KTM FX Weekly: Dips do not worry us.

• Markets have seen to have spent the last week with a mix of risk-off and risk-on mood. However, the sentiment soared to start the week with commodities rallied strongly.
• Overnight was a headline-light session, but strongly broad-based gains across asset classes. Interestingly there was no single catalyst for the overnight’s dollar weakness, but we believe month-end flows are being noted as the main catalyst.

FX review: The buying continues across G10 currencies against the dollar, with oil-related currencies Norwegian Krone NOK and Swedish Krona SEK rallied more than a percent. Overnight major currencies rose strongly, with the pound and Aussie dollar up by 0.60% each. Besides, the subject currency Euro rallied only 0.3%.

Bonds: In bonds, 10y Treasuries bounce back to 0.67% after yields closed at 0.66% last week. Besides, the 10Y German government bond yields closed at -0.526%.

Coming back to our subject currency, the Euro was lifted 0.30% as the dollar was down with the hopes of stimulus bills back on the table.

Data review: In terms of the EA macro data from last week, consumer confidence remains well below the long-term average. The Flash German Manufacturing PMI printed at a 26-month high in September. However, the service sector saw a decline in September, following increases in the previous two months. In Eurozone, business activity stagnates in September as rebound falters.

“Manufacturing production continued to make up the ground lost during the lockdown, rising to the greatest extent since January 2018,” according to the IHS Markit.

• Flash German Manufacturing PMI at 56.6 vs. 52.2 in August.
• Flash German Services PMI at 49.1 vs. 52.5 in August.
• Flash Eurozone Manufacturing PMI at 53.7 vs. 51.7 in August.
• Flash Eurozone Services PMI Activity Index at 47.6, 4-month low vs. 50.5 in August.
• The annual growth rate of broad monetary aggregate M3 decreased to 9.5% in August 2020 from 10.1% in July (revised from 10.2%).

Before we look at the week ahead, watching closely to the first presidential debate between Donald Trump and Joe Biden on Tuesday. As per the sources, Democrats are slightly favoriting, which could push the Euro higher.

We have collated a couple of forecasts to help you with the market expectations. 

• Chris Williamson at IHS Markit said, “The first presidential election debate between Donald Trump and Joe Biden will help guide market expectations and likely be framed by topics relating to the COVID-19 pandemic and the ensuing economic crisis, as well as the civil protests, Supreme Court nominations and the integrity of the election.”
• Danske Bank says, “Currently, the Senate election looks very close with prediction markets tilting towards a Democratic victory 56% (up 3pp since last week).”
• “A decisive Democratic victory would probably hit the USD and support European assets, while another Trump term would be full of uncertainties.” According to Nordea Markets.
• ING: Biden goes into the debate with around a 7% lead in opinion polls and will face a stern test from President Trump – typically a strong performer in events like these. We have the view, were Biden to win, the dollar could decline in 2021 on a benign world view – but let’s lookout for the price action on Wednesday.

Looking at the week ahead, it will be a reasonably busy week for data highlighted by EA manufacturing PMI and the US non-farm payrolls. Besides, the ECB Watchers conference is due on Wednesday. Undoubtedly presidential debate is the highlight of the week.

TECHNICAL OVERVIEW

The heavy calendar of event risks and data releases still on tap for this week could raise volatility, and we think the onus is now on the EUR to rally on the first presidential debate. The latest positioning data suggest dollar strength looks like it is running out of steam.

Danske Bank’s IMM positioning report cited that “Despite USD rebound, investors increase their bearish positions.”

The EURUSD is currently trading below at the major trendline resistance spread between 1.1710-1.1690. The corrective A-B-C pattern on the suggests 1.1590 offers near-term support ahead of the presidential election debate. Below here, focus on the 1.1500 level. Yet, these dips do no worry us and should enable the pair to gather momentum ahead of new rallies. The resistances are at 1.1690-1.1710 and 1.1870-1.1910.

The lower lows and lower tops formation are still intact, and a decisive breakout above the lower top formation is needed to confirm the trend reversal.

We look to buy EURUSD on dips.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

What is your Technical View?

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