Event Risk Noted In FX & Equities
Major Volatility Risk in USDJPY This Week
It could be an interesting week indeed for USDJPY. With both the Fed and rate decisions due there is likely to be plenty of volatility. The Fed is expected to cut while the BOJ has signaled in recent days that it might refrain from easing at this point. However, such guidance could be a tactic to allow room for the bank to surprise the market, creating more impact from easing. Plenty to watch this week.
USDJPY has fallen back under the 108.72 level which means that there is the risk of a move back down to the bottom of the range at 108.50. However, ahead of that level, we have support coming in from the rising trend line from October lows. While this trend line remains intact, focus is on a further move higher an eventual push beyond the 108.72 level.
US Rate Cut Expectations Driving SPX500
So in terms of the fundamentals driving SPX500 at the moment, the main topic is that of Fed rate cut expectations. In line with a slew of weak data recently, the market is now expecting that the Fed will cut rates when it meets this week. We are possibly looking for a .25% rate cut. Although voting was split more than usual at the September meeting, the deterioration in conditions since then has seen the market adjusting its view. Such a move would be bullish for equities, providing further liquidity for the business environment.
SPX500 is testing the higher timeframe resistance zone between 3020.23-3028.38. If this zone holds, for now, we could see some retracement lower. For shorter-timeframe traders, the key support levels to watch will be the retest of former highs into the 3012.98 level. Beyond that, the retest of lows into the 3002.33 level.
Brexit Delay key For UK100
Looking at the backdrop for the UK100 then and obviously the main driver at this stage is Brexit. The UK is currently still scheduled to leave the EU on October 31st. However, following Johnson’s failure to gain approval for passing his deal by that date, the UK has now requested an extension to Brexit. The EU has agreed to a delay. However, they have not yet said what the new deadline will be. In the short term, UK assets have been supported. This is given that a hard Brexit now looks likely to be avoided. There is potential that Brexit could be postponed until the end of January 2020.
The UK100 is currently testing the longer-term bearish trend line from 2019 highs having pierced the level last week to print local highs of 7339.3. This level remains the key upside marker to watch. Any retracement lower from here should find support into the 7258.1 level, however, where we have prior highs offering structural support.