Global equities plunged
The turmoil continued in the financial markets this past week, and the heaviest impact was seen for global equities. Major stock indices, especially in the United States, have officially entered into the bear market conditions as the recent decline exceeded -20% counting from the latest peak. Investors and traders kept selling high-yield assets on the back of panic news related to the Coronavirus outbreak worldwide. Many countries close borders and cancel trips abroad, lots of stores and plants were closed. The US government had banned European citizens to visit the country. Major Central Banks warn about a potentially hard shock for the global economy, increasing supportive measures to soften the possible impact. For example, the Bank of England had cut the interest rates by 50 basis points in an emergency move this past week.
Extremely high volatility affected trading in the stock markets, the US exchanges used to halt trading several times this past week. The largest daily drop was registered on Thursday when major US benchmarks dropped -10% on average. Although a significant recovery followed on Friday, the weekly loss has almost reached double-digit figures, which never happened since the financial crisis in 2008. The S&P 500 index declined by -8.98% with the weekly low value registered at 2396.1 points or -19.23%. The benchmark rallied +10.11% on Friday, however, the negative impact could keep on weighing on the market’s sentiment in the medium-term perspective. Tech-heavy NASDAQ Composite plunged -7.93%, while the Dow Jones Industrial Average dropped -10.36% this past week. Both indices have similar long shadows on the weekly timeframe.
Overseas indices suffered from the panic sell-off as well. Japan’s Nikkei 225 lost almost -16.0% of its value compared to the previous trading week. German DAX 30 and French CAC 40 plunged -16.77% and -19.86%, respectively. Supportive measures from the side of the Bank of England did not prevent the British FTSE 100 index from losing -12.32% on a weekly basis, even though Friday’s gain of +7% helped to recover part of the loss.
The US dollar gained strength
The greenback reversed the price action versus major currencies and remained strong versus emerging markets. The US dollar index measuring the greenback’s strength versus the volume-weighted basket of six major currencies added +2.76% to its value, while the initial loss was seen at -1.10% on Monday. So the overall weekly range exceeded 416 points, which is far above the average value. The single European currency jumped +1.39% versus the US dollar on Monday, testing 1.1500, the level never seen in several months. However, the price action made a dramatic U-turn and EUR/USD was declining throughout the rest of the week, closing Friday at 1.1105.
The British pound was affected by the sudden move of the Bank of England and the general risk-off sentiment. GBP/USD dropped -5.91% or 730 pips to 1.2277, the lowest rate in five months. Despite the flight to safety, the Swiss Franc weakened this past week, reflecting the reversal of Euro. USD/CHF gained +1.50, drawing a long downside shadow on the weekly candlestick with the lowest rate in 12 months. The Japanese yen was also gaining strength on Monday as USD/JPY tested the psychological support slightly above 101.00 yens per dollar. However, the weekly result was positive for USD/JPY as the pair added +2.40% to the exchange rate (107.88 Friday’s close), recovering most of the previous week’s loss.
At the same time, the greenback surged versus emerging markets currencies on the back of the risk aversion, repatriation flows and exceptionally large demand for safe-haven assets. Here are several weekly results of trading in the emerging markets: USD/BRL +5.00%, USD/MXN +8.97%, USD/ZAR +3.36%, USD/RUB +5.70%. Commodity currencies were vulnerable to high volatility. The Australian and New Zealand dollars plunged -6.85% and -4.38% versus the US dollar, respectively. USD/CAD surged +2.84% and closed the week at the highest rate since February 2016 - 1.3805, while the peak of the rally was seen at 1.4000.
Commodities sold off
Despite the global demand for safe-havens, the price of gold plunged -8.59% after charting the highest level of $1700 per ounce since December 2012. The weekly close price of $1529.71 promises another volatile action in the week ahead. Another precious metal - palladium - which used to lead the rally in commodities, dropped -30%, falling back to price levels seen in November last year. WTI Crude and Brent Crude were sold off as the oil market reflected the price war between the Saudia Arabia and Russia on the back of the sharp decline in global consumption. Besides, the gap between two types of oil narrowed to the lowest value in many years as most of the market players were fighting for the market share, dampening competitors. WTI Crude finished the week at $33.25 per barrel after testing the lowest rate since February 2016 ($27.40). Brent oil price closed Friday at $34.71 per barrel in London.
EUR/USD weekly technical forecast: Bullish
Current market conditions are tough to analyse as the volatility is reaching extremely high levels. EUR/USD charted a long upside swing on the daily chart, rallying to 1.1500, the level is never seen since the bullish retracement in January 2019. Besides, this psychological round figure highlighted the beginning of the recent downtrend, which lasted 13 months. However, the pair failed to hold gains and slid back inside the descending channel on the daily chart (see below) in a four-day bearish action. It would have seemed that EUR/USD is back to the bearish trend, but the technicals are mixed, so the forecast is not so straightforward.
The Ichimoku Cloud trend indicator had performed the bullish crossover of the leading span with a mid-term prospect range between 1.1137 and 1.1206. On top of that, Conversion and Baselines went above the cloud, confirming the bullish reversal pattern. The rate itself bounced back down after the bullish rally but remained above the cloud, which should point to further strength in upcoming days if not weeks.
Fast and sensitive Chaikin oscillator, taking into account the latest period of 3 to 10 days dropped back into the distribution zone, following the recent weakness. But if we looked at the Average Directional Index, we’d find that the bullish action is far from over as the mainline points to quite a strong momentum, while the surplus between -Di and +DI lines remained positive. Two long downside shadows on Thursday and Friday candlesticks point to the fact that buyers are still interested in long positions for EUR/USD on bearish rallies, while the bulls do not have enough power to absorb all of the demand.
Therefore, we expect the pair to consolidate in a sideways action in the upcoming week with a bullish bias. This is why the buy-dips trading strategy might be attractive. Forex traders should not hold their positions for too long, place tight stop-loss orders in the range of 1.1000/50 and target the resistance range of 1.1230/50. If the bullish breakout happened, then the pair could re-test the top at 1.1500.
GBP/USD weekly technical forecast
The British Pound had completed the bearish reversal pattern this past week. Several technical achievements and signals from indicators point to a high likelihood of a bearish acceleration in the week ahead.
First of all, Williams Alligator indicator turned into the bearish eating mode, the lines performed the bearish crossover and the rate appeared below the former support now resistance curves. Second, the exchange rate dropped almost 800 pips, which is quite a large movement, considering the recent uncertainty. On top of that, the plunge happened after four failed tests of the psychological round-figure level of 1.3200 dollars per pound. The market players reacted with the heavy sell-off to the inability of bulls to proceed with the long-term uptrend started in August 2019. As a result, two trend lines were breached: the blue descending support of the recent bearish consolidation and the green ascending support trendline of the bullish formation.
Third, the MACD trend indicator turned negative with the histogram plunging and both lines erasing all of the positive sentiment after the bearish crossover. The Relative Strength Index with a period of 13 days crossed the middle line from above and entered into the oversold zone for the first time in 7 months. There might be a short-term pit-stop in the support range of 1.2150/2200, but the medium-term target for the bears is the lowest daily close registered on August 9, 2019. On top of that, the comparatively small distance of 200 pips to that target shows that a breakthrough might happen next week. If confirmed, the bearish action could accelerate for the Sterling as the technical outlook is extremely negative.