The market was awaiting the next move in the US / Iran situation and it got early on Wednesday. Ballistic missiles from Iran hit US troop camps in Iraq as the Asia trading day got underway.

The markets immediately reacted with the traditional ‘risk-off’ trades you would expect. Oil jumped 4%, US equity futures fell sharply with DJ futures down over 400 points at one point. XAU jumped as high as $1,611. USDJPY would drop to 107.65 and EURJPY down to 120.17.

Then to just add to the uncertainty there are reports that a Ukrainian plane has crashed shortly after takeoff from Tehran airport. Was it hit by a missile or a tragic accident? At the time, the Iranian authorities were keen to suggest engine failure, but this was later retracted. Given events, you could have been forgiven for thinking that these moves in the markets would continue.

But during the European session, we saw a complete reversal. XAU dropped back to $1,572. USDJPY would rally to 108.77 and EURJPY to 121.03. US equity futures even turned mildly positive. So why the dramatic reversal? One comment from Iran stating they did not seek an escalation of current events coupled with the lack of response from the US has the market thinking that maybe this would be it and both sides would show restraint going forward.

So what would the US day bring? The start sees USD strength with EURUSD dipping to 1.1108 and GBPUSD to 1.3080. ADP Nonfarm Employment data comes out stronger than expected and puts a positive focus on Friday’s NFP data. However, it’s all eyes on the US and Iran and most importantly President Trump’s reaction to overnight events. When he finally speaks, he tones down his comments suggests Iran appears to be standing down. CNN even went so far as to suggest Iran deliberately avoid any US casualties.

The end result is that XAU drops sharply down to a low near $1,553, USDJPY rallies to 109.24 and equities rally strongly with the S&P making a new all-time high and the DJ up over 270 points.  Just as equities are about to close there are reports of a rocket attack in Baghdad which takes stocks lower, the DJ closing up 160 points, XAU jumps from $1,553 to $1,561 and USDJPY drops back to 109.00 Further details are not available at time of writing, but brings to an end quite a day of events and volatility.

Well, I said watch $1,616 and $1,555 in XAU. I didn’t think we’d come close to both in less than 24 hours! As I said a technical picture which is entirely event-driven.

Anyway, let’s look at something else for today. EURJPY is a pair worth looking at given the recent volatility. Looking at this hourly chart we can see that since the beginning of the year we have a double bottom in place at 120.17 and a double top at 121.45. Much of the volatility in the middle is event-driven, but the double tops and bottoms have formed a horizontal channel, which provides immediate trading opportunities. Look for a break on either side to determine for some directional momentum.

David Hannigan
Author

A graduate of the Cass Business School, Dave's career began with Credit Suisse as an Equity Options Trader on the London Stock Exchange, before moving into the world of FX with Chemical Bank and Citibank. 1994 saw him join National Australia Bank, first as a Senior Dealer, then Senior Vice President and Chief Dealer.

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