Selloff in Sterling was the main focus last week as it was first triggered by news that UK prime minister finally announced a plan on Brexit. Selling reached a climax Friday as the pound spiked to 31 low against greenback and breached 1.2 handle on "fat fingers". Subsequent recovery should settle the pound in range for the near term but outlook will stay generally bearish. The British currency will remain vulnerable to deeper selloff on more Brexit news. On the other handle, UK stocks benefited as it's believed that depreciation of the currency would help company profits. FTSE extended recent bullish run and is set to take on historical high in near term.
FTSE reached as high as 7121.93 last week as recent up trend from 5499.50 resumed last week. Outlook stays bullish for historical high at 7122.74. The long term up trend from 2009 low at 3460.71 is likely resuming too. Break of 7122.74 will pave the way to long term channel resistance (now at around 7400). And this bullish view will hold as long as 6654.48 medium term support holds.
US stocks, on the other hand, continued to struggle in tight range without any clear direction. The presidential election in November is a major risk event for the US economy and the uncertainty would likely limit moves in any direction. Meanwhile, the mildly disappointing non-farm payroll report released on Friday offset the positive ISM indices. While there were some hawkish fedspeaks over the week, there is no chance for Fed to hike interest rate in November after NFP. But still, Fed is on track to hike rate in December even though market pricing dropped from 60% to around 40% chance after NFP.
Technically, we're holding on to the view that correction from 18668.43 is not finished. That is, deeper decline is expected in the index ahead for 38.2% retracement of 15450.56 to 18668.43 at 17439.20. The key support level lies in 17063.08 and the medium term outlook will stay bullish as long as this support holds. However, firm break of 17063.08 will argue that price actions from 18668.43 are developing into a medium to long term correction that could drag back to 15450.56 support and below.
Another important development was the talk of ECB starting to taper its bond buying before the program ends next March. The news boosted global yields higher. In particular, US treasury yields staged a strong come back and provided some support to the greenback. 10 year yield in US rose to as high as 1.771 last week before settling at 1.736. The breach of 1.752 near term resistance suggests that rise from 1.336 is resuming. And the development also reaffirmed the case of medium trend reversal. And, as long as 1.543 support holds, we'd expect further rise in TNX to 1.890 level and possibly revisit 2.0 level in the final quarter of the year.
Dollar index's break of 96.33 resistance last week suggests that rises from 94.07 and that from 91.91 are resuming. Further rally would be seen to 97.56 resistance in near term. However, as noted before, price actions from 91.91 are still corrective looking and upside momentum remains unconvincing. Hence, we'd expect strong resistance above 97.56 to limit upside. That would remain the case before the picture of Fed's rate path is cleared.
Regarding trading strategies, firstly, while crude oil extend recent rise through 50, Canadian dollar didn't react. And USD/CAD has indeed continued to spiral higher last week and our sell USD/CAD on break of 1.2999 was not filled. Secondly, the GBP/USD short position (sold at 1.2997) worked well and met downside target of 1.2495 already. If our readers haven't exited the short position yet, here are our suggestions. GBP/USD is expected to engage in range trading for a while even though outlook stays bearish. Hence, exiting at market at weekly open won't be a bad choice. Another way to trade the position is to lower the stop to 1.25 and close it on another dip to 1.22. We'll hold our hands off other strategies for the moment.