The DAX traded lower in European trade as losses continue to mount since last week’s trendline rejection.
The cautious mood seen to start the week is down to a host of central bank meetings to come as well as Eurozone PMI on Friday.
Economic data for the eurozone is sparse for the week with a host of speeches by European Central Bank (ECB) members expected to be the key. Friday’s PMI print is the first glimpse of business activity in the eurozone for the month of September. The PMI print has already spent two months below the 50 level that separates contraction from expansion as recession fears for the region continue to grow. A recent Bloomberg poll of Economists now has the probability of two straight quarters of contraction at 80%, up from 60% in its previous survey. The PMI data is expected to be a key indicator as to how far from an official recession we are, something which could further weigh down the index.
On the daily timeframe we continued to push down this morning before finding support at the September 5th low around 12590. On an intraday view this level could hold the key with regards to the YTD low (12377), as a close below could open up a retest of the YTD low or a clean break lower and new lower low. This would be keeping with the overall structure on the daily timeframe. We currently trade back below the 20, 50 and 100-SMA while a pullback to retest the MA’s cannot be ruled out as we approach the FOMC meeting.
Crude Oil continued its rally in European trade on the back of a weaker dollar, yet it is still on course for a second consecutive weekly loss. We have seen an increase in demand concerns, rising stockpiles as well as central banks tightening across the board. On Thursday, US government data indicated a buildup of crude inventories which increased by a larger-than-expected 8.8 million barrels. To compound matters, a gauge of gasoline demand sank below 2020 seasonal levels. Despite the current weakness in price, US officials are hunting for ways to keep oil in check with officials fearing a spike in prices later this year, there remains a possibility of an additional release from strategic crude reserves.
Crude’s slump this week presents a challenge for the Organization of Petroleum Exporting Countries (OPEC) who earlier in the week announced a cut of 100k barrels a day. The cut though did nothing to arrest the slide in price this week, as it was nothing more than a reversal of last month’s increase. While sentiment remains negative, further cuts could support prices moving forward as OPEC+ hinted at its intention to keep crude oil prices around the $100 mark.
From a technical perspective, failure to defend the August low of around $85.73 has led to a further decline in prices, with a weekly low print of around $81.25. We have had an aggressive bounce higher since Thursday as we retested the descending trendline. We do however remain below the 100 and 200-SMA and considering the sharp decline of the last two weeks, we could see a pullback to retest MA’s. A continued rally to the upside may find resistance at the previous swing low around $86.21. A daily candle close above the most recent swing low at $85.73 will be key to see a continued move higher, which would also form a three-pin Morningstar candlestick formation which could lead to more upside heading into the new week.
Trade accordingly with your risk
Risk assets remain on the back foot to start the week as selling pressure spills over ahead of the Fed’s Jackson Hole Economic Symposium. Volatility appears to be elevated across asset classes as traders eagerly await what Federal Reserve Chair Jerome Powell may talk about in his remarks on Friday. Despite a softer CPI print in July, extremely strong labor market data indicates that the Fed may have the rope required to continue to be strong in the fight against inflation
It would appear that the rejection of the 4300 area marked the near-term top for price action, with downside momentum growing with each passing day. Friday’s session saw a weak close, and follow through occurred at the Sunday futures open with a gap lower. Price has since continued to cascade lower, with 4200 offering little in the form of psychological support. As sellers continue to drive price lower, it may be wise to wait for signs of exhaustion before trying to pick a pivot point.
With such major event risk on the calendar this week, sharp moves such as the one may become commonplace. Whether this is a case of the market once again getting ahead of itself in anticipation of a major Fed event will simply have to be seen in due course. Powell notably said in his last press conference that the Fed was approaching neutral, and while recent Fedspeak has pushed back on that, recent CPI and PPI prints may allow for Powell to talk down market pricing this Friday. While this all remains pure conjecture, the scenario for a nasty reversal remains in play. Price may look to the 4120-22 area for support if we continue lower, while 4200 or resistance at 4244 could come into play on any upside swings.
Trade accordingly with your risk
NZD/USD snapped the opening range for August after giving back the advance following the Reserve Bank of New Zealand (RBNZ) interest rate decision, and recent price action raises the scope for a further decline in the exchange rate as it extends the series of lower highs and lows from last week.
The advance from the yearly low (0.6061) may continue to unravel as NZD/USD trades back below the 50-Day SMA (0.6253), and the exchange rate may track the negative slope in the moving average as it appears to have reversed course after failing to test the June high (0.6576).
The near-term rebound in NZD/USD seems to have stalled following the failed attempt to break/close above the 0.6470 to 0.6490 region, with the Relative Strength Index (RSI) highlighting a similar dynamic as it falls back ahead of oversold territory.
The recent series of lower highs and lows has pushed NZD/USD to a fresh monthly low (0.6157), and lack of momentum to hold above the 0.6170 area may send the exchange rate towards the 0.6070 Failure to defend the yearly low (0.6061) opens up around 0.5900 to 0.5930 with the next area of interest coming in around the April 2020 low (0.5843).
The euro extended its fall this Monday as markets follow on from last weeks outlook about a hawkish Federal Reserve who could remain fervent in their path despite concerns around a recession. The inflation aspect of the argument is what many believe to be in favor of further rate hikes without inducing the U.S. economy into a recession reiterated on Friday by the Fed’s Barkin. Should Fed Chair Jerome Powell echo these sentiments on Friday at the much awaited Jackson Hole Symposium, we could see the greenback in the drivers seat throughout the remainder of 2023.
From a European perspective, soaring gas prices continue to weigh on the eurozone and with winter approaching, the problem is likely to worsen. The ECB has a tough task on their hands to try and juggle inflationary pressures while the weak economic backdrop shows no signs of letting up.
Price action on thedaily EUR/USD chart above has bears knocking at the 1.0000 support zone for the second time in this year as the pair approaches oversold territory on the Relative Strength Index (RSI).