5 Things To Watch This Week

US Midterms In Focus

US Volatility Index (VIX), 4-Hour Chart Analysis

The campaign preceding the US midterm elections have been relatively quiet with regards to political parties, but it wasn’t short on surprising and sad events. The pipe-bomb threats and the “migrant caravan” were in the center of attention and that put President Trump in an uncomfortable position, leading to some unusual moves by him.

The sudden change in the President’s China-related stance and the lack of follow-through on his new tax-cut plan were likely the results of a last-minute change in strategy, but for now, it seems that the Democratic House + GOP Senate is still the most likely outcome of the vote.

Volatility on Wall Street have been elevated in recent weeks, only in part because of the elections, but a no-surprise midterms could contribute to a normalization in the stock market. From a risk perspective, a total Democratic sweep would likely cause the biggest turmoil across assets classes, and given the tight polling, even that outcome is possible, despite being the least likely.

One-Day Wonder or Something Bigger in the Pound?

GBP/USD, 4-Hour Chart Analysis

November will be a crucial month regarding the Brexit talks, and the Pound, which already experienced wild swings compared to its largest peers, is expected to be very sensitive to the progress in the negotiations.

Compared to the Dollar, we only see a chance of a brief oversold rally, but against the Euro a durable rally could also be in the cards, depending on the deal (or no deal) in the coming weeks. While the British economy has been stable, in part thanks to the weakening Pound, we still see a no-deal Brexit as a huge bearish risk for the currency.

From a technical perspective, the 1.3050 and 1.27 levels could define a trading range for the coming weeks in the Cable, and we would be sellers of the pair anywhere in the 1.32-1.33 range in the case of a stronger rally.

No Fed Rate Hike Expected but Statement Could Prove Crucial

EUR/USD, 4-Hour Chart Analysis

The Fed and Jerome Powell have been adamant about the monetary strategy of the Central Bank even following the President’s open attacks on the Chairman and the recent rate hikes. That, coupled with the ongoing Quantitative Tightening contributed to the swift rise in Treasury yields and to the deep correction in stocks.

Analysts don’t expect a rate hike this week, but we will be closely watching for changes in the rhetoric of the statement, especially concerning global growth risks, the fragility of the financial system, and most of all inflation. Our guess is that the recent turmoil wasn’t enough to change the stance of the Fed, so a hawkish surprise is a more likely outcome, which could lead to another rally attempt in the Dollar and possible new highs in Treasury yields, especially on the short end of the yield curve.

A US-Chinese Deal on the Horizon?

USD/CNH, 4-Hour Chart Analysis

While President Trump quickly put the blame for the stock market correction on the Fed, we wouldn’t be surprised if his softening rhetoric with regards to China would have been an attempt to prop up equities ahead of the midterms. After the elections, we will have a better understanding of the situation, but for now, especially Chinese assets seem to be enjoying a relief rally.

The Yuan gained the most against the Dollar in months on the rumors, despite the broad rally in the Greenback, and although the country’s economy wouldn’t recover just because of a new trade deal, it would likely lead to a sharp rally in equities and risk assets across the globe. Copper already joined the party in Chinese assets, but given the bearish technicals globally we wouldn’t jump on the risk-on train because of a dubious deal promise.

What’s Next for Saudi Arabia and Crude Oil?

WTI Crude Oil, 4-Hour Chart Analysis

Given the apparent inner turmoil in the Kingdom following the Khashoggi murder, we wouldn’t be surprised if a tectonic change would be ahead, especially regarding the position of the Crown Prince Mohammed bin Salman, whose position looks very shaky.

For oil, the recent turmoil added to the pressures that the commodity started to experience due to the global economic slowdown, and the WTI contract dropped below $65 per barrel for the first time since April. The pledge by the Kingdom to increase supply pushed the contract as low as $63, and although now technicals show oversold readings, even a panicky dip below $60 could be ahead this week,

 

Author:
Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.