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Risk-On markets are pushing equities higher and the US dollar lower

A quiet economic calendar for the London session could see a continuation of momentum from yesterday as we saw in the Asia-Pac session. US retail sales are the only real tier-1 data points this afternoon so technical levels will provide key trading opportunities until then.

Market Brief

The quiet Asia-Pacific session has allowed equities markets to follow through after the rise in the US session. Concerns over inflation have been reduced with this week's CPI report. Patrick Harker, President of the Federal Reserve Bank of Philadelphia, predicts that inflation in the United States will amount to around 4% in 2021, "a bit over 2%" in 2022, and "right at" 2% in the following year. Also, the markets are happier since U.S. President Joe Biden signed the bill into law that will raise the federal debt limit. Under the stipulations of the law, the federal debt ceiling has been increased by $480 billion.

Fiscal flows need to pick up for the stock markets to rebound further from these levels, and therefore, the reconciliation bill needs to be passed. Several sources close to President Joe Biden's administration told CNN's Jake Sherman on Thursday that the White House is "near the end of its patience" when it comes to bipartisan negotiations on reconciliation. Apparently, the administration is preparing to inform both the Democrats and Republicans that "soon it will be time for negotiations to conclude." Nancy Pelosi called on Congress to agree on the size of the reconciliation package within the next couple of days. When this is passed a more permanent deal can be negotiated on the debt ceiling and we can work out how much is going to be spent on the economy compared to last year's $7.5 trillion.

At the London open the forex heatmap indicates that today will be a continued risk-on day and that the US dollar weakening will support the higher-yielding commodity pairs and possibly the equity markets.

The Japanese yen has been weakening all week and the USDJPY has risen very fast since breaking out of the descending channel.

Sentiment across retail traders on the ActivTrader platform is still heavily bearish so I am assuming these traders will be stopped out before any reversal occurs. 117.00 looks like the most probable target and resistance level to test.

A weaker US dollar is helping the oil markets to continue on their bull run, even though inventories in the USA are building.

And the gold markets have seen $1800/oz again, which proved to be resistance yesterday. On the daily chart above I have indicated the chart pattern most retail traders are watching. The inverse head and shoulders pattern is generally a continuation pattern to the upside. What I am noticing though is that we haven’t fully retraced the move down from mid-September and that the $1800 could be where the supply comes back in. There is a theory going around that $1750 is the sweet spot for traders with unallocated gold can swap out to allocated gold to comply with the Basel3 leverage ratios. What that means is for traders to sell out of one contract they need others to buy and vice versa. Anyone that is long now will puke their position on a return to the $1700’s which means they would sell the spot to the futures guys, who I reckon are still waiting down there. This market mechanics will be ended sometime early in 2022 when the bullion banks etc. have to comply with Basel3 or have enough collateral to back the unallocated gold contracts on their books.

With retail sentiment growing to the side of the bulls, I am even more skeptical that this is the breakout everyone has been waiting for.

The EURUSD is still in a downtrend and yesterday’s price action failed to close above the daily 20 ema. The indecision candle and rejection of that moving average should have resulted in a sell-off today if the bears were in control. If the bulls take out yesterday’s high I think not only does the EURUSD go higher to the daily 50-ema but we could see a bearish weekly outside candle on the DXY.

The sentiment indicator on ActivTrader for the EURUSD is, unfortunately, signaling that the EURUSD could also be susceptible to a near-term drop.


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