Key Talking Points:
- Brexit takes center stage as US-China tensions gain traction in the background
- DAX 30 breaks below ascending wedge pattern
- EUR/USD remains bullish in the long-run
US-CHINA TENSIONS RETURN, BREXIT WOES CONTINUE
Asian equities were trading lower this morning as tensions between China and the US appear to be back on the table. Tensions escalated back in July when US consulates were closed in China in retaliation for the US having ordered the closure of the Chinese consulate in Houston. The Trump administration is now looking to sanction at least a dozen Chinese officials over their role in disqualifying elected opposition legislators in Hong Kong.
Closer to home, Brexit talks are still struggling to find common ground before the deadline at the end of the year, and news headlines are quickly gaining traction as speculation increases over the possibility of talks ending abruptly as the three main issues – fisheries, governance, and a level playing field – continue to be unresolved.
This has brought back uncertainty in the markets after positive vaccine news in the month of November managed to remove a big part of the coronavirus drag. If we add that to the fact that we are nearing a holiday period, we may expect investors to be on the defensive with their positions, leaving many assets confined to a tight range going forward.
Stock Market Holiday Calendar 2020/21
DAX 30 Daily chart
Looking at the daily chart, the DAX 30 confirmed the bearish breakout from the ascending wedge pattern pointed out last week, causing it to retreat to a two-week low at 13,160. This area has now shown short-term support, and so a break below this area could offer further selling pressure down towards the 13,000 mark, where stronger support currently stands.
If price holds above this short-term support, we could see consolidation coming into play, shifting price sideways as investors await for the next catalyst to offer some direction. Momentum indicators have had a chance to reset from overbought conditions that were showing last week, so further upside might be achieved, although gains are likely to be capped around the 13,325 – 13,400 area of resistance.
EUR/USD CORRECTS ON A STRONGER USD
On the currency front, the euro remains a strong contender but the US Dollar is trying to claw back some losses against a basket of major currencies. EUR/USD managed a fresh two-year high on Friday at 1.2177 but price action quickly reversed and bearish pressure has followed through to start the new week. Although bullish conditions remain for the pair, short-term corrections are likely to arise as the ECB’s monetary policy announcement this Thursday may bring some tailwind risks given expectations of further extensions to the TLTRO program and an increase in PEPP by up to 500bn euros.
A fall below 1.2075 may ramp up selling pressure towards the 1.20 mark, where buyer support is likely to increase. On the upside, a renewed push above 1.21 is likely to accelerate upside momentum towards last week’s high and possibly heading towards a new two-and-a-half-year high at around the 1.23 level.
EUR/USD Weekly chart
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--- Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin
