The Swing Overview – Week 48
Positive economic data came out of the world's major economies last week, but news of a new coronavirus mutation sent risk currencies and stock indices into the red. The EURUSD currency pair fell below the magic value of 1.12. The Czech koruna is weakening in the context of the coronavirus. It is approaching an interesting resistance on the pair with the euro, which may be attractive for position traders, for whom the koruna brings attractive daily swaps.
The US economic data
The initial unemployment claims for the week ending November 20 reached 199k, which is the level last seen before the coronavirus. In the previous week, the number of claims was 270 thousand.
The manufacturing managers' index PMI reached 59.1, the previous reading was 58.4. New home sales were 745k in October, higher than the 742k sold in September. These economic data suggest that the recovery in the US continues.
The negative news was the information on the GDP growth, which reached 2.1% in 3Q. Analysts had expected growth of 2.2%.
The US dollar continues to strengthen
The US dollar strengthened especially after the US President Joe Biden formally renominated current Fed chairman Jerome Powell for a second term. This means that the continuity of the US monetary policy is assured, which is a strong positive signal for investors.
The USD index approached 97.0, the highest level of July 2020. The yield on the US 10-year Treasury bond reached 1.684% last week. However, bond yields fell sharply on Friday morning when news of a new coronavirus mutation emerged. This is due to investors shifting their focus to so-called safe haven assets, which includes US Treasuries as well. There is an inverse relationship between bond yields and bond prices.
The threat of a new coronavirus mutation has weakened stock indices
On Friday morning, report of a new coronavirus variant in South Africa, which is the most significant mutation so far, emerged. Meanwhile, some authorities are concerned that the mutation could be resistant to vaccines. This could completely bury hopes of reopening of economies. In the event of such news the markets tend to react quickly first and ask the questions later. In any case, this news has sent the major world indices into the red.
The SP 500 index moved in a sideways range last week. Earlier in the week it made a new all-time high, which is now 4,744.
In the current correction, the index has approached the first support at 4,635- 4,650. Very strong support is then around 4,550, which has formed on the daily chart. If reports of resistance of the new coronavirus variant to vaccines are confirmed, it is likely that the current bullish trend could be ended.
German DAX index
European countries continue to vaccinate against COVID-19 and have tightened restrictions. Slovakia has declared a two-week lockdown and Germany has crossed the 100,000 COVID-19-related deaths threshold. Austria had previously declared a lockdown, and these developments in Europe are having a negative impact on the DAX.
The manufacturing managers' index in Germany came in at 57.6, a slight deterioration from the previous month (previous reading was 57.8). The index has been declining since August 2021. The Ifo Business Climate sentiment indicator in Germany reached 96.5 which is also a deterioration compared to the previous month.
In terms of technical analysis, the DAX continues to move in an uptrend, having reached a new all-time high at around 16,300. Since then, however, it has been weakening sharply. It can be seen that it has not respected the nearest support levels in doing so. Currently, it has reached the price of 15,600, where the next support is. Very strong support is in the 14,800-15,000 range.
The EUR/USD continues its free fall
The overall deteriorating situation with COVID-19 is mainly reflected on the European currency in the pair with the US dollar and the Japanese yen. Both of these pairs are in a strong bearish trend. In the past week, the EURUSD saw a break below 1.12, reaching 1.1187. The EURUSD last traded at these levels in June 2020.