Net global market reactions to the Fed’s 75 basis point rate hike have been mostly negative. Global equities generally ended lower after an initial rally. Additionally, the SNB announced a surprise rate hike of 50 basis points while the BoE’s 25 basis points had a hawkish undertone with three members wanting more. The BoJ remained calm and kept interest rates unchanged while keeping the 10-year JGB yield cap at 0.25%.
In the currency markets, the Swiss franc was by far the strongest. The dollar followed in second place but there was clearly some hesitation towards the end, especially against the euro. The Canadian dollar was the worst as it was further dragged down by falling oil prices. The Aussie dollar was also weighed down by general risk aversion sentiment.
Could DOW defend the 30k cluster support level?
DOW extended the correction from 36952.65 to close at 29888.78 last week, losing the 30k handle. Ideally, this is a bottom area, with a 38.2% retracement from 18213.65 at 36952.65 to 29794.35, and 29568.57 resistance turned support (2020 pre-pandemic high). Additionally, it is now reasonably close to the 55-month EMA (now at 38563.61), which should provide strong support.
However, the break of the gap resistance at 31144.91 is needed to be the first sign of a bottom. Or the risk will remain sharply on the downside. Sustained trading below 29794.35 could lead to an even deeper drop at the long cluster level at 25308/71 (61.8% retracement from 18213.63 to 36952.56 at 25371.94, 38.2 retracement % from 6469.95 to 36952.56 to 25308.25).
Limited short-term upside potential of the 10-year yield
The 10-year yield jumped as high as 3.483 last week, but fell back to close at 3.239. Another upside can’t be ruled out yet, but upside potential should be limited for now. The 161.8% projection from 0.398 to 1.765 from 1.343 to 3.554 should limit the upside to bring consolidations. Indeed, the break of the 3.167 support should confirm that a short-term correction has started for the 55-day EMA (now at 2.848). However, a firm break of 3.554 could bring further upside acceleration to the 200% projection at 4.077.
The dollar index quickly lost momentum after resuming the uptrend
The dollar index also resumed its recent uptrend and hit 105.78, but quickly lost momentum and pulled back. Further consolidations would likely be seen in the near term, but the decline should be contained by the 55-day EMA (now at 102.16) to bring the rally back to resumption. The current uptrend should aim for a 61.8% projection from 72.69 to 103.82 from 89.20 to 108.43 at a later stage. But to do so, risk aversion will have to continue as the 10-year rate should extend its uptrend, while the EUR/USD will have to break the support at 1.0339.
WTI crude oil in the third leg of the pattern from 131.82
The sharp decline in the price of oil last week could offer some hope for the inflation outlook and risk sentiment ahead. The break of the 112.25 WTI support indicates that a short term high has already formed at 124.12. The entire rebound from 93.47 may also be over. A sustained trade below the 55-day EMA (now at 111.18) will confirm this case. The drop from 124.12 would then be seen as the third leg of the pattern from the 131.82 high. A deeper drop should then be seen at 61.8%, projecting from 131.82 to 93.47 to 124.12 to 100.41 initially. A firm break there could see an acceleration down from 93.47 to a 100% projection at 85.77, which is near 85.92 resistance turned support.
USD/CAD Breaks Key Resistance at 1.3
But of course, the oil price reversal could also be seen as the result of weaker demand due to a bleaker economic outlook. In other words, it is part of risk aversion trades. If so, the Canadian dollar could be hit twice. USD/CAD has already broken through the resistance at 1.0375 last week. Sustained trading above the 38.2% retracement from 1.4667 (2020 high) to 1.2005 (2021 low) at 1.3022 will suggest this is a full reversal of the downtrend from 1.4667. A further rally would be seen at 100% projection from 1.2005 to 1.2947 from 1.2401 to 1.3343. The dynamic between oil, stocks and the Loonie is worth watching closely over the next two weeks.
EUR/CHF Weekly Outlook
EUR/CHF’s sharp drop last week and the break of 1.0216 support suggests that the corrective rebound from 0.9970 has been completed after failing long-term resistance at 1.0505 as well. than the 55 week EMA. The initial bias remains to the downside this week. Break of 1.0086 support will confirm this bearish case and bring a retest of 0.9970 low. On the upside, minor resistance above 1.0232 will first turn the intraday bias into neutral. But risk will remain on the downside as long as 1.0513 resistance holds.
Overall, as long as the support at 1.0505 becomes resistant (2020 low), the long-term downtrend from 1.2004 (2018 high) is likely to continue. The next target is a 100% projection from 1.2004 to 1.0505 to 1.1149 to 0.9650. However, a firm break of 1.0505 will suggest a medium-term bottom and bring a stronger bounce towards structural resistance at 1.1149.
Over the longer term, capped below the 55-month EMA, EUR/CHF is seen as extending the decades-long downtrend. There is no prospect of a bullish reversal until some sustained trading above the 55-month EMA (now at 1.0846).