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Daily Report
Written by Jameel Ahmad, Chief Market Analyst at FXTM
I can barely move my eyes from the charts for at the moment without thinking to myself “what on earth has just happened?” As the US opening bell rang yesterday, we received the disappointing news that Advance Retail Sales fell by more than forecast in September. It was expected that retail sales would decline by 0.1% last month, but sales actually fell by 0.3%. What transpired around 20 minutes after this announcement on Wednesday was quite bizarre and shouldn’t be entirely attributed to the weaker than expected retail sales data. Instead, it is far more likely to be linked to continual fears of the global economic recovery.
These fears sparked another round of sell-offs in Wall Street and the market got into quite a frenzy. At one point, the S&P 500 fell by as much as 3% and nearly erased its gains for 2014, dropping as low as 1820. This represented a near 170 point drop from the high of 1967 last Thursday, meanwhile the Dow Jones moved over 600 points in under 30 minutes of trading. While some movement was expected in the run up to the Federal Reserve concluding QE later this month, what we have observed in recent days is in fact severe volatility. Investors are clearly becoming spooked by consistent fears over global economic growth resurging and as such, closing positions and taking profit.
As Thursday’s US session commences, Initial Jobless Claims are released. The substantially improved US labour market has been the cornerstone of improved economic data from the United States and investors will be looking for something to cheer this afternoon. Otherwise, we can’t rule out the possibility of another sell-off.
The fire sale was not just noticed in the US stock markets, with extreme profit-taking also noted in the Greenback. ECB President Mario Draghi would have been left frustrated and perhaps even rubbing his eyes at the Eurodollar moving from as low as 1.2670 to as high as 1.2884 over the course of just one hour. For weeks it has been stated that for the EURUSD bear market to continue, the EU economic sentiment needs to remain bleak and demand for the Greenback must remain consistent. Widespread profit taking in the USD will lead to severe appreciation in “riskier” currency pairs such as what was evident in the Eurodollar yesterday.
Later in October, we are expecting Federal Reserve Chair Janet Yellen to make a statement that although QE has concluded, the US economic recovery has been a long process and the Federal Reserve will not be pressured into raising rates anytime soon. As such, and if our expectations are accurate, the EURUSD could make a return to 1.30 as October concludes. For now, support is can be seen around 1.2750 and we need a downside break below here, before the pair can enter the low 1.27s. Other than the Eurozone Trade Balance, economic data from the EU is low today. Therefore, the pair is far more likely to move in accordance with how the markets react to the US Initial Jobless Claims data. Draghi will be hoping for positive US news, otherwise the unexpected appreciation in the Eurodollar will continue.
The GBPUSD continues to struggle to find direction and is repeatedly alternating between bullish and bearish movement. The UK unemployment rate was declared at 6% on Wednesday but other than that, there was nothing in the employment report to get the GBP bulls excited. Average Wage Growth showed some signs of improvement, rising by 0.7% but when CPI is at 1.2% there is no real pressure on the Bank of England to raise rates anytime soon. After the US market sell-off, the Cable appreciated by 100 pips and concluded trading at 1.6019.
As the European session has got underway at the time of writing, the pair has already slipped back to 1.59. UK economic data is low today and this pair will therefore fluctuate in accordance to how the US session opens, and the reaction to US Initial Jobless Claims. As long as Initial Jobless Claims continue to improve and the US market sell-off pauses, the GBPUSD is likely to continue softening today and find support around 1.5946 and if the Greenback really strengthens, 1.5895.
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