FX & Futures Analysis by Earn2Trade October 8, 2018

NFP and Unempoyment Rate

According to last Friday’s figures, US unemployment is at a record low not seen in 50 years. The impressive 3.7% unemployment rate is a result of the US economy’s vigorous growth. The news wasn’t entirely positive, as the Non Farm Payroll (NFP) report shows that only 134 thousand new jobs were created last month, instead of the expected 190 thousand. This is also 140 thousand less than the August figures. The NFP results had a negative effect on investors sentiment, causing stock markets and the US dollar to decline. Today will likely have low trade volume due to Columbus day and there are no major macroeconomic reports or indicators expected to come out either.

China’s RRR Cuts

China is expending a great deal of resources to sustain its economic growth by reducing their reserve requirement ratio. Major banks now only have to keep 15.5% of their reserves in China’s central bank and smaller financial institutions only have to keep 13.5%. This 100 basis point drop freed up approximately 110 billion dollars of reserve capital. Chinese stocks still declined despite this sudden and drastic measure, mainly due to the Shanghai exchange being closed and thus unable to keep up with the rest of the market last week. The Shanghai Composite started off the week with a 3.72% drop and other Asian indices did not do particularly well either. The Hang Seng, the Australian index and Nikkei all declined by 1.26%, 1.38% and 0.8% respectively. This downwards trend mirrors the those of US indices last Friday.

WTI

Tensions seem to be easing up on the oil market. At first both Russia and Saudi Arabia announced that they’ll be stepping up to fill the void left by Iranian oil, then even the US government showed signs of willingness to give concessions. In the aftermath of Trump’s negotiations with India’s Prime Minister, it seems Washington is no longer as adamant on limiting Iranian exports to zero starting on November 4. Analysts in Asia suggest India will import 9 million barrels of oil from Iran in November, which will not be subject to US sanctions.

Oil prices have initially been driven up by uncertainties surrounding global supply, so naturally this latest news caused prices to drop from 77 dollars back to 74 dollars. Last week’s analyst forecast of $100 per barrel did not come to fruition. Based on the chart, a decline seems to be the more likely scenario for the past few days at least. According to the one hour charts, price is now below the 200-period moving average and is attempting to break the 73.66 support line. As the possibility of production dropping declined so did the upwards momentum that drove prices higher, causing them to return to earlier resistance levels. The key price level for the past few months was 71.39 and it did previously stop price from rising higher. Now after being broken, it acts as a persistent line of support. It would not be unexpected for price to potentially retest this level. Before that, however, it would have to break both the 73.66 and 72.66 support lines, which could take several days if it does happen.

EURGBP

It’s difficult to talk about the EURGBP without bringing up Brexit as it continues to keep traders in suspense while drawing ever closer. According to a recent announcement by the European Central Bank, the EU expects UK based banks to dismantle their so called ‘back-to-back’ trading mechanism by 2022. British business journals estimate that this requirement will force banks to terminate 4000-5000 banking positions in London. This latest news suggests that the EU does see a silver lining in Brexit, at least as far as them taking on London’s role as a financial hub is concerned. Global banks headquartered in London now seem to be moving to Eastern Europe, where they can find highly qualified back-office workers for only a fraction of the price compared to Western European salaries.

That said, the EU’s hard line stance on Brexit did does not seem to help the price of the euro at all. Meanwhile the financial issues of the Italian government also keep investors from buying more euros. In light of these factors the pound strengthened against the euro, causing the pair to drop from its 0.8988 peak to 0.8777 since September 21. Even so 0.8777 acts as a powerful barrier against further decline, causing price to go completely flat at first, then subsequently reverse its direction. This behavior is typical of periods when investors notice a lack of momentum and thus opt to quickly reduce their positions, leading to the upwards spike as was the case in this particular instance. Using the Fibonacci tool to determine the potential reach of this correction, we can estimate 0.8830 to 8858 as its likely upper limit. It’s worth noting that while the Commodity Channel Index shows that price does have some room for growth, the fundamental trend still points downwards.

Sincerely,
Laszlo | Market Analyst

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