One to watch 3 charts you should be watching now

When there is so much to focus on in the markets it can be helpful to narrow your focus to one or two charts which can help you to come up with actionable trading ideas. Below we take a look at two charts that should be on every trader’s radar today.

1, The Ibex:

We mentioned on Monday that Madrid’s direct rule of Catalonia has been welcomed by the markets and indeed the Ibex rebounded strongly on Monday. Now that the Catalan President has escaped to Belgium it is hard to see how the secessionist movement can keep up its momentum, which could be good news for Spanish asset prices. This is also positive from a technical perspective and the Ibex actually broke above the daily Ichimoku cloud on Monday and has extended gains so far on Tuesday. Although this situation is fluid and may still stir up some risk aversion in the coming months, we believe that in the short-term this technical development is positive and could trigger a recovery in the Ibex towards the 10,750-10,800 mark last reached in August.

2: Relative growth rates

The flurry of Q3 GDP data is also worth looking at closely to try and deduce relative growth prospects. One of the easiest ways to do this is by looking at the annual GDP rates for the Eurozone, US and UK and then normalising them to see how they move together, as I have done in the chart below. The outcome is illuminating. As you can see, Europe’s growth rate is recovering at a fast clip, and although growth levels are nominally blow those in the US the pace of recovery is still going strong, suggesting that there remains decent potential for growth in the currency bloc, which could boost asset prices and limit the downside for the euro.

The US comes in second place, although its overall rate of growth is the strongest, however, its increase in growth is not as impressive as the Eurozone. This is fairly neutral for US asset prices, which seem quite happy to move higher, especially equities. However, it could be more troublesome for the dollar. If there are any delays or big changes to Trump’s tax plan that could limit the rate of growth in the US then it is hard to see how the dollar can rally. Interestingly, the 10-year Treasury yield has retreated back below the 2.4% level which has stymied the vigour of the dollar’s rally this week, so the buck’s upward move may be a slow grind higher from here.

The UK is in third place as Brexit concerns weigh on the UK. It is lagging the US and the Eurozone, which makes the pound an unattractive bet at this stage, although we believe that the internationally – focused FTSE 100 should be fairly unscathed from domestic problems in the UK. Overall, based on relative growth rates and nothing else, the euro should be a strong performer alongside the USD with the pound lagging in the coming weeks compared to the other major G10 FX currencies.

3, What does this mean for FX?

Interestingly, as you can see in chart 3 below, the euro is the top performer in the G10 so far this year, followed by the pound, while the dollar is a major under-performer. Based on this GDP analysis, and considering growth rates can be a key driver of FX performance, the dollar is the outlier here. The euro’s strength seems justified, the pound looks like it is punching well above its weight, while the dollar is unfairly fading away. This leaves GBP/USD more at risk from a pullback in the coming weeks than EUR/USD right now…