Vienna Summit
The International Atomic Energy Agency is holding a summit today at their Vienna headquarters between Iranian President Hassan Rouhani and the foreign ministers of England, China, France, Germany and Russia. The purpose of the summit is to renegotiate the Iran nuclear deal, now that the United States has withdrawn from it. No invitation was extended to the US Secretary of State. The terms include a guarantee of Iran’s oil exports and its ability to process financial transactions. This absence of invitation could be considered open opposition of the USA, which has previously called for other countries to completely cease the purchase of Iranian oil from November 4. The European Investment Bank is already working on a financial construct against potential secondary US sanctions.
Investors speculating on a narrowing supply of oil should pay close attention to this event. The fundamentals behind that theory will disappear if an agreement is reached this weekend and it will definitely have a significant impact on the price of oil as well. Other market segments could also react poorly to the formation of a de facto anti-US coalition.
The Usual Friday Recovery
Asian stocks markets have been declining all week. However, Friday was once again dominated by the buyers, following the pattern of the past few weeks. The growth of all four major Asian indices exceeded 1%. The Hang Seng led the way with 1.29%, with the Shanghai Composite, KOSPI and Nikkei close behind. This overall positive outlook started with the North American trading session, despite tariffs on Chinese imports going into effect today. Events played out in reverse of the old broker proverb “Buy the rumour, sell the fact”. By the time the tariffs went live, the market had already priced in their expected consequences to some extent. China’s retaliatory tariffs against US products effective as of today came as no surprise either. In a press release, China’s Ministry of Commerce claimed the US tariffs forced their hand with regards to these measures. They went on to say they’ll be using additional economic policy tools along with these tariffs to minimize their losses from the trade war.
One of the driving forces behind this optimistic attitude could be yesterdays ISM Purchasing Managers’ Index, which exceeded expectations by showing an increase rather than a decline.
EURCHF
The euro has been showing signs of recovery across several currency pairs, however this is most noticeable in its relation to the Swiss franc. At the start of the year the euro boasted a 1.2 exchange rate, however between March and May it dropped to 1.1370. By June it managed to regain some of its former strength, despite still trending downwards. The eurozone struggled with the German and Italian political crises, as well as worsening macroeconomic indicators like high unemployment and slowing GDP growth. Meanwhile Switzerland simply stayed on its usual predictable economic trajectory. The contrast between the franc’s negative interest rate and the euro’s zero base rate should not make much of a difference, especially since neither region seems inclined to raise interest rates. Under these circumstances one would expect the Swiss franc to strengthen, however, in June the EU successfully resolved many of the domestic political issues that were causing internal friction. Deciding on a common framework for dealing with the the migration issue could strengthen cohesion among member states. It is a good step towards the Union pulling itself out of the state of disarray it was left in after Brexit, despite it being a political defeat for many national leaders.
These events allowed the euro to form an ascending trend channel and strengthen against the franc. The EURCHF pair’s upwards movement started at 1.1480 and moved to 1.1630 over the course of two weeks. Price peaked today at the same resistance line that previously caused it to rebound three times in June. Technical analysis indicates the movement has lost momentum, which could lead to a price correction. The combination of narrow bollinger bands and the decreasing height of upwards spikes signals that price is gathering momentum for a break-out. This could mean a downwards correction potentially reaching the 1.1590 support line, which could serve as the starting point of a true break out.
GBPUSD
As previously mentioned, the ISM’s PMI showed positive results in the face of pessimistic market expectations. There was one more notable announcement yesterday, however it was not not a promising one. ADP’s employment report showed 189,000 new hires in May so the market’s prediction for June was 190,000, however, the final result of 177,00 was far below expectations. The overall sentiment on the currency market suggests traders of the dollar were more interested in this report than in ISM’s figures. Most likely they’re still waiting for further details on employment figures to emerge later today. The disappointing ADP report could be considered a preview of the results of today’s upcoming nonfarm payrolls (NFP). Analysts initially predicted the NFP will drop from 223,000 to 195,000, however the ADP report caused them to lower their expectations to 178,000.
As seen on the chart, the dollar began strengthening as soon as the ADP report broke, however this momentum was short lived. Instead of trending downwards, the GBPUSD pair switched to sideways ranging movement. Today the dollar shows signs of weakening, with the expected range before the NFP being 1.3275 to 1.32. High tensions will lead to equally high volatility once the figures are released at 8:30 A.M EST. The dollar could weaken further if the data is overly negative, lowering the probability of an upwards break-out for the cable.
Sincerely,
Laszlo | Market Analyst
Disclaimer:
Leveraged trading is high risk and may not be suitable for everyone as your losses may exceed your investment. We advise you to consider whether trading is appropriate for you in light of your experience, objectives, financial resources, risk tolerance and other relevant circumstances. Ensure you fully understand all of the risks involved and seek independent advice if necessary. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading. Trading through an online platform carries additional risks.