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Investors remain cautious as geopolitics simmer

Even though gold prices shot up on Monday as a result of the latest threats by North Korea they quickly gave up their gains yesterday as normal service resumed, even though there remains no sign that either side wants to wind down the current level of tension.

As if to reinforce that, the US administration announced further measures to crank up the pressure on North Korea, by targeting eight of its banks and 26 individuals around the world with links to the Kingdom. President Trump also kept up his rhetoric saying that any military intervention would be “devastating” for Pyongyang, and remained an option.

Both European and US markets ended the day mixed with investors remaining cautious, as Brent crude oil prices retreated from their highest levels since 2015, as tension about a potential flare up in the Kurdistan region of Northern Iraq simmered below the surface.

Turkey’s President Erdogan appeared in no rush to dial down the tension by saying that he reserved the right to shut off the oil pipelines, as well as invade the north of Iraq if he felt the need to do so, as the Kurds vote for the right to independence in a referendum.

The US dollar continued to build on its recent gains hitting its highest levels this month as traders mulled over comments from a number of Fed officials about the future direction of monetary policy, and the timing of the next rate hike in particular.

Federal Reserve chief Janet Yellen made it clear that she wasn’t in favour of moving on rates too gradually in comments that were interpreted as a signal that we could well see another rate hike in December. She did caveat her remarks by saying that policymakers were puzzled as to why inflation was as low as it was, but was confident that it would return to its 2% target level in due course.

While French President Emmanuel Macron was holding court in the Sorbonne outlining his utopian vision of the future of Europe, the euro was similarly unimpressed sliding to one month lows as uncertainty over the creation of the next German government, as well as events in Spain kept the mood cautious.

Spanish Prime Minister Rajoy’s response to the Catalonian government’s attempt to hold Sunday’s referendum may well have the force of the law behind it, but the heavy handed nature of it is only likely to make any sense of grievance that much worse, even if it does go ahead. Recent poll numbers had suggested that the support for independence was lukewarm at best. The Spanish government’s high risk response has the real potential to be counterproductive and ferment further unrest.

EURUSD – the break below the 1.1800 area opens up a test of the 1.1600 level having completed a treble top break out. Only a close back above the 1.1830 level negates this scenario and argues for a retest of the 1.1900 area.

GBPUSD – current sterling weakness has seen the pound drift lower below the 1.3450 area towards 1.3400. We could even see a move down to 1.3365, and the 100 week MA, but while above here the upside remains for a retest of the 1.3660 area. A move through this level could see a move towards 1.3755, on the way to a move towards the 1.4000 area.

EURGBP – we’ve drifted below the previous lows at 0.8770 and look set for a test of the 200 day MA around the 0.8700 area which remains the next target. Pullbacks need to stay below the 0.8820 area, while we have broader resistance at last week’s high at 0.8900. 

USDJPY – held above the 111.30 area for now which means the up move remains intact, though the trend line resistance at 112.90 from the highs this year needs to give way to argue for further upside towards 114.00.  A break below the 111.30 area, argues for a return towards the 110.20 level.

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