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GBP firm on EU/UK deal, US stocks at new records


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Asian stock markets traded mixed. Japanese stocks gained on softer yen, while Chinese stocks remained on the back foot. Gold traded close to its daily upper Bollinger band ($1297). WTI crude consolidates near $57/barrel as traders are holding their breath before the OPEC and its allies decision on the extension of the production cuts, but also on how to end this deal. Russian decision is important.
The yen softened on soft economic data. Japanese retail sales contracted by 0.2% year-on-year in October, versus +0.2% expected by analysts. The USDJPY is struggling to clear resistance at the 200-day moving average (111.70). Soft US yields curb the upside potential.
There is also a severe lack of appetite in the Aussie, despite softer US yields and firm iron ore prices. Currently, the 2-year AU yield (1.736%) pays off less than the US 2-year yield (1.75%). This ratio is negative for the first time in more than seventeen years. The AUDUSD is all but interesting for the carry traders at this point. The lack of carry positions should continue weighing on the pair. The next support is eyed at 0.75 level.
The US 10-year yield extended decline to 1.3240%, as the next Federal Reserve (Fed) Chair Jerome Powell sounded slightly more dovish than expected at his confirmation hearing before the Senate on Tuesday. He said that the case for raising interest rates at our next meeting is coming together, but he also mentioned that the labor market could be further improved without increasing inflation worries, which has given a mixed signal on how fast the rate tightening would happen beyond December 2017.
The US dollar was little changed. The US stock markets were again on fire. The Dow Jones (+1.09%) and the S&P500 (+0.98%) traded at all-time highs. Wall Street financials rallied by 2.17%, as Powell also sounded in favour of a 'rewrite' of the Dodd Frank rule.
The EURUSD edged lower after having traded at 1.1961 on Monday. Options are supportive of a stronger euro against the greenback, but the pair should not lose momentum. Call options stand at 1.1825, 1.1855, 1.1975 and 1.2000 at todays expiry. On the downside, support is eyed at 1.1801 (100-day moving average) and 1.1757 (50% retracement on November rebound). Surpassing 1.1960 could pave the way for a further rise toward the 1.20 mark.
The pound appetite remains firm on news that the UK and the EU reached a deal on the settlement bill, which would be an amount between 45 55 billion euros. According to the FT, the UK could even assume liabilities up to 100 billion euros. It is a hefty price tag, but it will allow both sides to start the post-Brexit trade negotiations off on the right foot. This is an encouraging development for the UK businesses and the pound. Cable consolidates gains slightly below the 1.34 level. The positive momentum strengthens. Light call options are seen at 1.3465. The next natural target for long positions is 1.35.
The FTSE 100 gained more than 1% on Tuesday. Energy stocks rallied 2.93%. Financials added 0.80% despite a soft FPC (Financial Policy Committee) statement. The FTSE is expected to correct a part of yesterdays gains at the open.


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Ipek Ozkardeskaya is a senior analyst at MBAex with a solid experience in the financial industry. She has strong technical background in economics and quantitative finance. Previously, she worked as a senior market analyst in London Capital Group, FX strategist in Swissquote Bank and as a client sales executive at HSBC Private Bank in Geneva. She also developed quantitative models in automatic trading as part of BCV’s Structured Products team. Ipek has a Master’s degree in Financial Engineering & Risk Management and a Bachelor degree in Economics from University of Lausanne.
 
Contributing  author since 11/09/2017

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