Markets on standby ahead of Jackson Hole

Investor anxiety gripped the global markets on Monday with tension heightening ahead of Friday’s Jackson Hole meeting which could offer clarity on when the Fed plans to break the tradition of central bank caution.

Asian shares concluded mixed with the Nikkei edging higher following Yen’s weakness which provided exporters in Japan a welcome boost. In Europe stocks meandered between losses and gains as the combination of uncertainty ahead of Friday and risk aversion repelled investors from riskier assets. Wall Street was vulnerable to losses on Friday and may follow this negative path if the bearish domino from Asia and Europe entices sellers to attack.

With the mass still heavily bullish on stocks despite the bearish fundamentals it seems likely that the driver behind the impressive gains remains sentiment. Oil’s sharp resurgence and optimism over central banks intervening have elevated investor risk sentiment consequently propelling global stocks higher. It should be kept in mind that the abrupt rise in oil prices has been based on expectations over a potential production freeze while concerns still linger over the state of the global economy. Sentiment may be quick to change and once it goes back in line with the painful fundamentals then stocks could be left vulnerable to heavy losses.

Dollar gains on US hike hopes

Dollar bulls received further encouragement on Monday as upbeat comments from U.S Federal Reserve policy makers on the strength of the US economy bolstered hopes of a potential US rate hike in 2016. The fluctuating expectations over if the Fed would take any action heavily punished the Dollar last week with the Fed divide providing a foundation for bears to attack prices. Although sentiment towards the Dollar and US economy remains somewhat bullish, the Federal Reserve may wait for further domestic data to rationalise raising US interest rates in December. Investors may direct their focus towards the Jackson Hole gathering on Friday which could offer some direction on when the Fed may take action. A hawkish Yellen could install bulls with inspiration consequently sending the Dollar Index higher.

From a technical standpoint, the Dollar Index still remains bearish on the daily timeframe and previous support at 95.00 could become a dynamic resistance that opens a path towards 94.00.

GBPUSD breaks below 1.3100

Sterling received punishment on Friday following talks that Theresa May; UK prime minister could invoke the article 50 in April consequently triggering the formal EU exit negotiations. Although the pound was provided a lifeline last week from the string of positive domestic data which alleviated some Brexit concerns, the persistent uncertainty continues to leave prices extremely vulnerable to losses. Sentiment towards the Sterling remains bearish with prices poised to further declines as expectations heighten over the Bank of England cutting UK rates to near zero before year end.

The Sterling remains pressured with the potential divergence in monetary policy between the Fed and BoE encouraging sellers to send the GBPUSD lower. With the economic calendar light today, price action could prevail and this may keep the GBPUSD depressed.

WTI elevated by freeze deal hopes

Oil has been chaotic this month with prices charging into a bull market as expectations inflate over a production freeze deal in September’s informal OPEC meeting. Oil sensitivity amid oversupply concerns continues to intensify speculative boosts in prices which have attributed to the commodity entering a bull market in only eleven trading days. Last week showed incessant build ups in US oil rigs while Iraq seeks to boost crude oil shipments above 5% in the next few days. Many questions must be asked about the sustainability of the current market rally since the awful combination of oversupply worries and fears of slowing demand still linger. If September’s informal OPEC meeting concludes with no production freeze deal then bears may be enticed to send oil prices back towards $40.

Currency spotlight – USDJPY

The USDJPY was on a slippery slope last week with prices breaching below 100.00 as the cloud of uncertainty around when the Fed may raise US rates weakened the Dollar consequently encouraging sellers to install repeated rounds of selling. This pair remains bearish on the daily timeframe and the potential combination of Dollar vulnerability and Yen strength from risk aversion could drag prices much lower. From a technical standpoint, previous support around 101.50 could act as a dynamic resistance that encourages a steeper decline back below 99.50.

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Otunuga is a research analyst at FXTM