Monday’s miraculous stock market rebound continues to highlight how financial markets have become increasingly resilient against unexpected negative shocks, with bulls exploiting the instances of weakness to propel prices higher. The initial wave of jitters and uncertainty created from Italian voters’ rejection of constitutional changes transformed into a free for all, as the risk-on magnetised investors to riskier assets.
Asian shares warmly welcomed the return of risk appetite with most arenas posting their biggest gains in two weeks as investors refocused on the heavily discussed reflation trade. In Europe, shares were resilient on Monday, with further appreciations expected today amid the stabilising oil prices and improvement in overall sentiment.
Wall Street continues to be buoyed by the rising confidence towards the health of the US economy while the champion known as Dow Jones has glided to fresh historical highs. It is becoming increasingly clear that the market resilience is the product of investors learning to tie the knot tightly against negative news while also ignoring the waves.
Dollar still remains king
The dollar edged lower during trading on Monday as investors took profit and adopted a prudent approach post-Italian referendum results. Despite the slight weakness, sentiment still remains firmly bullish towards the greenback with the rising optimism over Donald Trump boosting fiscal spending, cutting tax and increasing infrastructure spending ensuring the currency remains buoyed.
November’s impressive U.S services activity which hit a one-year high at 57.2 continues to highlight how domestic data from the world’s largest economy has repeatedly exceeded expectations in Q4. Although it is widely expected that US interest rates will be increased in December’s meeting, much attention may be directed towards rate timings for 2017.
From a technical standpoint, the dollar index could be experiencing a technical correction with support around 100.00, encouraging bullish investors to jump back in. Prices are trading below the daily 20 SMA, but the MACD trades to the upside. If bears can conquer the 99.50 support, then sellers could make an appearance once again.
Euro rocks the currency markets
The euro displayed a savage recovery across the currency markets during trading on Monday, with the EUR/USD lurching a near 300 pips from the 1.050 lows, as investors seemingly brushed away the Italian referendum “No” vote. The mounting fears of political instability in Europe, uncertainty over the Italian economy and fears of Italy leaving the Eurozone were pushed to the side with risk-on propelling the euro higher.
While the short term gains in the euro are very impressive, it may be too early to gauge the impacts of Sunday’s referendum results with more time needed in the New Year to digest the reality. There still exists a layer of uncertainty over the next steps Italy may take and such could encourage the European Central Bank to extend its QE programme at December’s policy meeting. Although sentiment should logically be bearish towards the euro amid the uncertainty and anxiety, bulls have prevailed.
Euro bulls blasted through the 1.065 resistance with prices flying to fresh weekly highs above 1.075. If this upside momentum holds then the next relevant resistance may be found at 1.085.
Commodity spotlight – Gold
The ever-rising expectations of the Federal Reserve raising US rates in December have left gold extremely vulnerable to losses, with the metal hovering around 10-month lows at $1170 as of writing. This zero yielding metal has received a beating this year with the painful combination of mounting rate hike expectations, dollar’s resurgence and revival of investor risk appetite encouraging bears to install heavy rounds of selling.
With prices repeatedly creating lower lows and lower highs on the daily timeframe, the metal can be considered bearish. Previous resistance around $1190 could transform into a dynamic resistance that sparks a steeper selloff towards $1150.
Currency spotlight – GBP/USD
Sterling bulls may be commended on their bravery to fight against the tide despite the persistent hard Brexit fears denting buying sentiment towards the currency. This GBP/USD remains fundamentally bearish with a strengthening dollar amid the heightened rate expectations capping extreme upside gains. From a technical standpoint, the current technical bounce on the daily timeframe could come to an end at the 1.2850 resistance. Although a decisive breakout and daily close above 1.2850 could be a game changer for the bulls, this level is historically pivotal and could fight back.
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