Yesterday, US stocks declined sharply with the Dow Jones Industrial Average and Nasdaq declining by more than 800 and 200 points respectively. Overnight, the futures market continued the downward momentum with the Dow and Nasdaq falling by 350 and 320 points respectively. These were the sharpest declines since early this year and were associated with the recent prospects of slowed growth and worries about treasury yields. The decline in US stocks contributed to the futures drop with the DAX and Stoxx set to open 60 and 70 points lower. Asian stocks had big declines with the Hang Seng, Nikkei, and Shanghai Composite declining by 900, 1000, and 100 points respectively.
The US dollar index declined sharply overnight dropping by more than 30 points. This week, the gains by the US dollar have been hampered by the rise of the euro and sterling. The gains by the latter two are mostly because of traders’ hopes that a Brexit deal will be near. On Tuesday, it was reported that the EU and the UK were close to a compromise. A deal is expected to be made as early as on Monday next week. Such a deal will be positive for the market, which seems to favor a soft Brexit instead of a hard one.
The Japanese yen strengthened against the US dollar in overnight trading. The gains by the yen were mostly because of its role as a safe haven when risks increase and because of positive data from Japan. In September, bank lending rose at an annualized rate of 2.3%, which was better than the 2.1% traders were expecting and the August growth of 2.2%. An increase in bank lending is a positive sign for the market because it helps to stimulate inflation. In addition, the PPI rose by 3.0% which was higher than the 2.9% that traders were expecting. The PPI shows the change in price of goods bought by companies.
On Tuesday, the EUR/USD pair declined to a low of 1.1430. It then started an upward rally that continued overnight when it reached an intraday high of 1.1570. This upward trend will continue. This is confirmed by the Average Directional Index which is currently at 44. The ADX is an indicator traders use to measure the strength of the trend. It is also confirmed by the crossover of the 7-day and 14-day SMA and the momentum indicator as shown in the four-hour chart below.
The GBP/USD pair continued the upward trend as the dollar weakened and as traders continued to hope for a Brexit compromise. It reached a high of 1.3245 in the Asian session. In the hourly chart shown below, the pair is trading in a cup and handle pattern and overnight, it completed the first part. This is an indication that the pair could see a minor decline to the 1.3100 level which is an important support level and the 50% Fibonacci Retracement level.
The USD/JPY pair continued the declines started last week when it reached 114.53. Today, the pair reached a low of 112.00, which us the lowest level since September 20. The pair is forming an inverted cup and handle pattern. The Ichimoku Kinko Hyo indicator points to a continued decline of the pair. The pair will continue to decline ahead of important US inflation numbers.