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Euro Zone and the UK in focus as central banks meet

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2018’s summer is over and we are officially in Q4.

This week’s focus is on the Euro Zone ECB meeting and, potentially, another rate hike in the UK.

But before we dive into the charts, let’s have a quick summary of what we saw during the Summer:

  • It was a pretty slow August as the markets slightly fluctuated on Trade War news.
  • S stocks continued to climb and SPX reached to a new record high
  • The GBP was the most volatile Major pair as Brexit talks generated several 100-200 pips swings.

It is interesting to see the lack of correlation between the U.S stock markets and the European ones.

While the S&P500 and the Nasdaq broke record highs, the DAX, the CAC and the UK FTSE generated bearish signals as they broke key daily support zones.

This dissonance between Europe and the U.S has to be resolved.

We will either see the expensive U.S stock markets joining the current European correction move…Or, pulling European stocks back up with another bullish wave.

See more about this subject and potential trading scenarios in the analysis section below.

weekly markets analysis

Key Global Economics Events and Data this week

CPI in the U.S

Rate Decision in the UK

ECB meeting

Employment data in Australia

See this week’s economic calendar




DXY analysis

DXY had a nice run up during the summer vacation months.

That run-up drove DXY’s price beyond the 95-95.5 resistance zone and even beyond the top of the rising daily channel that you see below:

weekly markets analysis

DXY – Testing support

But, as you can also see, that run up wasn’t strong enough and DXY failed to hold on to its highs.

The Dollar’s price is now back near the bottom of the channel following a false breakout.

Technically, that can be a bearish sign for the Dollar.

95 is the key price zone this week.

If 95 will hold as support and the buyers will step back in, DXY may try to run back to 97-97.5 to re-test the channel’s top.

If the Bulls will not be able to defend the 95 support zone, DXY can crash down to the next major support zone – 93

Such a bearish move can lead to a very strong rally in the Majors.

A rally that hawkish tone from Draghi and another rate hike in the UK can generate.

So in terms of the Dollar Index and the Majors, you should pay close attention to price action this Thursday when the central banks will publish their statements and the U.S will post the CPI number.

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EURUSD analysis

In the Dollar Index analysis section above I mentioned the option of a rally in the Majors, if DXY will fail to hold above 95.

We can see the same potential in EURUSD’s chart:

weekly markets analysis

EURUSD – Approaching the breakout point

Here’s a brief breakdown of what happened to the Euro during the Summer:

  • EURUSD was consolidating inside a Triangle Pattern, above its weekly uptrend line, in the month of July.
  • The consolidation ended at the beginning of August and EURUSD crashed down to test the 1.14-1.15 support zone.
  • EURUSD spiked below 1.14, generated a false breakout scenario, and rallied back up above the weekly structure support zone.

EURUSD was saved by a weekly structure zone.

Following the false breakdown, we saw an extremely strong bullish reaction that drove EURUSD straight towards the broken trend line

EURUSD tested the broken uptrend line from below (trend line that has turned to a resistance line) and got rejected.

1.16-1.165 is this week’s focus zone.

If EURUSD will be able to overcome this resistance zone, it will continue north to test these elements:

  • The broken uptrend line again
  • The 200 days MA line

It all depends on Draghi now.

If Draghi won’t be hawkish enough and signal to the markets that he intends to hike before the end of his term, EURUSD can slide back down and a potential break below the weekly support zone.

But, if Draghi will hint about a coming rate hike, it can boost the Euro and send the Dollar below 95 to start a weekly bearish correction wave.

 

GBPUSD analysis

As mentioned above, the most volatile Major Pair this summer was GBPUSD:

GBPUSD – Back above 1.3

GBPUSD had few wild swings between 1.28 and 1.3 this summer:

  • It started with a strong bearish move that drove GBPUSD price below 1.28 and below the descending channel.
  • In mid-August, the bulls managed to drive the price back up to 1.3 and to the top of the channel (creating a false breakdown in the process)
  • We saw 2 more 200 pips swings during the last weeks of August, between 1.28 and 1.3.

GBPUSD is set up for a breakout.

If GBPUSD will stay glued to 1.3 till Thursday, Investors and Traders will wait to see if the Bank of England will indeed hike again.

Such hike can give the final push that GBPUSD needs to break out and continue towards 1.33-1.34

From what I see, both in DXY and GBPUSD chart, that’s the most likely scenario.

But if the Dollar will get another boost from the support zone, or if they won’t hike as investors expect, we can see GBPUSD continues its downtrend and dive back down towards 1.28.

Potential swings and trading scenarios are shown in the chart above.

 

SPX vs. the DAX (GER30)

In my intro words, I mentioned the dissonance between the U.S stock markets and the European ones.

Here’s how it looks in the charts:

weekly markets analysis

SPX – New record highs

SPX broke to new record highs territory and now it is testing previous structure resistance as potential support.

 

weekly markets analysis

GER30 – Lower high and a downtrend

The DAX, on the other end, couldn’t break above its weekly downtrend line, and instead, it generated another lower weekly high.

What’s the next step?

The bullish scenario

As you can see, both GER30 and SPX are now testing potential support zones:

  • SPX is testing the 2860-2880 (and the Fast MA line) as support – If the breakout is real, SPX should bounce higher from here
  • GER30 is testing the 12,000 structure zone (potential support) with the 200 weeks MA line approaching as additional support from below.

If the bullish sentiment will drive SPX back up again, the DAX can use the weekly support zone to try and rally with U.S stocks.

No doubt that the ECB’s meeting will have an impact on the DAX, so also here, the focus should probably be on Thursday.

There’s even a pattern to trade here:

weekly markets analysis

GER30 – Harmonic trading patterns

GER30 has completed a bullish Gartley pattern (yellow) and if it will slide a little bit lower, it

will also complete a bullish AB=CD pattern (which is within the Gartley pattern).

Basically, that means that we have a potential Buy Zone between 12,000 and 11,800

Personally, I am still missing another bullish sign inside the Buy Zone.

A daily Pinbar, Engulfing Pattern or some other bullish indication inside the Buy Zone will give me much more confidence if I’ll choose to try and trade this technical Buy Zone.

 

 The bearish scenario

If SPX will break below 2850, that won’t be a positive sign for the U.S stock markets.

It can generate a false breakout signal, similar to what we saw above in DXY’s chart.

In such a scenario, the U.S stock markets will probably start to catch up with the weak European Indices.

There’s one pattern that sends us a warning signal regarding the U.S stock markets:

weekly markets analysis

DOW – Bearish Harmonic Trading Pattern

The DOW has generated a bearish Gartley pattern.

The price is already inside the PRZ (Potential Reversal Zone)

A close below the Fast MA line can ignite a selloff in the DOW and signal that a short term correction wave is on the way.

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Summary

The markets are just getting back from the summer vacation.

The first week of September didn’t change much for my analysis.

The market, and I, waited for something real to make the next move.

This week’s ECB and MPC meetings are definitely real.

In this analysis I’ve detailed all the key Price Zones that I intend to monitor and possibly trade.

I’m not sure about stocks, but in my opinion, based on my analysis, the odds that we will see a weaker Dollar are higher than the odds of another rally in DXY.

We will have to wait and see.

What do you think?

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