The market is in a state of confusion, with the pendulum swinging from risk on to risk-off in a very erratic fashion. Reports suggest a partial deal may not happen as China mulls to cut its visit to the US short, which led to Gold, bonds, Yen, Swissy all bought up, then a headlines emerged that the US may consider a 'currency accord' with China, leading to a V-shaped reversal day so far...

Quick Take

It's all about the US-China trade outcome, with the erratic swings in currencies a testament of how unpredictable trading around these high-stake events can be. The latest we've learnt reflects the confusion and state of uncertainty. On one hand, reports suggest that the US and China made no progress on key trade issues, leading to speculation that the Chinese delegation will cut the trip short to just one day of meeting with their US counterparts. On the other hand, a report via Bloomberg said the US is considering a currency agreement with China. The instruments most intertwined with risk aversion (Gold, bonds, Yen, Swissy) caught a solid bid ahead of the Tokyo open before an epic reversal, while the likes of the Aussie or the Kiwi were marked down only to fly higher on the speculation of a currency accord. Meanwhile, in the Brexit saga, the usual dose of algo-led volatility in the Pound was observed, although the net result was an acceptance of lower levels, prove that the market is not buying into a resolution of the Brexit conundrum. The USD put on a combatant performance to reverse its early losses on Wednesday, even if it's now under some pressure. The Euro broke higher on Wed. 

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

Did all hell break loose before getting even started? The markets were in full risk-off in early Asia as a report via the South China Morning Post revealed that the US and China made no progress on key trade issues in two days of deputy-level talks, according to sources. What’s worse, as the report notes, “the high-level talks are expected to last for only one day, with Liu He and his team now planning to leave Washington on Thursday.” This negative sentiment was later reversed. Read on... 

High-level trade talks start officially today: China’s Vice Premier Liu He will be leading the Chinese delegation. Ahead of the report by the SCMP, there had been tentative evidence that China was willing to make a partial deal that would include buying more agricultural products, although leaving no room for negotiation in other sensitive issues the US had complained about such as the protection of intellectual property and or reduction in government subsidies for public firms.

Turnaround on talk of currency accord... According to Bloomberg, the White House is looking at rolling out a previously agreed currency pact with China as part of an early partial deal that could also see a tariff increase next week suspended, according to people familiar with the discussions. The currency accord -- which the U.S. said had been agreed to earlier this year before trade talks broke down -- would be part of what the White House considers to be a first-phase agreement with Beijing. It would be followed by more negotiations on core issues like intellectual property and forced technology transfers, the people said. 

Violent rotations in risk assets: The immediate reaction in financial markets amid the realization that a partial deal may not happen was to buy the assets most intertwined with risk aversion (Gold, bonds, Yen, Swissy), while the likes of the Oceanic currencies, especially the Aussie, were the most punished in thin liquidity Asian markets. These moves were fully reversed after the news broke out that the US is considering a 'currency pact'.

Fed minutes a non-event: The Fed Minutes, while not a market mover due to its redundancy after new relevant fundamental data not taken into account in the last meeting, it nonetheless left a sense that the Central Bank is growing more concerned over downside risk from slowing global growth, the ongoing strides in the trade war and depressed inflationary pressures. A debate on when to stop the easing cycle also emerged this time, while it as revealed that several members were keen on keeping rates unchanged in the last meeting, in other words, there were more dissenters in theory than previously thought, which means the support to keep easing has shrunk.

Sellers lurk around in the Sterling: The Pound saw an ephemeral spike before coming back down after a report from The Times speculated that the EU was mulling to make some concessions by which a mechanism for Northern Ireland to leave the Irish backstop would be set up after a number of years. However, an unnamed EU official dismissed the report by noting "no bold new offer is coming". The Guardian's Brussels correspondent, Jennifer Rankin, added that “the EU is *not* about to make a big bold offer to allow Stormont to exit part of the Brexit withdrawal agreement…”

Turkey launches an offensive against Syria: In the words of Turkish President Erdogan, the attack is aimed to eliminate the 'terror corridor', bringing peace and stability to the region. Trump said that the US does not endorse the attack on Syria, reiterating that “any unforced or unnecessary fighting by Turkey will be devastating to their economy and to their very fragile currency. We are helping the Kurds financially/weapons!.” The Turkish Lira has been under continuous sell-side pressure as the geopolitical tensions escalate.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The FX Indices Charts

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime's Research section.

The EUR index made further strides by violating a tough level of resistance in the hourly, finally allowing for a fresh upcycle to be formed in the hourly, with the next target now seen over 0.20% higher, where a daily level of resistance and the 100% proj target intersect. In early Asia, we’ve already seen a touch and go from the backside on the breakout point, proving that the analysis of indices as a technical aid to assist in entering positions based on the aggregate flows of the EUR vs G8 FX holds great value for the avid trader willing to put in the work by patiently awaiting to engage in these areas where a decision will be made.

The GBP index stopped in its tracks at exactly the 100% proj target based on the latest swing breakout, with the predictive nature of selecting the right levels to act as reactionary areas still keeping those following these analysis on the right side of the market. As anticipated, a fresh retest of the broken daily support led to an abrupt rejection of the index, returning back down prior to acceptance of lower levels for the remainder of the day. This is a bearish admission by the market. Note, there are no longer fresh levels nearby, both the backside retest of the breakout point and the 100% proj target partially consumed in the last 24h. Still, in the grand scheme of things, the market clearly exhibits a bearish structure, with a more macro projection based on the always reliable 100% target over 0.6% lower from Wed’s NY close.

The USD index keeps printing higher highs and higher lows, and with it, building up expectations that further increases in the valuation of the currency lie on the horizon. For today, there are two critical areas to engage in long-side business, the most immediate one includes a level of hourly support recently acting as a magnet to attract and reject prices. Further down, if a setback in the USD takes us down all the way to the prior swing low, it would represent a potentially great area to reinstate longs as it aligns not only with an 8h horizontal support, but the 13d ema comes at the very same level, strengthening the case to see a cluster of bids. On the way up, there aren’t any levels of resistance catching my attention for now.

The CAD index has been treading water going nowhere fast this week as the focus is elsewhere. The fact that we haven’t had any major data releases out of Canada is not helping either. The index, as it was the case yesterday, remains encapsulated right in the middle of a range, between a level of resistance and another of support, both identified via the 8h chart. Drilling down into the hourly chart involves getting into a rather rough sea of erratic fluctuations, so I suggest to stick with the outer levels as the cleanest areas to find opportunities.

The NZD index has transitioned into a bearish structure in the hourly, which implies selling rebounds should dominate proceedings intraday. A retest of the breakout point is happening as I type, with plenty of leeways for sellers to exploit the technicals until the 100% proj target is met over 0.4% lower, allowing for the anticipation of a solid risk-reward. Right before the 100% proj is potentially visited, a level of support off the 8h chart may also act as an early reactionary point in the chart since the last 8h swing achieved a full rotation back up. Should the NZD muster enough strength to recover its losses, a level of 8h resistance lies on top as well.

The AUD index managed to violate a series of lows acting as support for the index in recent days, finally opening the doors for the market to potentially transition into lower levels. The retest of the broken support level has led to an immediate resumption of the downtrend, which if it were to pick up further momentum, has as first target the 100% projection as depicted in magenta line in the chart, followed by an hourly level of support further down. Even if the AUD keeps challenging higher levels from here, the cluster of levels overhead, alongside the bearish structure, makes the currency a clear candidate to depreciate further heading into week-end.

The JPY index found strong bids at the intersection of the 13-day ema in early Europe on Wednesday, which coincided with hourly support as per the impulsive departure of price the prior day. The follow-through demand seen in early Asia this Thursday keeps playing into the view that this is a market with risks skewed towards the upside in line with the bullish structure in higher time frames. Unless the trade rhetoric in the US-China talks goes through a U-turn, buying on dips for an eventual breakout of the recent highs is a scenario to account for.

The CHF index has printed a marginal new high, and what this does to the technical outlook is to create, based on market structure analysis, greater expectations that the current pullback will be bought up at areas of interest as the ones outlined in the chart below. That’s where the highest concentration of bids should reside for an eventual resumption of the uptrend. There tends to be a substantial amount of buyside interest when the origin of a demand is retested as it seems it will be the case with the Swissy index, hence why all else equal, this is a market where expectations for higher levels in line with a constructive hourly structure may ensue.

Important Footnotes

• Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
• Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
• POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
• Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
• Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
• Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
• Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
• Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection