Daily Market Outlook, October 19th, 2021

Overnight Headlines

  • US Democrats Battle Over Climate Change Plans In $3.5 Trillion Bill
  • Manchin Casts Doubt On October 31 Deadline To Act On Biden Plan
  • Treasury Sec Yellen: Treasury Must Extend Special Measures On Debt
  • Brussels Eyes Unilateral Power To Boost Flexibility Of Budget Rules
  • Brussels Signals Extension Of Looser Covid-Era State Aid Rules
  • UK PM Johnson: We Will Fix Brexit's Northern Ireland Protocol
  • Australian Central Bank: Delta Outbreak Interrupts Economic Recovery
  • North Korea Fires Ballistic Missile Off The East Coast Towards Japan
  • Oil Falls As Weaker China Growth, US Output Stoke Demand Concerns
  • Asian Equity Markets Track Wall Street Higher, China Rebounds

The Day Ahead

  • The risk tone improved during the Asian trading session, as major equity indices rose amid reports of positive corporate earnings and as US Treasury yields fell back. Markets remain focused on the global interest rate outlook and on a number of central bank speakers in the period ahead.
  • As market speculation builds that the Bank of England may increase interest rates as soon as November, there will be focus on today’s central bank speakers and tomorrow morning’s UK inflation figures. BoE Governor Bailey commented at the weekend that the MPC will “have to act” to curb inflation, adding further fuel to the speculation. He speaks today on the economic and financial impact of climate change, so it’s not clear if he will say anything on monetary policy. The BoE’s chief economist Pill speaks on a panel about central bank strategy reviews. He previously said that “the current strength of inflation looks set to prove more long lasting than originally anticipated”. His fellow MPC member Mann also speaks today.
  • Expect UK September inflation to edge down to 3.0%y/y from 3.2%y/y, partly as a result of the base effects from the end of the Eat Out to Help Out Scheme on prices a year ago. The market consensus is for no change at 3.2%y/y. It will be a temporary respite from inflation’s march up to and probably beyond 4% in the coming months. The increase in the energy price cap will pull inflation higher in October, with a further significant rise likely next April as a result of soaring wholesale gas prices. That means that inflation seems set to remain around 4% into the second quarter of next year. It will present the MPC with a difficult policy trade-off between supporting the economy and tackling inflation.
  • Other central back speakers today include the ECB’s Lane (chief economist) and Panetta. A number of Fed officials are also scheduled to speak later today, including a discussion on the economic outlook by Governor Waller

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

  • EUR/USD: 1.1600-15 (1.3BLN), 1.1670-75 (581M)
  • USD/CHF: 0.9270-80 (1BLN)
  • GBP/USD: 1.3685-1.3695 (754M), 1.3700-10 (257M), 1.3725-35 (548M)

1.3745-55 (585M), 1.3800 (202M)

  • AUD/USD: 0.7350 (663M), 0.7375 (238M), 0.7500 (341M)
  • USD/JPY: 113.50 (370M), 113.60-70 (348M), 113.80-85 (347M), 114.00-15 (500M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.17 Bullish above

  • Breaks higher as USD swoon in Asia
  • EUR/USD opened +0.10% at 1.1610 after moving up after weaker US IP
  • After trading 1.1609 it tracked higher as USD broadly eased
  • There was a burst of USD selling late morning and EUR/USD spiked
  • It traded above resistance at 1.1640 to a high at 1.1642 so far
  • The next level of resistance is at the 38.2 of 1.1909/1.1522 at 1.1669
  • A close above 21-day MA at 1.1621 re-ignites trend higher

GBPUSD Bias: Bearish below 1.37 Bullish above.

  • Bid with risk, lower U.S. dollar and UST yields
  • +0.2% - USD led risk on, as UST yields eased and Asian stocks bounced
  • Trades towards the top of a 1.3725-1.3764 range with plenty of interest
  • Charts; 5, 10 & 21 day moving averages climb, 21 day Bollinger bands expand
  • Daily momentum studies head north - positive signals continue to build
  • Rising 1.3794 upper 21 day Bollinger a good overbought market indicator
  • Bullish setup supports a strategy of buying dips rather than breaks
  • Targets a test of 1.3831, 50% of 2021 fall - 1.3625 21 DMA pivotal support

USDJPY Bias: Bullish above 112.50 Bearish below

  • USD/JPY slumps some but essentially sideways in core 114.00-50 range
  • Asia today 114.08-35 EBS, bids still from ahead of 114.00, trail down
  • Japanese importers, those caught short look to buy into any dips
  • Offers from various players towards 114.50
  • Option expiries more supportive than not, more below than above
  • Today 114.00/15 total $500 mln, 113.50-85 total $1.1 bln
  • US yield curve flatter but yields relatively high, Tsy 10s @1.577%
  • JPY crosses bid, more upside seen for many on higher yields, commodities

AUDUSD Bias: Bearish below 0.75 Bullish above

  • Well bid into the afternoon as USD slips
  • AUD/USD opened at 0.7412 and after trading 0.7407 it tracked higher
  • It moved above 0.7420 before the release of the RBA minutes
  • The RBA reiterated their dovish bias but demand for AUD/USD continued
  • There was a surge of broad USD selling and AUD/USD popped to 0.7447
  • Stops above 0.7440 were triggered before it settled back around 0.7440
  • The next level of resistance is the Sep 3 trend high at 0.7477
  • Support is at the 10-day MA at 0.7366 and break eases upward pressure