The sentiment in markets shifted firmly to the negative yesterday as the impacts from the trade war landed in the US. A breakdown in relations between the US and China has been building over the last week and this has created a pause at the top in equities in recent days. The weakness that has developed in the US economy was registered as a fall in ISM Manufacturing PMI to 48.1 yesterday, which missed its forecast of 49.2 and fell below the previous reading of 48.3. This is now the fourth consecutive monthly print of this number that has come in under the 50 mark, a sign of contraction in the metric and a signal of weakness in the sector. The reaction in markets was to accelerate the earlier selloff that started in Europe and pushed equities off the highs. The stock markets printed large red candles on the daily charts for yesterday, closing at the lows as risk aversion took over sentiment. The memory of a dire December market, only last year, is still fresh in the minds of traders, but it is interesting to note that the turnaround last year came on 26 December and has lasted until now when markets created a new high. Whether this is the start of a new selloff or a short price adjustment remains to be seen. However US President Trump reacted by tweeting that the FED should act to devalue the dollar and help the manufacturing sector, “Manufacturers are being held back by the strong Dollar, which is being propped up by the ridiculous policies of the Federal Reserve - Which has called interest rates and quantitative tightening wrong from the first days of Jay Powell! The Fed should lower rates (there is almost no inflation) and loosen, making us competitive with other nations, and manufacturing will SOAR! Dollar is very strong relative to others”. Meanwhile China’s Foreign Ministry has said that US Secretary of State Mike Pompeo is repeating “toxic lies” about Huawei to European countries. They cited a recent speech of his where he said “With so much on the line, it's urgent that trustworthy companies build these 21st-century information arteries. Specifically, it's critical that European countries not give control of their critical infrastructure to Chinese tech giants like Huawei, or ZTE”. Huawei has announced that it will move its research centre to Canada from the US. The relationship between the two has taken body blows in recent days but traders have maintained a relatively positive outlook for a Phase One trade deal. In Japan, Prime Minister Abe confirmed that they are preparing a package of Economic Stimulus and this has helped lift markets off of their overnight lows. Details of the package are expected to be announced in the coming days. In Europe new ECB President Lagarde spoke before the European Parliament where she said that the symmetry of the inflation goals will be a topic in the review of the ECB as she begins her Presidency. European Manufacturing PMI’s showed that while there was some improvement in the numbers, most are registering contractions with reading under 50. The RBA has maintained its Cash Rate at 0.75% overnight with the AUDUSD pair continuing to move higher, currently trading around 0.6845.
UK Construction PMI is due to be announced this morning and is expected to improve to 44.5 from 44.2 previously. Eurozone PPI is expected to fall to 0.0% from 0.1%. In the afternoon, US Wards Total Vehicle Sales are expected to rise to 16.8M from 16.6M previously.
The GBPUSD pair is currently trading at the 1.2950 level as it continues to consolidate around 1.2900. The pair failed to get far above the 1.3000 level of resistance in October and has now remained under the level as the price action produces a pause ahead of the general election. A break of the 1.3000 level may target the 1.3177 area as the May high, followed by 1.3200 level. Continued buying may push the pair back to the March trading range and the high at 1.3383.
Price action has stayed above support at 1.2770 and this level may be used if price moves back under 1.2800 once again. For now the higher low at 1.2833 may provide short term support. A loss of these levels may open the way to 1.2600 and the 1.2582 September high. Price consolidated around the 1.2500 area in July and September and this may produce an area of support in the event of a selloff. The 1.2382 area was also used as support and resistance on the chart and a breakout above this level in October produced a significant rally to 1.3000. Support found at that time came from the 1.2200 level.
UK 100 Index
The UK 100 Index has moved back into its channel after finding resistance at 7446.00 on Wednesday. The Index has produced the channel from price action over the last six months and this channel has contained much of the price action during that time. Breaks outside the channel had produced deep rapid retracements once resistance is found, creating lower highs and lows in the process. The channel top is being tested at present after price moved down from the resistance zone at 7400.00/7445.00. Further resistance may be tested at 7500.00/7530.00 on a break higher. Above that level 7630.00 has been used as resistance followed by the high at 7733.00.
Support at 7200.00 marked the extent of the selloffs this month so far with support at the level producing a rally to the current area. A loss of the channel top at 7320.00 and the 7300.00 round number may see 7260.00 tested again, followed by 7200.00. Below this the 7140.00 area also produced support ahead of 7100.00. The zone between 7100.00 and 7000.00 has been used by buyers to enter the market and there may be a considerable reaction if this zone is broken, opening the way for a move towards 6900.00.