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Market Wrap: August 2019

   

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Global growth (or lack thereof), Brexit and trade wars were the main concerns in August, however it was the trade wars between the United States and China that resumed its spot in the limelight in the markets.  According to some market strategists and US economists, the ongoing trade wars increases the chances of equities declining and more significantly, a global recession over the next 12 months. Morgan Stanley’s chief economist, Chetan Ahya has suggested that the global economy would fall into recession around six to nine months after the U.S. and China enforce their new round of tariffs.  “Risks remain skewed towards further escalation at least until material market or economic weakness shows,” Ahya told clients in a note.

EURUSD

During the month of August, the EURUSD showed some positive signs early on only to reverse and return to two-year lows below 1.11.  In falling through this level, it is getting very close to falling to its lowest levels in more than two years and looks precariously placed with no more obvious support levels below.  In the last three weeks it has moved strongly lower from above 1.12, where it had numerous doji and pin bar candlesticks showed how enthusiastic the selling was during that period, down through any support at 1.11.  For the last four months the EURUSD has enjoyed a lot of support from the 1.11 level so it is significant that it has now failed at this level, which is now likely to offer some resistance.

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European Central Bank (ECB) policymaker Klass Knot has made public comments in which he saw no reason for quantitative easing (QE) to be resumed in the Eurozone.  Many do believe however, that the ECB is not far away from starting a fresh round of bond purchases and cutting rates further, as early as next month’s meeting in two weeks’ time.  Recent soft inflation data has helped underpin market expectations that the ECB will inject stimulus into the economy next month. However according to outgoing ECB policymaker Ewald Nowotny, the ECB should be prepared to disappoint the market every now and again, and in the past, may have gone to great lengths to meet market expectations. 

 

GBPUSD

Unlike the EURUSD, the GBPUSD has shown some positive signs throughout August as in the last three weeks or so, it has been able to consolidate and receive solid support off the now key 1.20 level, allowing it to stop the rot and take a breather from its drastic falls in the last two months.  It will be interesting to see if the strong selling continues and threatens the support at 1.20 again. Around four weeks ago the GBPUSD fell heavily from 1.24 down to its present trading levels, although it had been declining for several weeks after falling through the key 1.27 level. It was only at the end of June that the GBPUSD reached a one month high near 1.28 before its steady but strong decline in the time since.   The sterling had been attracted to the 1.27 level throughout May and June and this level may offer some resistance should the GBPUSD rally higher.

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Earlier this month, the Bank of England’s (BOE) nine-member Monetary Policy Committee, led by Mark Carney, unanimously voted to hold interest rates at 0.75%, as the countdown to leaving the European Union moved under 100 days.  This decision met some opposition as they left borrowing costs unchanged however was in the face of increasing risk of a ‘no-deal’ departure from the European Union. With the backdrop of a slowing global economy and worries about Brexit, the central bank also cut its growth forecasts for the U.K. economy.  The BOE reported it now expects growth of 1.3% this year and next year, down from 1.5% and 1.6% respectively in its May forecast - in its last set of projections before the official Brexit date of 31st October. The central bank warned that Britain has a one in three chance of moving into recession as uncertainty over Brexit drags down the economy.  

 

AUDUSD

Up until the last week, the AUDUSD has experienced a reasonably flat and stable August as it rested on a new support level at 0.6750 even though it fell through down to a 2019 low below 0.67 earlier in this period.  The last four days of the month have seen it drift lower and should the AUDUSD fall lower then it will be trading at its lowest levels in over 10 years as it feels the brunt of a strong down trend throughout this year.  Prior to its recent consolidation, the AUDUSD fell sharply from above 0.7050 down to the support level at 0.6850 before continuing to decline down to 0.6750. Having provided solid support over the last three months, the 0.6850 level may now offer some resistance should the AUDUSD rally.

AUDUSDvDaily (1)

After the Reserve Bank of Australia (RBA) set a record low interest rate last month, many are now expecting low rates are here to stay for a significant period, due to the global economy being in deep trouble.  Many are also suggesting that central bankers around the world are running out of tools to tackle the struggling growth, with the most recent influence being the escalating US-China trade war. Deutsche Bank Australia's chief economist, Phil O'Donoghue believes Quantitative Easing, a strategy that has been used my many major central banks around the world to increase the domestic money supply purchasing government and corporate bonds, is just a matter of time.  "At some point you are going to see the RBA adopting unconventional policy," he said.  

 

US30

The US30 index has had an interesting month of August, as it has traded back and forth around the key 26000 level as its volatility has doubled in the last month.  This trading within the range came after it suffered its largest falls this year dropping sharply from near its all-time highs down to its lowest levels in two months near 25000 earlier in the month.  The longer it remains below 26400, it does look likely to struggle to return to its previous highs. Prior to the fall and for three weeks, the US30 index remained close to its all-time high, after it has surged higher throughout June.  In the first week of July, the index consolidated a little in a narrow range roughly between 26500 and 26900, and it used that period of consolidating to great effect pushing higher to the new highs.

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According to some market strategists and US economists, the ongoing trade wars between the United States and China increases the chances of equities declining and more significantly, a global recession over the next 12 months.  Mark Haefele, global chief investment officer at UBS Wealth Management has suggested that a portfolio shift will be in order to mitigate the poor global outlook. “With talks between the US and China dominating market moves over the near term, investors should brace for higher volatility. We believe it is prudent to take action to neutralize part of this event risk,” he wrote. “As a result, we are reducing risk in our portfolios by moving to an underweight in equities to lower our exposure to political uncertainty.”

 

Gold

Gold has enjoyed a steady and strong August as it has spent most of the month resting on support at $1500 before moving higher in the last week or so to achieve a new six year high above $1550.  Around four weeks ago, gold surged higher off support at $1400 towards the recent six year high above $1530, which was reached three weeks ago, before its recent surge higher yet again. The $1500 level will be expected to continue to prop up price should there be any declines, given its recent strong support offered to gold.  It was well supported by the $1400 level throughout July, and any time it has moved lower, it has been quickly bought up and supported, pushing it back above this level. If gold was to decline from its current highs, you could reasonably expect it to receive support from $1400 again.

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A wide variety of risks have sent gold to its highest levels in more than six years, and is leading investors to take a ‘risk-off’ approach to their portfolios, as they are uncertain about near-term global economic trends and are likelier to gravitate toward low-risk assets.   Gold has been enjoying support from likely Fed moves and ongoing concerns over the global economy, including United States - China trade negotiations. Although, some analysts believe if the trade negotiations turn positive and economic data, especially inflation, improve soon, July's cut could easily be the Fed’s only move this year.  the ongoing trade wars between the United States and China increases the chances of equities declining and more significantly, a global recession over the next 12 months, according to some market strategists and US economists.

 

UK Oil

Oil has been well supported by the key $58 level during August, helping it move back towards its highest level for the last month.  For the most part of August, UK Oil has traded within a narrow range between $58 and $60 with the former level providing some support.  UK Oil remains reasonably close to its seven-month low after falling sharply back through the key $63 level at the start of the month. It had been enjoying solid support from the $63 level for more than one month before the strong fall, and this consolidation may have allowed it to potentially threaten the next significant level of $68.  UK Oil will be looking for the support at $58 to remain and keep prices propped up as the medium-term trend down and there is a lot of selling pressure being applied.

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Rising tensions in the middle east and continued hostilities have seen oil rally yet again.  However, at the start of August, U.S. President Donald Trump announced that the United States would impose additional 10% tariffs on $300 billion worth of Chinese imports from 1st September.  China retaliated by allowing its yuan to weaken below the key 7-per-dollar level for the first time in more than a decade. Trump appeared to escalate tensions even further by declaring China as a currency manipulator.  This back and forth sent oil prices to their lowest levels in seven months. Now they have rallied a little after a recent attack on a Saudi oil facility by Yemen’s Houthi forces, however the rally was limited by a downbeat report by the Organization of the Petroleum Exporting Countries (OPEC) that fuelled concerns about growth in oil demand.

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