Reasons Behind USD Weakness And A Key Level To Watch

Okay, very good morning to you. Hope you're well. It's Wednesday the 18th of November. Uh, just before I begin, don't forget to subscribe if you're watching this on the YouTube channel. Got a brand new video we've recorded this week which we're going to release on Saturday, which is the third installment of the trading psychology series, what's being led by one of our traders, Tim Duggan. He speaks this time to a professional high-performance psychologist and some really great practical tips about just managing your emotional state and your mindset. So I think you'll really enjoy that. We're going to release that on Saturday at midday, so don't forget to subscribe. Otherwise, let's just get straight into it and start talking about just generally what's going on this morning. And yeah, it's a relatively quiet— there hasn't been one individual single piece of news that I think I can really update you on, but there definitely is a few different themes, uh, that are playing out at this present point in time. So right now, in terms of the asset class mix and general sentiment, The dollar index is a little bit softer. We're down just shy of 0.2%, and that has helped both major currency pairs, EURUSD and Cable on the top left, just move up a little higher as European players have come into the market. Cable just surmounting its high that was seen from yesterday's session, running up to around the R1 at 3284 in the futures. EUR/USD, quite an initial obstacle and resistance on the upside with that R1 sitting around that 119 handle, which did mark around yesterday's high as well. So worth keeping an eye on. I'll come back in a second and look at the dollar index because that's at some quite interesting long-term levels as well. Otherwise, in terms of the gold market, and we, you know, this colored line I've had, which has been a level of, of relevance really going back over the period of the last 5 or 6 trading sessions as an area of resistance turned support. Once again, in the late US session when that got breached, saw quite a strong push on the downside where we responded down at what was on today's daily pivots, the S1, which was around those lows we had on the 13th on that double bottom on that session, and a bit of recovery. So in the upside move now, that kind of band area there of resistance support is also coinciding with the pivot. So So once again, that around $82.50 remains quite key as a kind of main area of price points to break through on either side for the gold market. In the equity market, you probably would have seen yesterday then we had a negative close on Wall Street. So losses were ranging in the tune of about 0.5% in the case of the S&P and the Dow, and a little bit more flat across the three major indices. So the NASDAQ was also down about 0.3%. Remember, we had been seeing quite big divergences where we're getting this kind of moderate rotational play where either the NASDAQ would be out or underperforming on the back of that kind of context. The one story, of course, which was pretty interesting, I thought, on a single stock basis yesterday was Amazon, uh, because the pharmacy chains were amongst the worst hit in terms of performance individually in single stock news yesterday. That came after Amazon, which did actually buck the trend and finish in positive territory, albeit just marginally yesterday. They unveiled a new push into prescription drugs, which will offer discounts of up to 80% on generic drugs for Prime subscribers paying without insurance, either, um, on its website or at more than 50,000 brick-and-mortar pharmacies nationwide is the deal that they've done. So Walgreens, CVS Health were down close to 10% and 9% each respectively. Uh, so yeah, pretty monumental news, I think, for, for Pfizer— excuse me, for Amazon, as they continue the kind of juggernaut that they are. I heard one analyst refer to them as the Death Star, uh, in terms of their just overall slow takeover of everything, every sector. And this just being the latest, it isn't really a new idea. The execution of it though, and, and just the aggressiveness of the discounts was really quite interesting. So elsewhere, Pfizer shares were down about another 3.5%. So again, a little bit more realization about the kind of pitfalls after that initial positivity, but also the Moderna news coming out and the kind of improvements that that latter one has made over the, the competitive Pfizer product continues to see an unwind of that again that they saw at the beginning of last week in their shares. On a stimulus front, where are we with that? Well, Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer yesterday asked the Senate Majority Leader Mitch McConnell to resume negotiations while McConnell stuck to his insistence on a targeted package. Basically, there isn't going to be any stimulus anytime soon. I don't think that's really changed from the discussion points we were having yesterday, but the point is that they've now started some degree of dialogue. Again, as we go into what was a lot of the focus in the rundown from yesterday, which was this idea about the kind of renewed implementation of restrictions, as that economically starts to bite, I'm sure that will sharpen the, the dialogue on Capitol Hill going forward. So not really looking out for much headway to be made anytime soon, but perhaps some more progressive conversations might start to materialize. Looking at the equity markets just very briefly here on the S&P, I was going to stick it on a daily because then we can see the kind of the narrative of where we've been and where we're heading. And interestingly, now that previous all-time high that we printed back on the early part of September now acting on the daily candles, it's quite a significant area on the pullback. You can see after the break that we had on the Moderna news when we hit the all-time high Yesterday we bounced off that level, and overnight we've bounced off that level. So really, that 86.5 is a pretty decent daily level to look out for where we close today, above or below, whether or not we can continue to push on up here in the— on the upside. The NASDAQ, it's that trend line that's been the one that's been on focus on the daily charts. So if I start on a higher time frame, Uh, this is that descending kind of trend line we've been looking at ever since we hit the peak, uh, back at the same time, beginning of September. We have the Pfizer and brief breakout, that's that extension on that wick on the upside, as you can see. But back on Monday on the Moderna news, we, we failed on that daily to, to get above there, and we failed as well on rejection yesterday. So quite interesting to see here how the, the NASDAQ is going to perform. On the shorter-dated chart then, that area where, if again I just broaden this out a little bit, from the Fib retracement from the Pfizer spike higher to the following day's low, that area is still a pretty stubborn area of resistance on any push on the upside if that were to materialize. That being then the kind of weekly range high, you've also got the R1 on the daily pivots and the 618 fib retracement of that move I just spoke of. So that would be quite, quite key. On the downside, any break of the intraday low seen already as Europe has come in— we've had a bit of a bounce, but a breakthrough of that S1 which provided support late into the Asia-Pacific session, then probably be looking back down towards the 382 fib, which was also the low that we printed on Monday session, which would be the weekly low of course. Okay, let's get into— well, final, actually, before I get into the headlines, final charts I did want to look at was the 10-year, because I thought the T-note was quite telling really of where people's heads are at, at the moment. And I say that because here's the Pfizer news. When it, when it broke, we obviously saw, um, kind of a reflation trade. What I mean by that is, is that this initial perception was so positive about a, um, a vaccine coming out and therefore kind of reassuring that the economic recovery will take hold perhaps quicker than anticipated. Obviously, this is totally ignoring all the other facts that we've discussed about why that's probably a little bit over optimistic, but it meant that yields rallied aggressively and the dollar rallied aggressively. And that's two really important points because Since that, that day on the 9th, the market's pretty much been continuing to reverse that initial kind of assumption. And so if you actually look at the 10-year, what I thought was quite interesting is now we've pretty much reversed the entire move. We've got about another 9 ticks or so to go this morning. In terms of the 10-year, we've run into a bit of an obstacle, which is quite a nice technical level here. Um, which is— if I just draw a rectangle, you've got those previous highs on the 2nd of November. The market's held up then on the 4th. It also acts as an area of support prior to the Pfizer news coming out. And then you've got the R1 on the daily pivots here, which is around 138.15. So that being said then, with that unwinding, obviously a lot of people looking at the COVID developments at the moment, although equities still hold up, they were obviously looking a little bit fragile as you started to see some of those restrictions getting rolled in. But it does bring about then quite an interesting concept with the dollar, because the dollar, if anything, has been re-weakening. And again, just like yields in the US, they shot up on the back of, well, dollar strength, high yields when the initial kind of vaccine news came out. If you look at Moderna, when that came out, same reaction but smaller. And again, this behavioral kind of play of the diminishing return of now people becoming a little bit more educated about this vaccine news. What does it mean? What's the likelihood of it being rolled out more effectively? The kind of reality check, I guess. So the knee-jerk reaction has been dollar strength, yield strength, uh, but it's got progressively smaller. And probably I'd anticipate that to be the case going forward as we get the other updates to come. But the point I'm trying to make here is there are quite key levels in the currency pairs. As I mentioned, both major dollar pairs, euro-dollar cable are moving higher this morning. Aussie dollar the same, it's testing up around its pivot at the moment. And in the Dixie, this kind of 92, um, 92 area where we're trading at the moment, 92.30, 40, quite key. That was the low that we had in yesterday's session. That starts to bring into play then the lows that we were trading, uh, back just before that news broke on Pfizer. Which was around 92.12. And the reason why this is quite important is because if you start looking at the dollar index on a— this is on a monthly chart, so here we're basically looking at the last 20 years of price action on the dollar index. If you actually look at that chart then, at 92.25 area, which is this dotted horizontal line, I mean, just look at how important it's been. I mean, yes, we have got lower, of course, back in 2018, And that in itself, quite a crucial level at around 88.30. You can see there back in the financial crisis and also the recovery in the sovereign crisis, um, that was a peak of price activity, which does line up quite nicely. You can see here at around kind of 88.50 type level. But here is key because as that blue line would indicate, not only was it a supportive factor back in 2016, 2015, There's also key resistance in 0.5004, going back all the way to 1998. So the dollar does warrant watching. One thing is, is that there were some interesting comments, of course, out of Jerome Powell yesterday, and he was paying heed to the fact that, you know, obviously the COVID situation is worsening in America. His exact comments were, he said, the US economic recovery is likely to continue at a solid pace yet risks losing momentum as the virus surges. Um, Powell called rising virus infection rates a significant downside risk, especially in the near term. He added the Fed will stay here, will be strongly committed to using all of our tools to support the economy. Now, one thing we definitely are seeing, and this was kind of slightly evident in the, the retail sales report we had out of the US yesterday, but even more so COVID-19 concerns squeezed incomes and restricted mobility because of all these state-level restrictions that are being applied at the moment indicates then weak consumer activity going forward, uh, over the coming months. So really November and December, we are anticipating a deterioration in a lot of these macroeconomic indicators, um, that would suggest then this kind of W-shaped recovery, i.e., a renewed downturn after what is now this situation, of course, which is a continued move higher in the, the case count and subsequent deaths in North America. Interestingly, I did catch some commentary last night on Twitter. It was citing the White House Coronavirus Task Force, and they said that there is now an aggressive, unrelenting, expanding broad community spread across the nation. Reaching most counties without evidence of improvement, but rather further deterioration. So here then, COVID cases as of yesterday were just over 150,000, deaths now 762. If you actually start looking at the, the 7-day average, we're obviously coming up on the death side of things to where we were on the Sunbelt outbreak and the worst period at the beginning of August. So yeah, as we mentioned many times before, this number undoubtedly is going to get much worse over the next couple of weeks. And so that then, if you put these things together, as Powell was indicating, the emergence of continued virus being a downside risk, we already know then that that's going to impede economic activity. Do the Fed need to do more? And if so, So looking back at this long-term dollar chart, does the dollar then ultimately start to break down further? And if it does, technically then, you know, there's some scope for a decent move downward in the dollar, a continuation of really what has been the trend of 2020. Of course, remember, this is a 20-year chart we're looking at. If you just isolate this part on the right-hand side here This is the pandemic. And ultimately, despite some of the ebb and flow the dollar has had, it's substantially weaker, predominantly on the back of, uh, very expansionary loose monetary policy coming way of the Fed. And remember what that Standard Chartered FX macro strategist was saying that I covered on Monday? Now, if things get materially worse, could the Fed even look to do something prior to their December meeting? I think it's a little bit early to be making that— those kind of assumptions. But the point being is, is that it's going to keep the pressure on perhaps the Fed to be committing to more. If that does, well, perhaps that explains then some of the re-weakening of the dollar and this key level to look out for, and also the reversal in the US 10-year, which we were just looking at, irrespective of the fact that equities are holding up. Don't forget with equities that there's sector— sectorial plays, right? So even though cyclical stocks might suffer if the pandemic rages on, ultimately those big mega-cap tech names will just push on. And given that they're so big from a market capitalization point of view, that will hold and support the market up. So I wouldn't be looking so much then for, uh, a kind of perfect in-sync harmony move, because ultimately now the sector plays in, in equities can help support it in a different way, whereas you're getting that quite clear narrative, I think, in the dollar and US yields at the moment. So hopefully that makes a bit more sense from a top level. All right, a few other headlines for me to get you up to speed on. Um, wanted to talk about UK COVID situation because you've had the British Medical Association, the BMA, they've come out yesterday, well actually overnight, and they've warned that lifting the lockdown on December 2nd— remember that's where this current phase of national lockdown ends, at least at this point in time— they said lifting the lockdown on December 2nd without beefed up regional restrictions risked a fresh surge in infections. Ministers— this was in The Telegraph last night that I saw— are set to announce a package of post-lockdown measures next week. That's again according to The Telegraph. They were basically saying which could see households across England banned from mixing until Christmas, when the government aims to loosen restrictions for a few days. So the two kind of news stories fitting in, in connection with one another. Basically, the advice at the moment is that the lockdown, if anything, should either be extended or come with a very subtle loosening, which does mean that people should still not be able to mix, then meaning that if we can really get on top of it at the moment on the outbreak, it would allow people then to have some degree of looser restrictions around Christmas, of which the government already knows is going to be problematic to probably manage, as we've heard from various different surveys of Americans about what's their intentions of adhering to social distancing rules and max numbers of household gatherings. And 40% said they weren't going to play by the rules, which is a obviously significant amount. And definitely Christmas will be a testing time in the UK as well. Given the normal connotations of family gatherings with friends and so on. COVID cases then in the UK currently just over 20,000, deaths at 598 at the moment. That's a bit of context. Okay, going to talk a little bit about Brexit actually just before I move on while I'm talking about the UK. And there was a couple of really interesting comments about from Tom Newton-Dunn, used to be the head political correspondent at The Sun. He's now at The Times— Times Radio, actually. So he's a pretty well-informed chap. He's kind of one of the more heavy hitters on the UK political side. So he's got a pretty good ear to the ground in terms of the negotiation status of Brexit. And he said that Downing Street is said to push back on the idea of an imminent Brexit deal. Remember, we had The Sun yesterday, and then you had Bloomberg recycling that news The pound was a little bit bid yesterday on the back of the idea that they might get a deal as soon as next week. However, interesting thing that was being brought up here by Newton Dunn was that the departure of Dominic Cummings is said to have made it harder for PM to compromise with those close to PM Johnson, who's nervous about being painted as selling out So wants more time to pass, with the first or second week in December now seen as most likely. So yeah, I get that. I mean, if he just cuts a deal right now, I mean, Dominic Cummings has kind of won in that sense, and those around him will feel that that's the case. So as much as there's a bigger thing going on rather than Dominic Cummings, obviously the management of your political influence is ultimately what Boris Johnson is— right up there, one of the top things on the agenda. And so again, it doesn't really detract too much from the timeline that our expectations are, which is basically it's going to be between mid and the end of December when a deal gets done. And so some of that latter commentary would certainly supplement that, that view, which I think makes a lot of sense that, that Boris will want to portray that, look, this isn't to do with Cummings, this is all me. And I'm going to push for the best deal possible, and that deal gets brokered at the 11th hour. France, in The Telegraph, are said to understand to have now accepted that there will be reduced fishing access to UK waters post-Brexit. So that would again be fitting at the fact that it seems like both sides are getting a little bit closer to compromising. However, there's a little bit of political management that needs to happen on the side of particularly the UK government, given some of the chief advisor changes that we've had. Close to the Prime Minister. A few other things, uh, this, uh, has been out for a little while and I'm not bringing it to your attention as a piece of breaking news rather than something to just be a little bit vigilant about if you're trading oil. And that's in the FT, they're talking about Iran threatened a, quote, crushing response to any US military strike on the country's nuclear facilities. So the New York Times Times reported yesterday that Trump asked his senior advisers last Thursday for military strike options that he could take in the coming weeks on some of the nuclear facilities in Iran. Again, this type of rhetoric sounds pretty sensational, and you would, you know, if you weren't, I guess, used to this, the way of geopolitics and how it works in that region, you would think, wow, this is quite scary stuff. It's not really that new in terms of a kind of a use of or choice of language. If you remember prior to the pandemic, Iran and Iraq, these types of areas were absolutely one of the main key stories of 2020. It's just been superseded by this other thing that's happening right now. So my point here is that tensions are quite high. It seems like Trump doesn't want to go without making a bit of a splash because he's, you know, talking about the withdrawal of troops in some of these key areas in the Middle East. Uh, there's talk about a couple of departing potshots at China in various different forms, strong rhetoric against Iran. He certainly doesn't want to make it easy for Biden stepping in. Uh, but the point being is that oil obviously is hypersensitive to any type of potential supply disruption that can happen, particularly with the geography of things like the Straits of Hormuz, where before we've seen captured cargo tankers from Western companies, drones shot down, things of that nature. So if that did happen, not that I think you'd get a sustainable move over the medium term because ultimately that would be derived from the demand situation with COVID and how that's dealt with, but also the supply situation with the OPEC+ deal. But that doesn't mean in the intraday environment you might not get a very violent spike in prices if that were to materialize. So just something to be aware of, it's kind of festering in the background, and it would only take one headline to really rock the boat, uh, if you're day trading. And then API crude oil inventories, these came out last night. We did see a bit of a drift low in oil, but it's already been taken back. WTI crude is trading pretty flat this morning, so it's not really that big a deal. Um, but we had a fairly bearish headline, a build of just over 4.1 million. Expectations were pretty flat, pushing a build of just shy of 200,000 gasoline, around a quarter million distillates, draw 5 million. Um, just going to have a quick chat as well. I thought quite an interesting article, um, on Bloomberg regarding the ECB. And this isn't important really for the right here right now for trading strategies intraday, but I thought it was quite an interesting concept that Bloomberg were talking about, and, and maybe a good lesson for any of those not used to central bank communication. But the article is kind of just putting together a lot of the comments that have come out recently from a variety of different central bank speakers. And as I've mentioned before, Nearly every day we've had a calendar littered with, with central bank speakers. And ECB, for one, the headline wants next stimulus to be judged on quality, not quantity. And the analysis that they're trying to put together here is the fact that if you actually look at the, the PEP, the Pandemic Emergency Purchase Program, you know, the current envelope that they're talking about is to end with a size of 1.35 trillions. You know, these are— this is mega money that we're talking about here. And at this point in time, we've already only got to about half of that, really less than half, because we've still got some time to run. This is going to not end until way into the summer of next year, and the pace at which they're going at the moment with buying €20 billion a week. But if we then start taking this out, because the market is very much expectful that this will be expanded to roughly €1.85 trillion in December. So additional €500 billion top-up. What the ECB will be very mindful of is not having what happened to Draghi before. Draghi had this kind of reputation of overdelivering with stimulus. But the problem that that then has is markets start to over-expect, you know, such as life and human response. If I was just to give you £1 million, the first time that happened, you'd be absolutely ecstatic. But if I gave you £1 million every day, you'd soon be, oh, it's just £1 million. So that kind of very crude analogy really plays out in the behavioral way markets react. And the ECB will be very conscious of this because it's something which did impact Draghi before in his tenancy. So what they've already tried to to kind of push people toward is that it's about the quality, not just the quantity. The quantity is coming, but check out the quality. And that being predominantly about the, the length and maturity of the types of bonds of which they're purchasing, looking to target out and flatten the, the kind of long end of the curve and be more supportive in different ways beyond that just number. The worst thing that can happen is you do have highly complex, very supportive overall package and people just look at one number in markets and they go, no, it's not good enough. And then it's almost self-defeating in a way, because ultimately, as much as this is a physical thing, buying bonds, ultimately it's about managing confidence. And if you can manage the market confidence, that, that's the most powerful thing a central bank can do. Uh, and so yeah, this is what this article is talking about. I thought it was quite interesting. All right, let's wrap it up then. What's coming out for the day? You've already had UK CPI. Although the pound is trading higher this morning, I don't think it's on the back of the CPI. I mean, it did beat 0.7 against 0.6 on a year-on-year basis, but that's beside the point. Remember the dollar conversation we've been having. Euro-dollar is also higher, and that's coming up to quite a key level of resistance at the moment. If then cable does continue to remain on the front foot. Then on a daily chart, you're just coming up to around where the 11th of November high was, around a week ago. This is when the pound saw quite an abrupt turnaround after EU-UK negotiators are said to likely miss their November deadline. So we're back up to around that peak of price movement now, which was that high that we printed back on the 4th of September. So quite a key technical level. We're only around about 30 pips away from that in the sterling future. at the moment. So that's out the way though, but looking further forward, Eurozone final CPI, not important because final, and it's, uh, quite old dated, uh, figures now. So looking forward to the US session, housing starts, building permits, CAD inflation, CPI, and then you get the DOE oil inventory levels. Chief Economist from the Bank of England speaking this morning, and you've got Fed speakers littered in through the afternoon and evening. And that's pretty much it. So gonna leave it at that, let you guys get on with things, and I wish you a good day ahead. I'll catch you same time tomorrow. Thanks very much.