Heading into a German Federal election on Sunday, the latest polls suggest that the race to the country’s leadership tightens, as the key candidates hold their final rallies. Sunday’s vote will mark the end of Chancellor Angela Merkel’s 16 years in office.

Exit polls will be released when voting ends at 1600GMT on Sunday and results will trickle in throughout the night.

Source: Al Jazeera 

Poll predictions on Saturday point to the center-left Social Democrats (SPD) holding a small but narrowing lead over Merkel’s party, the center-right Christian Democratic Union (CDU), per CNN News.

The SPD is standing at 25.2%, predicted to gain 4.7 percentage points compared to the 2017 national elections. This lead could mean an end to a 20-year-long downward trend for the Social Democrats. Meanwhile, Merkel’s CDU is behind SPD at 22.4%, according to the latest polls. The Greens are currently seen lagging at 15.9%, in third place.

German Elections Preview: Three EUR/USD scenarios for the post-Merkel dawn

EUR/USD booked a third straight weekly loss ahead of Sunday’s German election, thanks to the Fed’s tapering signal and the persistent uncertainty around the indebted China Evergrande Group.

The currency pair found strong support around 1.1685 levels, finishing the week at 1.1720, as the bulls failed to find acceptance above the 1.1750 psychological barrier.

  • The Dow Jones and the S&P 500 finished the day with gains of 0.1% each, while the Nasdaq was unchanged.
  • Evergrande’s uncertainty will carry on throughout the weekend.
  • Stocks rose, despite the new Federal Reserve hawkishness.
  • Nike fell 6.5%, claiming supply chains crunch and high freight shipping prices.

Two of the three major US stock exchanges ended the week in the front foot. The Dow Jones Industrial Average (DJIA) rose 0.1%, to close at 34,798. The S&P 500 added 0.1% finished the day at 4,455.48, whereas the Nasdaq Composite slid less than 0.1% settled at 15,047.70.

Surprisingly, the Dow Jones and the S&P 500 ended the week with gains amid uncertainty surrounding the indebted real-estate giant Evergrande Group. At the start of the week, equities sold off in the outcome of Evergrande’s default could spill over the financial markets. 

Nevertheless, on Wednesday, Evergrande Group calmed the markest with a press release that said they would pay the yuan-denominated bonds, leaving US dollar bond-holders in limbo. As the news was released, investors seized the opportunity to buy the dip.

Additionally, the Federal Reserve unveiled its monetary policy statement and its Summary of Economic Projections, also known as SEP.  The Fed left the rates and its bond asset purchasing program unchanged. However, a subtle change in the monetary policy statement opened the door for the so-called bond tapering process. Further, inside the SEP, the famous dot-plot revealed that half (9) of the FOMC members saw the need to increase the rates in the second—half of 2022, adding more fuel to the already hawkish statement. Despite the aforementioned, US stocks held to their own and rallied for three consecutive days.

That said, the Dow and the S&P finished the week with gains of 0.5% and 0.6%, each, while the heavy-tech Nasdaq barely changed.

Moving to stocks, Nike dropped 6.5% after warning of possible delays during the holiday’s shopping season, blaming a supply chain crunch.  In line with Nike, Foot Loker shed 7.2%.

Further, the US Dollar Index finished the day at 93.27, up 0.19%, while the US 10-year Treasury yield rose four basis points (bps), ending the week at 1.453%, the highest level since July 2.

In commodity markets, gold (XAU/USD) rose 0.45%, closed at $1,750 troy ounce, while crude oil Western Texas Intermediate (WTI) finished at $73.85 per barrel, up almost 1%.

In the Crypto environment, Bitcoin is trading at $42,956.85 at the time of writing, down 4.28% weighed by news from China, specifically the PBoC, saying that cryptocurrency-related transactions are illegal.
 

  • AUD/USD struggles at 0.7300 as the market mood is risk-averse.
  • Evergrande’s failure to pay its bond interest weighs in the AUD.
  • Australian Retail Sales and Building Permits for August could provide fresh impetus to AUD/USD.

Earlier in the Asian session, the aussie was trading at daily highs around 0.7310’s, on the back of the positive market sentiment, amid the hawkishness showed by the Federal Reserve on Wednesday monetary policy statement and dot-plot. Nevertheless, Evergrande’s woes and failure to pay the dollar bond coupon changed the market’s mood to risk aversion, thus benefitting the US Dollar. At the time of writing, the AUD/USD is trading at 0.7253, recording a loss of 0.56% during the day.

The Australian dollar is the most exposed to China’s woes – ING

According to ING, the Australian dollar is the most exposed currency for any spillover from a potential Evergrande’s default. The rationale is that Australia is the most Chinese-dependant country in the G10. A collapse in the real estate market would raise further demand concerns in the iron ore market, generating another sell-off in the commodity’s price.

That said, further in the next week, in Australia, the Retail Sales and the Building Permits for August in a month-over-month reading could be catalysts for the AUD/USD pair.

Moreover, the US economic docket is packed with Durable Good Orders, Consumer Confidence for September, GDP monthly and yearly basis figures, Initial Jobless Claims for the week ending on September 23, and the ISM Manufacturing readings for September.

AUD/USD Price Forecast: Technical outlook

Daily chart

The AUD/USD is trading at the mid-point of the trading range of the day. 

The price action of the last two candles suggests that a Dark-cloud cover or a bearish-engulfing pattern might be forming. Either way, both have bearish implications. The first one is a weaker signal, and it will need confirmation. The second is a strong signal, though it will require a daily close below 0.7245 to confirm its validity.

In case of that outcome, the first support on the way down would be the September 20 low at 0.7219. A decisive break of the latter could expose the 2021 low at 0.7105.

The Relative Strenght Index is at 43, heading lower, supporting the downtrend.

  • USD/CAD dropped 40-pips on the back of WTI’s climb to new monthly highs.
  • Market sentiment dampened the appetite for high-beta currencies, like the loonie.
  • In the next week, the Canadian GDP report will be the focus for investors.

Early in the American session, the loonie was trading above 1.2700 on the back of dampened market sentiment caused by various factors. However, as the session progresses, the USD/CAD is barely up 0.09%, trading at 1.2667 at the time of writing.

As previously mentioned, the market sentiment is downbeat. Evergrande’s concerns of a possible spillover could materialize. The Chinese real-estate giant failed to pay the interest in the dollar-denominated bond due on Thursday, though it has 30-days to fulfill the coupon. Additionally, the Federal Reserve’s prospect of bond tapering later in the year, and half of the FOMC members looking for a rate hike in the second half of 2022, according to the dot-plot, also weighed in the mood.

WTI reached a new two-month high above $74.00

Back to USD/CAD, oil prices are on the front foot. WTI’s rose to a monthly high of $74.14, a gain of 1.10% during the day, boosting the oil commodity-currency loonie, as the pair struggled at 1.2700 before the New York session open.

Meanwhile, the US Census Bureau unveiled the New Home Sales for August, which rose to 0.74M better than 0.70M foreseen and 0.708M of the previous reading. The US Dollar Index showed no reaction to the report, and at the release, was trading at 93.29, up 0.23%. 

In the next week, the Canadian economic docket, on Thursday, will unveil the Gross Domestic Product for July expected at 0.7% on a monthly basis. Meanwhile, on Friday, the Marking Manufacturing PMI for September foreseen at 57.2 will be released.

In the US, on Monday, the US Census Bureau will release the Durable Goods Orders for August, expected to rose by 0.6%. Further, Nondefense Capital Goods Orders excluding Aircraft will also be revealed.

KEY TECHNICAL LEVELS TO WATCH

 

  • Western Texas Intermediate printed a  two-month high at 73.90
  • Oil companies with installations in the Gulf of Mexico turn to Iraq and Canadian oil.
  • The crude oil rally was capped by China’s first sale of crude of its reserves.

Western Texas Intermediate (WTI) crude oil is climbing for the fourth day in a row, surging almost 1%, trading at $73.86 at the time of writing. 

The market sentiment is downbeat. Major global equity indices closed with losses, except for the Japanese Nikkei and Topix, which reported gains of 2.06% and 2.31%. Meanwhile, as the New York session advances, the S&P 500, the Dow Jones, and the Nasdaq record losses between 0.01% and 0.25%.

Meanwhile, the US Dollar Index, which influences the price in commodities stills up some 0.17%, at 93.25.

WTI reached two-month highs at $73.90

The surge in oil prices is due to low inventories in the US, which are near a three-year low, and rising natural gas prices impacting customers who may be forced to switch to oil. Further, no new lockdowns in Europe and robust recovery in China mobility lift the prospects for upside.

In the Gulf of Mexico, crude oil companies that have not been able to re-establish operations turn to Iraq and Canadian oil to meet the market demands. 

Nevertheless, the rally was capped by China’s first sale of crude from its strategic petroleum reserves in its attempt to curb inflation in raw material prices.

WTI Price Forecast: Technical outlook

Daily chart

WTI is trading above the neckline of an inverted head-and-shoulders pattern that has bullish implications. A daily close above the July 30 high at $73.88 could propel the black gold towards the inverted head-and-shoulders target of $80.00. But on its way up, it will find the July 13 high at $74.95, followed by $76.00. A decisive break of that level would expose the inverted head-and-shoulders target of $80.00

The Relative Strength Index is at 65, aiming higher, towards oversold levels, but it has room for some upside.
 

  • EUR/USD recovered modestly after declining to 1.1700 area.
  • US Dollar Index stays in the positive territory above 93.20.
  • 10-year US Treasury bond yield is clinging to modest daily gains.

The EUR/USD pair declined to a daily low of 1.1701 in the early American session but managed to erase a large portion of its daily losses. As of writing, the pair was down 0.1% on the day at 1.1725 and was on track to end the week virtually unchanged.

US stocks stay resilient on Friday

Earlier in the day, the data from Germany showed that the IFO – Business Climate Index declined to 98.8 in September, missing the market expectation of 100.4, and this reading weighed on the shared currency. Additionally, the IFO Current Assessment Index edged lower 100.4 from 101.4 in August.

On the other hand, the risk-averse market environment allowed the greenback to continue to outperform its rivals in the first half of the day. However, with Wall Street’s main indexes holding near Thursday’s closing levels, the US Dollar Index (DXY) struggled to preserve its bullish momentum and helped EUR/USD stage a rebound. Currently, the DXY, which touched a session high of 93.42, is up 0.2% at 93.27.

In the meantime, hawkish comments from Fed officials continue to support the greenback. Kansas City Fed President Esther George said on Friday that the criteria for bond taper have been met. On a similar note, Cleveland Fed President Loretta Mester noted that she supports starting to reduce asset purchases in November. 

Technical levels to watch for

 

Analysts at Danske Bank forecast USD/RUB at 72.00 in one month, at 72.00 in three months, 71.00 in six months, and at 70.00 in twelve months. They argue the risks for the Russian ruble shifted from geopolitics toward a strengthening of the US dollar. 

Key Quotes: 

“RUB has faced a number of headwinds since mid-2020: inflation has come up, oil prices have been low and amid lockdowns, activity has remained weak. In turn, improvement in activity indicators have been slow. Russian politics have also been RUB-negative, though sanctions have been milder than expected. Relations vis-à-vis Ukraine, US and Europe have also been a headwind for FX. However, in recent month(s), the central bank have turned increasingly hawkish and raised interest rates, economic activity has picked up and geopolitical risks faded. RUB have strengthen on this reversal of fundamentals. EUR/RUB has also come lower.”

“We keep our RUB-positive forecast largely unchanged. For RUB, it seems like the key risk has shifted from geopolitics vis-à-vis Ukraine and more so towards a further (large) strengthening of broad dollar.”
 

Data released on Friday showed New Home Sales rose in August by 1.5%, against expectations of a modest decline. According to analysts at Wells Fargo, sales have cooled down compared to the feverish pace seen in late 2020 and early 2021 but they argue that despite some moderation recently, the overall pace of sales is still very strong relative to before the pandemic. 

Key Quotes: 

“New home sales rose 1.5% to a 740,000-unit pace during August. The modest pick-up in sales continues to show that underlying demand for homes remains strong. The slight pull-back in sales experienced this spring and early summer likely had more to do with builders struggling to build enough homes to show prospective buyers. It is challenging to sell a home when you are unable to tell a buyer when that home will be completed.”

“Lumber prices have come down from the exorbitant levels seen this spring. Other key building materials, however, remain in short supply, which is delaying new starts and preventing projects from wrapping up. An uptick in the already lofty NAHB/Wells Fargo Housing Market Index (HMI) for the month of September, which was released separately this week, provides addition evidence that builders are still overwhelmingly optimistic, even with supply-side headwinds.”

“The 740,000 unit pace registered during the month is the fastest since April. Sales have cooled down compared to the feverish pace seen in late 2020 and early 2021. Despite some moderation recently, the overall pace of sales is still very strong relative to before the pandemic. For context, there were 683,000 new homes sold in 2019.”

The GBP/USD pair could accelerate to the downside if the 1.3600 support area is broken, according to analysts at MUFG Bank. Their target from current levels is seen at 1.3200, with a stop-loss at 1.3950.

Key Quotes:

“We are establishing a short GBP/USD trade idea which is based on our scepticism of the current pricing in the rates market being sustained. Macro-economic conditions are worsening and data released today on consumer confidence and retail sales suggest there is already an impact from the increasing reports of the rising cost of living and how this could quickly erode consumer spending power at a time when nominal income are about to suffer. The universal credit support of an additional £20 per week will end on 13th October while the larger than originally expected 1.4mn workers still on furlough will suffer with the furlough scheme ending next week.”

“While demand for labour is strong and these furloughed workers should be absorbed, there will inevitably be a period of uncertainty. The government today has announced some loosening of visa controls to allow for increased employment of HGV drivers from Europe but the measure is likely to take time to have an impact. Rising energy bills and further collapses of energy supplier companies will also weigh further on sentiment.”

“1.3600 looks like an important technical support level, and we see a high risk of a breach, possibly next week which has potential to accelerate the near-term momentum to the downside.”