Retracements, corrections and pullbacks continued dominating in the financial markets this past week. Traders and investors headed to the risk aversion flow as global equities, and emerging markets assets were hit the hardest. The fundamental environment caused a sharp sell-off in U.S. equities, while capital flows to safe-haven Treasury bonds were increased, 10-year yields closed the trading week at the lowest level since December 2017. Since the Wall Street dipped towards long-term technical support levels, major U.S. stock indices suffered significant losses, even though bounced back up from the weekly bottom. S&P 500 declined by 0.86%, tech-heavy NASDAQ lost 1.21% of its value, and Dow Jones Industrial Average benchmark slid 0.69%. Asian shares mostly followed the trend in the North American markets. For instance, the Japanese Nikkei 225 index ended the trading week with weakness of -0.44%, recovering most of the mid-week losses though. European stock indices, in contrast, recovered a decent part of the previous week’s decline. German DAX 30 added 1.49%, charting a bullish engulfing on the weekly timeframe, while French CAC 40 gained strength of 2.08% on a weekly basis.
The foreign exchange market suffered a dramatic change in the recent trend. The world’s reserve currency - the U.S. dollar completely reversed the price action, gaining significant momentum. The U.S. dollar index, measuring the greenback’s value versus the volume-weighted basket of six major currencies, added 0.71% to the rate, closing the trading week above 98.00 mark for the second time since May 2017. Emerging currencies suffered more meaningful losses versus the greenback. For instance, Chinese yuan was weakening for another 1.5% for the second week in a row, South African Rand declined by almost 2%, and Mexican Peso slid another 0.34%. Other risk currencies, even among majors, were vulnerable to sharp sell-offs as well. For instance, GBP/USD accelerated the bearish action, and closing the week with a negative result of -2.16%, eliminating all of this year’s gains (1.2719 close rate). The Australian dollar plunged 1.90% versus the greenback as AUD/USD appeared below 0.6900 level for the first time in 40 months. The New Zealand dollar kept sliding towards 0.6500 support.
In other markets, gold price was trying to hold previous gains above $1300 per ounce ($1303.40 weekly high) but failed to do so, edging back lower to $1277.10 (-0.66%). Silver was hit even harder as the precious metal plunged 2.5%, printing fresh local lows slightly above $14.40 per ounce. Copper, Aluminum and Palladium were all in the red this past week. WTI Crude Oil price was edging up throughout the week, but the bulls failed to hold gains above $63.60 per barrel, and the black gold price edged back below $62.70 per barrel. Brent Crude Oil price gained almost 2%, finishing the week above $72.00 per barrel for the first time in 7 months.
The U.S. dollar index is back on track to the highest rate in two and a half year. The peak above 103.00 was noticed in December 2016, and the index bounced back down since then. The bulls came back to control the market after a two-week retracement with a target of 97.00 for the bears. The defensive barrier held further slide of the index as buyers found the price attractive for new entries. The four-hourly chart below shows classical reversal set-up with a combination of three technical indicators. First, slow MACD trend indicator showed a slight bullish divergence in the bottom (right green arrow), and its lines performed the cross-over. Fast RSI oscillator confirmed the reversal pattern with higher lows of the range, while the rate was trying to chart lower lows. The 233-bars simple moving average acted as the support curve for the fourth time since the false breakout in March this year. The long shadow of the reversal candlestick pointed out the bullish strength as buyers stepped in with heavy-volume long positions. As a result, the index edged higher above 98.00 quote, which suggests a further advantage of the greenback in the week ahead. Those traders, who prefer hedging themselves from risks in particular currency pairs, should consider holding long positions for the U.S. dollar index in the medium-term perspective.
The British Pound lost the ground, accelerating the slide. GBP/USD lost almost 300 pips of the exchange rate after six-weeks consolidation around 1.3000 technical support. The pair charted the lowest close weekly this year, testing the mark of 1.2700. The bearish action was gradual and consistent throughout all five days of the trading week, which confirmed the total absence of buyers among currency speculators. Such strong movements do not end up just like that, therefore, we suggest that the downtrend will continue in the week ahead. The daily chart below indicates the horizontal static support line at 1.24881, the lowest daily close rate charted on December 11 last year. The blue median dotted line has almost the same angle, showing that if the support were breached, further downside risks would persist of the GBP/USD currency pair. The quote failed to hold above 233-days simple moving average, coming off the resistance curve for quite a considerable distance. Since daily oscillators are somewhat oversold, a temporary consolidation is possible in the range of 1.2600/50 as it happened before the bullish breakthrough in mid- December. We’d suggest seeking intraday whipsaws in order to implement the sell-highs trading strategy. Pound cross-rates also look heavy, especially GBP/CHF and GBP/JPY.
The Australian dollar is in danger of a more significant plunge toward 67 cents versus the greenback. The technical sentiment is extremely bearish on the daily chart below. Parabolic Sar’s dots are far above the recent price, -DI line (red) is far above the +DI line (green), while the ADX mainline (black) edged up again after smoothing the trend’s momentum on May 14. The bears even managed to breach the descending support line (blue), which never happened since October 2018. The last time such low rates were noticed was December 2016, when the Aussie bottomed at 0.6838 versus the U.S. dollar. All those technical factors point to heavy selling pressure on the AUD/USD currency pair. The enormous whipsaw charted on January 3 2019, might play out as the water test before pushing the rate to multi-year low levels. The nearest support is placed at a psychological round-figure quote of 0.6800, and if breached, further losses are likely.
The greenback’s peak rates from December 2016 are reflected on the long-term weekly chart below. The Chinese yuan is nearing to all-time low prices as USD/CNH became extremely bullish recently. Two weeks of gains added more than 3.15% to the exchange rate, and USD/CNH jumped back to an alarming rate of 7 yuan per one dollar (6.9484 weekly close). The all-time peak at 6.98741 represents static horizontal resistance, which could be tested for the third time in two and a half years. The recent bullish momentum suggests that the market players would get there sooner rather than later. The Fibonacci Retracement Levels tool shows that the uptrend begun after the failed test of 61.8% from the bullish rally started in March 2018 (green arrow on the chart). Usually, that suggest new highs to be charted. Therefore, we’d suggest holding long positions for USD/CNH in the medium term until reversal signals occur on shorter timeframes.