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The ECB is looking to hike rates but fears that the higher government bond yields that follow create a higher risk of fragmentation. More hawkish than expected policy stance together with ECB president Lagarde’s comments sent DAX lower. She repeatedly mentioned the fragmentation risk related to the planned rate hikes. This soured the risk sentiment and sent the stocks lower together with the southern European government bond markets (yields moved higher). It has long been the concern that Italy (the second-biggest euro sovereign debt market by size) cannot afford to borrow money from the markets if the yields rise significantly. Therefore, higher yields create a risk of Italy and other southern European countries breaking away from the European Union. What was problematic for the markets was the fact that Lagarde didn’t provide any programs for managing this risk. As a result, the dollar rallied sending risky assets lower. Heads up for the US CPI release which is the next key risk event in the economic calendar today.  By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

In today’s report, I provide you with trade ideas, analysis and key technical levels on

  • DAX
  • DJ
  • EURUSD

Get live updates on my analyses and trade ideas here: https://t.me/TIOmarkets_Announcements

DAX Daily chart 06 10 1

DAX – More hawkish than expected policy stance together with ECB president Lagarde’s comments sent DAX down to the range I anticipated yesterday. I said that a decisive break below the 14227 – 14263 range could take the market down to the 13868 – 14102range. This is what happened as risk aversion spread over to the US stock markets and the dollar surged. My view was earlier that the worst is over for the stocks but now I have to take the new data into account and factor in the possibility of the EU fragmentation talk increasing in the future. This together with higher rates and stagflation fears would obviously be bearish for DAX and we just have to play along and go where the market will take us. In other words, re-evaluation is needed and market reactions to the coming newsflow are a key in determining what the long term view on stock markets should be. 

Such a strong change of language and a risk of increasing Euro-crisis ahead investors could turn quite careful in their risk-taking. This is manifested in DAX with follow-through selling today. Yesterday created a strong reactionary candle and today the traders didn’t hesitate to take out yesterday’s low. So based on the current data inputs, it seems we might have more downside ahead before this market can turn positive again in the daily timeframe. But as I said above it all depends on what kind of newsflow we will get and how the market reacts to it. 

The nearest key S&R levels in the daily chart are 13270, 13684, 13868 and 14313. The 13868 level is interesting as it coincides with the 50% Fibonacci level. The nearest resistance level at 14313 coincides with the 23.6% Fibonacci level which adds to its significance.

DJ Daily chart 06 10 2


DJ – The US equity investors didn’t like the possibility of a re-run of the Euro crisis (due to higher sovereign bond yields) either and the descending triangle formation I talked about yesterday was resolved to the downside. The breakout has resulted in the DJ moving nicely towards the measured move target (31930) I gave yesterday.  The 32509 and 32614 lows form the nearest key resistance area above while there really aren’t good technical levels before the May 20th low at 30636. 
EURUSD Daily chart 06 10 3

EURUSD was torn between the news about the ECB going for more rate hikes than expected (bullish) and the fears that by doing so the central bank could create fragmentation in the EU. In the end, the dollar (the ultimate safe-haven currency) started to attract inflows taking the EURUSD down. The pair is now trading right below key support levels and close to the channel low. Given the general risk sentiment in the markets, I’d say it’s the channel low that will sooner or later have to give in. The key S&R levels in the daily chart are 1.0349, 1.0627, and 1.0652.

Macro Drivers for the USD 

As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.

The Federal ReserveFed hiked by 0.5% in May but according to Powell 0.75% hikes are off the table. 
StimulusThe Fed is looking to scale down its bond-buying program (QE) but has signalled that it be careful with tightening due to the war in Europe. 
YieldsThe US 10-year treasury yield has been drifting lower since early May as equity investors have moved over to T-Bonds in search of safety. 
EmploymentThe May non-farm payrolls increased by 390K (436K previous) while the participation rate was confirmed at 62.3% (62.2% previous). The unemployment rate remained unchanged at 3.6%. 
InflationThe US annual inflation growth for April slowed down and came in at  8.3%. This represented a 0.2% drop from the 41-year high of 8.5% in March. It was, however, above the analysts-predicted number of 8.1%.

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 The Next Main Risk Events

  • CAD – Employment Change
  • CAD – Unemployment Rate
  • USD – CPI m/m
  • USD – Core CPI m/m
  • USD – Prelim UoM Consumer Sentiment

For more information and details see the TIOmarkets economic calendar here.

Trade Safe!

Janne Muta

Chief Market Analyst

TIOmarkets.com

Open a VIP Black account now at www.TIOmarkets.com. We want you to be able to exploit trading opportunities in financial markets with 0 commission and tight spreads. Take advantage of the best trading account in the industry: Tiomarkets VIP Black. For more details on this truly exceptional offering see here. For more analysis and commentary, visit our YouTube channel where you can find market commentary videos to support your learning and growth as a trader. 

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