Weak Chinese Economic Data Buoys Dollar

16 August 2022, 02:12

Market Focus

US stocks rallied for a second day in a row, as investors digested weak data on New York manufacturing and the Chinese economy. The markets are coming off a fourth straight weekly gain, the longest run this year, with sentiment buoyed by signs of slowing inflation pressures that stirred hopes of a shift by the Fed to less hawkish rate hikes and a gradual slowdown in the economy. Still, the rally has left the market looking stretched with stocks vulnerable to a pullback. Meanwhile, data showed that China’s July retail sales, investment and industrial output missed economists’ estimates, and in the eurozone, the risk of recession has reached the highest level since November 2020.

The S&P 500 and Dow Jones Industrial Average both advanced on Monday. The S&P 500 closed near highs of the day, reversing losses of as much as 0.5%, with nine out of eleven sectors staying in the positive territory. Consumer Staples was the best performing among all sectors, rising 1.05% on a daily basis, while Energy slid 0.98% for the day, performing the worst. The Dow Jones Industrial Average rose 0.4%, Nasdaq 100 increased 0.7% as big tech led gains, and the MSCI world index moved up 0.2%.

Main Pairs Movement

The US dollar edged higher on Monday, benefiting from its safe haven status, while the Chinese yuan dipped after a batch of disappointing data prompted the country’s central bank to cut interest rates. The DXY surged unstoppably and closed near a daily high above 106.4 for the day.

GBPUSD slid for the day as undermining risk sentiment provided a boost to the safe-haven greenback. Cable witnessed heavy selling pressure at the beginning of this week, closing near thr daily-low of 1.205. Meanwhile, EURUSD was also under bearish momentum and dropped to a level below 1.016. It’s worth noting that investors preferred to pile onto the greenback ahead of Wednesday’s FOMC minute showdown, which may reveal some clues to the next move by Fed officials.

Gold dropped 1.26% on Monday, as Chinese data triggered risk-aversion and investors resorted to selling everything amid the pessimistic market mood. XAUUSD was driven by bearish momentum almost the entire day, falling from the $1802 to $1780 mark. Moreover, WTI and BRENT oil declined 2.91% and 4.53% respectively.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair tumbled on Monday, extending its slide that started last week and dropping to a daily low below the 1.020 mark amid the risk-averse market environment. The pair is now trading at 1.01935, posting a 0.62% loss on a daily basis. EUR/USD stayed in negative territory amid a stronger US dollar across the board, as the poor results from the Chinese docket earlier in the session underpinned the safe-haven greenback and dragged the EUR/USD pair lower. The weaker-than-expected Industrial Production in China rose by 3.8% in July, indicating signs of slowing economic activity in the country and escalated concerns about recession. For the Euro, the German energy crisis continues to be the main factor concerning a Eurozone recession, which might act as a headwind for the shared currency.

On the technical side, the RSI is at 33 as of writing, suggesting that the pair is facing heavy bearish pressure as the RSI drops toward 30. As for the Bollinger Bands, the price preserved its downside traction and moved alongside the lower band, therefore the downside momentum should persist. In conclusion, we think the market will be bearish as the pair is heading to test the 1.0150 support line. The near-term outlook stays bearish as the technical indicators have extended their declines within negative levels.

Resistance:  1.0287, 1.0347, 1.0430

Support: 1.0150, 1.0111, 0.9988

GBPUSD (4-Hour Chart)

The GBP/USD pair declined on Monday, coming under selling pressure and refreshed its daily low near 1.206 mark during European session as the US dollar continues to capitalize on safe-haven flows at the beginning of the week. At the time of writing, Cable is in negative territory with a 0.46% loss for the day. The US dollar Index extended its rally toward the 106.00 area as escalating geopolitical tensions between the US and China and weak data releases from China both helped the safe-haven greenback to find demand. For the British pound, latest news on Monday reported that 30 of 51 economists expect the Bank of England to hike the policy rate by 50 basis points at its September meeting in a recently conducted survey, but the news failed to lift the GBP/USD pair higher today.

Meanwhile, the RSI is at 39, suggesting that the downside is more favored as the RSI stays below the midline. For the Bollinger Bands, the price regained downside traction and dropped toward the moving average, therefore a continuation of the downside trend can be expected. In conclusion, we think the market will be bearish as the pair might head to test the 1.2027 support. The RSI also reflects bear signals and confirms the lack of buyers’ interest in the British pound.

Resistance: 1.2178, 1.2248, 1.2309

Support: 1.2027, 1.19400, 1.1897

XAUUSD (4-Hour Chart)

The XAU/USD pair fell down on Monday amid risk-aversion mood. The price declined toward the $1,780 level in European session, having struggled around $1,800 earlier in the Asian session. The risk-off market remains still after China activity came in below forecasts. In addition, an unexpected rate cut by PBOC fueled fears over a slowdown of the world’s second-largest economy, therefore makes the safe-haven US dollar more attractive. Investors seek safety in the US dollar amid market panic as US-China tension still remains. The key event risk this week is Wednesday’s FOMC minutes, which could set a clear direction for gold prices if it tells the Fed’s future policy

The RSI is at 41, suggesting that the downside is more favored as the RSI stays below the midline. For the Bollinger Bands, the price dropped below the moving average, the downside traction should persist. In conclusion, we think the market will be bearish as the RSI indicator figures 41 and the price droped below moving average. The price might heads to test the next support level at 1769. For more price action, eyes on the next support level.

Resistance: 1803, 1857, 1874

Support: 1769, 1757, 1714