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USD Softens As U.S. Stocks Kick Off Week On Negative Note

Published 10/24/2017, 02:54 AM
Updated 04/25/2018, 04:10 AM

FTSE -14 points at 7510 DAX -7 points at 12996 CAC -8 points at 5378 IBEX 35 points at 10126

The US dollar softened, the US stocks kicked off the week on a slightly negative note. The S&P 500 (-0.40%), the Dow Jones (-0.23%) and the {{14958|NASDAQ}} (-0.64%) pulled back from historically high levels. FANG (Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOGL)) dropped. Twitter, Google and Amazon will release earnings on Thursday; Facebook results are due on November 1.

Meanwhile, there is some support building for Donald Trump’s tax reforms as latest news report that fiscal hawks may be willing to disregard deficit spending to allow Trump to go ahead with his tax cut plans to boost growth. If approved, the fiscal reforms will cost an arm to the government, but on the other hand, it is important for the congress to achieve some progress before the end of the year in order to restore confidence. US treasury yields are soft, the 10-year yield stagnates below the 2.40% level, as the possibility of good news on the fiscal front is not been priced in the Federal Reserve (Fed) rate expectations just yet. The VIX index jumped past 11% on Monday, hinting at some anxiety in the US stock markets. This being said, good news regarding the tax reforms could give another boost to the US stocks later in the week.

Timid kneejerk reaction to Shinzo Abe’s victory, combined to softer US yields prevented the USD/JPY from extending gains beyond Monday’s top, 114.10 . This being said, the post-election bias is negative for the yen on prospects of a longer period of ultra-loose monetary policy and higher fiscal spending under Abe's empowered rule. The hourly Ichimoku cloud base (113.20) is expected to lend support to the USD/JPY. Nikkei (+0.50%) and Topix (+0.36%) are marginally higher despite a softer-than-expected flash manufacturing PMI read in October.

The EUR/USD is testing the 100-day moving average (1.1750) on the downside, the decline in the euro yields is weighing on the sentiment. The generic 10-year euro yield slid by 4.43% on Monday, which partly explained the selling pressure in the euro markets. The Catalan and Northern Italy autonomy crisis helped, although the political turmoil was certainly not the main catalyzer on Monday's pullback. The EUR/USD was better bid in Asia on the back of a broadly softer US dollar.

The Eurozone’s October flash manufacturing data is due today, and a solid read could revive the speculation that the European Central Bank (ECB) would give crunchy details on its Quantitative Easing (QE) exit plans on Thursday’s meeting. Latest news suggested that the ECB could cut its monthly purchases by half, to 30 billion euros. But there is also a risk of disappointment, as Mario Draghi will likely reiterate his warning that the euro rates will remain low ‘well past’ the end of the QE program. Traders remain buyer at dips below the 100-day moving average. The topside could be limited by 1.1855/1.1880 area (50-day moving average / Fibonacci 50% retracement on September – October pullback, which has acted as October resistance).

The EUR/GBP traded below the 0.8900 support on Monday. The UK gilt yields declined less than the euro yields on Monday, the yield divergence discouraged euro traders to gain territory above the 0.89 level. Failure to hold ground above this level will likely prevent last week’s upside attempt from gathering a stronger momentum and keep the intra-day bias on the sell-side. The death cross formation on hourly chart (50-hour moving average crossing below the 200-hour moving average) could encourage a further slide toward 0.8855 (October 15 low).

European stocks traded marginally higher on Monday, except the IBEX (-0.60%). Spanish financials closed the session 1.09% lower on escalating political crisis in Catalonia.

The GBP/USD trends higher for the second day. The next resistance is eyed at 1.3237 (50-day moving average). Last week’s inflation read failed to boost the hawkish expectations regarding the Bank of England’s (BoE) rate hike plans. The market is pricing in a dovish hike; a one-and-done rate increase by the end of the year could be a good compromise to temper the inflationary pressures as the Brexit negotiations stall.

The FTSE futures (-0.19%) edged lower in Asia. The UK equities are poised for a soft open in London. Steady oil and upbeat commodity prices could temper the selling pressure. Copper futures gained 1.25%.

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