse to engage with proposals put forward by Brussels,” the UK Telegraph came out with the Brexit news quoting Maroš Šefčovič, Vice-President of the European Commission in charge of Interinstitutional Relations and Foresight.

The news also mentioned that Maros Sefcovic has urged Lord Frost to back down and reconsider the EU’s proposals.

“Brussels has warned the UK not to “embark on a path of confrontation”, amid tensions over Northern Ireland and post-Brexit fishing rights,” said the Telegraph.

Market reaction

With this news, GBP/USD bears get another reason, in addition to the firmer US dollar, to poke a fortnight low surrounding 1.3670.

Also read: Brexit News: French Pres. Macron questions UK credibility amid fishing row

“The United States and the European Union on Sunday ended a dispute over steel and aluminum tariffs and said they would work on a global arrangement to combat ‘dirty’ production and overcapacity in the industry,” said Reuters.

The news also cites the positive development as a challenge for China as it produces over 50% of the global steel and is accused of creating overcapacity, which in turn challenges the survival of the EU and the US steel.

Key quotes

The United States will not apply Section 232 duties imposed by former President Donald Trump and will allow duty-free importation of steel and aluminum from the EU at a historical-based volume.

The EU will suspend tariffs on U.S. products like whiskey, power boats and Harley-Davidson motorcycles, imposed in retaliation for the steel and aluminum tariffs.

The two sides said they will work to restrict access to their markets for “dirty steel” and limit access to “countries that dump steel” in their markets, both of which contribute to worldwide oversupply.

The United States also published a consultation that brought on board what it called “like-minded nations” like Japan and Britain on issues related to steel and aluminum, with a focus on the impacts of overcapacity on the global steel and aluminum markets.

FX implications

The news offers a positive start to the market’s risk appetite as the S&P 500 Futures rise 0.30% by the press time of early Monday morning in Asia.

  • EUR/USD consolidates the biggest daily fall since mid-June.
  • Reversal from 50-DMA, downward sloping MACD line keep sellers hopeful.
  • Latest September’s peak adds to the upside filters.

EUR/USD licks its wounds near 1.1560 during Monday’s Asian session, following the heaviest daily slump in 4.5 months portrayed on Friday.

The currency major’s U-turn from 50-DMA takes clues from the MACD line’s inability to reach the positive region, also tilt southwards before that, to favor the bears. Also signaling the quote’s further weakness is the downside break of three-week-old horizontal support, now resistance around 1.1590.

Hence, EUR/USD sellers are determined to smash the yearly low of 1.1524 and aim for the 1.1500 threshold.

However, the quote’s further weakness will be challenged by a downward sloping support line from August 20, around 1.1470 by the press time.

Alternatively, corrective pullback remains less worrisome until crossing the immediate support-turned-resistance line near 1.1590.

Following that, 38.2% Fibonacci retracement of September-October downside and 50-DMA, respectively around 1.1670 and 1.1690, will be tough nuts to crack for EUR/USD buyers.

Even if the pair buyers manage to cross the 1.1690 hurdle, the 1.1700 round figure and late September’s peak near 1.1760 will be challenging them.

EUR/USD: Daily chart

Trend: Further weakness expected

 

The Japanese Prime Minister Fumio Kishida’s ruling LDP defied expectations and held on to a majority in Sunday’s parliamentary election, exit polls showed, solidifying his position in a fractious party and allowing him to ramp up stimulus, Reuters reported. This adds to the prospects of additional stimulus spending and weighs on the yen.

”While Kishida’s conservative Liberal Democratic Party (LDP) was projected to emerge with fewer seats in the powerful lower house than it won in the last election in 2017, the party retained its majority, exit polls by public broadcaster NHK showed early on Monday,” Reuters reported, adding, ”the result was at odds with expectations and initial exit polls that suggested the LDP could lose sole majority. Kishida, a soft-spoken former banker who has struggled to shake off an image that he lacks charisma, is also likely to be emboldened by the win.”

”The vote was a test for Kishida, who called the election soon after taking the top post early this month, and for the long-powerful party, which has been hurt by perceptions it mishandled the coronavirus pandemic,” the note ended with. 

USD/JPY ended up 0.37% on Friday and this news could add to the upside for the open with eyes above 114 the figure. 

  • AUD/USD is on the verge of a downside continuation for the open. Trendline support is under pressure. 
  • The RBA and Fed are the main highlights for the week ahead along with US jobs. 
  • For the open, Chinese data will be taken into consideration. 

AUD/USD ended the day around 0.3% lower on Friday following a sharp rally in the US dollar. The Aussie closed at 0.7518 and had ranged between 0.7500 and 0.75550.  Volatility in the foreign exchange and interest rate markets increased in recent trading days as markets position for central bank actions and economic data. Friday was especially volatile due to the squaring up of month-end portfolios on the day of the week when markets tend to be the least liquid.

US Treasury yields climbed after the government’s index of core personal consumption expenditures which supported the greenback. The PCE is the Fed’s preferred inflation measure and climbed at a 4.4% annual rate in September, continuing a run of inflation at levels not seen in 30 years ahead of the Federal Reserve meeting this week. This measure showed prices continuing to rise faster than their 2% target. The data reinforces the idea that the Federal Reserve is going to raise rates around mid-2022.

China data in focus

Meanwhile, Aussie traders will be taking note of the data from China that fell over the weekend. It has shown that growth has lost momentum, with construction and real estate under pressure. Supply-side pressures are evidently weighing on activity. Some restrictions are easing such as in coal, however, which will be expected to support electricity production and usage while there is a little softening in credit availability. 

The data arrived as follows: Manufacturing PMI 49.2 vs the expected 49.7, prior 49.6. This was the second month of contraction in a row. Meanwhile, Non-manufacturing PMI fell to 52.4 vs the expected 52.9, prior 53.2 leaving the Composite down at 50.8 vs the prior 51.7. 

October’s manufacturing and non-manufacturing PMI demonstrated the effects of intensive policy actions on the economy. Still, to come, Caixin PMIs are up next for today’s sessions being the private survey. Manufacturing PMI, expected 50, prior 50.  In other data for Asia, we will see Australian PMI, Melbourne Institute inflation and ANZ job ads, and the Japanese PMIs.  

Central banks and US jobs in focus

The credibility of established Fed and Reserve Bank of Australia guidance is under enormous pressure and the next meetings are going to be an opportune time to update it. The RBA tomorrow is expected to change its guidance following stronger core inflation by possibly abandoning its 3-year yield target. ”We expect the RBA to announce an end to its Yield Target Framework next week,” analysts at TD Securities said. 

”This follows the RBA’s decision to not defend the yield on the Apr’24s even after trading significantly above the 10bps target. As for QE we expect the Bank to leave its guidance unchanged, continuing to purchase bonds at a weekly A$4bn rate through to Feb.”

As for the Fed, tapering will be announced. ”We don’t expect any definitive new “liftoff” signal, and we expect “elevated” inflation will continue to be seen as “largely reflecting transitory factors,” but the chair will likely emphasize how tapering will lead to flexibility in responding if the economy evolves in a way that deviates significantly from expectations,” the analysts at TDS explained.

For US payrolls, the analysts argued that they likely reaccelerated in October, consistent with a fading of Delta’s drag as well as a smaller education-related drop in government jobs than in September. 

AUD/USD technical analysis

The price is on the verge of a critical test of the dynamic support following a touch of the 61.8% Fibonacci retracement level and a rejection at the 20-EMA. If the support breaks, the downside will be in play for the open this week.