Two-way price action on geopolitics and dovish Fed speech.

Headlines

* Israel air strikes intensify with Gaza under “total blockade”

* Stocks rise and USD turns lower as Fedspeak is mindful of higher yields

* Oil settles 4% higher as Middle East escalation raises output risks

* Gold prices rally on haven demand and falling yields

FX: USD found a safe haven bid as geopolitical issues kicked off in the Middle East. That stopped a run of three days of losses for the DXY at the end of last week. But later in the session, dovish Fed comments trumped Israel-Iran war fears. The 50% level of the October 2022/2023 drop sits above at 1.0717 and acted as resistance. The “shooting star” candle on the weekly chart is a bearish reversal signal. The very rare streak of 11 straight weeks of gains was also ended. The next Fib level is at 105.38.

EUR couldn’t make it four days in a row of gains. The top of the long-term bear channel sits above 1.06 as resistance. German industrial production came in slightly softer while the Sentix confidence survey printed a smaller decline than expected. The ECB’s Guindos said rates are likely to stay at their current levels for some time. Futures have virtually priced out any more rate hikes from the central bank.

GBP was very modestly softer on the day and cable closed near its highs. Last week saw prices hit a cycle low at 1.2037. A long-term Fib level (38.2% of the September 2022 rally) reinforces this zone at 1.2079. UK GDP is the main highlight on the calendar which is released on Thursday.

USD/JPY was a battle of haven currencies with the yen winning. But the major traded in a narrow range posting an “inside day”. That is where the day’s high and low and range trade inside the previous day’s range. This means prices are consolidating which suggests a range breakout at some point. Last week’s top was 150.16. Initial support is at 148.25.

AUD clawed back early losses to finish green on the day. Strong support is seen around 0.63. The 50-day SMA resides at 0.6436. USD/CAD fell sharply for a third day just below 1.36. We signalled strong resistance at 1.3667 recently. Oil prices jumped over 4% while risk sentiment turned positive late in the day.

Stocks: US equities closed up for a second straight day. The benchmark S&P 500 added 0.63% to settle at 4335. The tech-laden Nasdaq finished 0.49% higher at 15,047. The Dow closed up 0.59% at 33,604. Energy stocks and defence names led the gains. It’s the start of earnings season this week with well-known consumer brands like PepsiCo and US banks in focus.

Asian futures are in positive territory with the turn-around on Wall Street. As well as dovish Fed chatter, A senior Hamas official said the group is open to discussions over a possible truce with Israel.  

Gold enjoyed its best day since early May. This halted nine days of straight losses on Friday. A base of support sits around $1820. Falling yields and uncertainty over the Middle East are helping bugs. The halfway point of the November rally is at $1840. Above here, the mid-August lows just below $1900 are a target of the bulls.

Market Thoughts – Choppy day of risk-off abates

Markets reacted to the events in Israel with a typical knee-jerk reaction in early trading. Heightened geopolitical risk saw Treasuries bid, the dollar gain, crude oil spiking higher and stocks taking a hit. But dovish Fedspeak especially helped risky assets pare losses. Notably, Logan, who usually leans hawkish, and Jefferson, who hasn’t spoken since June, both acknowledged the impact of higher Treasury yields on financial conditions. This suggested that the Fed may not have to do as much on policy as initially thought.

Wall Street’s fear gauge, the VIX index, failed to break above 20, Which makes it close to 100 sessions in which the VIX has closed below 20. That is the longest such stretch since October 2018. Ironically, that is when the market tumbled after the Fed realised it would need to be far more hawkish. Of course, geopolitics is tough to call and certainly in the early stages. But Iran is key here with the US also playing a big role in calming the crisis as oil goes north. That is very much not wanted by the Biden administration.

Chart of the Day – USD/CAD falls below strong resistance

The loonie has appreciated over 200 pips in three days since spiking higher at 1.3785 in the major last Thursday. Surging oil prices driven by the Middle East escalation have benefitted the loonie today. Recent data was also strong last Friday. Canada recorded its most robust job creation in 8 months during September. The Ivey PMI was also better than forecast and the country enjoyed its first trade surplus since April.

Strong resistance around 1.3667 has eventually seen USD/CAD turn lower. This level capped the upside in April, May and September. The 50-day SMA at 1.3535 is initial support below ahead of the 200-day SMA at 1.3459. 

(Sources: vantagemarkets.com)