Unrest in the Middle East rocks financial markets; Safe havens are becoming increasingly important

The abrupt escalation of conflicts in the Middle East significantly impacted global financial markets last week, prompting capital inflows to safe havens. Amid the military confrontations, gold and other precious metals experienced a sharp rise in value. Oil prices also recovered, reflecting geopolitical tensions. While government bonds enjoyed some benefits, stock markets managed to avoid catastrophic declines despite the declines experienced. These military tensions were coupled with continued adjustments to Fed interest rate expectations and continued strong U.S. inflation data, painting a complex picture for investors.

In the monetary space, the Swiss franc emerged as a front-runner, buoyed by its recognized status as a safe haven amid geopolitical turmoil. The Canadian dollar secured second place, supported by the recovery in oil prices. The US dollar took third place, supported by mild risk aversion in equity markets and robust government bond yields. Interestingly, the dollar managed to withstand gold’s impressive rally, a testament to its inherent safe-haven appeal.

In contrast, the New Zealand dollar remained at the bottom of the performance chart, while the Australian dollar was close behind. Sterling and the euro were under significant pressure and succumbed to accelerating selling against the Swiss franc following the breakout to the downside. Although the yen was choppy, its decline was mitigated by the looming threat of intervention from Japan.

As the global gaze remains focused on the Middle East, the potential for regional expansion or containment of the Israel-Hamas conflict is expected to significantly influence the upcoming market development. Although economic data continues to play a crucial role in shaping market movements, its influence may be temporarily overshadowed by unfolding geopolitical events.

Middle East conflict fuels rush for safe havens and boosts gold and Swiss francs

After the devastating attacks by Hamas militants on southern Israel, investors fled to safe havens at the beginning of the week. Towards the end of the week, massive inflows to safe havens again occurred after Israel began to retaliate. Gold prices had their best week in seven months as the Middle East conflict escalated, while the Swiss franc rose to its strongest level in a year against the euro and sterling. Oil prices and government bonds also rose slightly. If the geopolitical situation worsens, there is a good chance that these safe havens will continue to appreciate in value.

Technically, Gold’s strong rally and decisive break of the 55D EMA should confirm that the corrective decline from 2062.95 is complete with three waves lower to 1810.26, just ahead of structural support at 1804.48. The short-term outlook now remains bullish as long as the support at 1884.92 holds. A firm break of 1947.21 will pave the way for a retest of the 2062.95 high.

More importantly, in the bigger picture, the current trend with a corrective decline of 2062.95 suggests that the rise from 1614.60 (2022 low) is still underway. This reinforces the view that the long-term corrective pattern from 2074.84 (2020 high) has completed with three waves lower to 1614.60. It may be too early to confirm this bullish scenario, but it is uncertain how quickly the geopolitical situation could deteriorate. A firm break of the 2062.95/2074.84 resistance zone will set the stage for a 61.8% forecast from 1160.17 to 2074.84 from 1614.60 at 2179.86.

The Swiss franc was the strongest major currency last week, outperforming both the Canadian and the dollar. EUR/CHF breaks the 0.9513 support crucially to continue the downtrend from 1.0095 (January high). The short-term outlook remains bearish as long as support-turned-resistance at 0.9557 remains in place. Next should be a retest of 0.9407 (2022 low).

It should also be noted that a firm break of the intermediate-term support of the lower channel and 0.9407 could lead to a downward acceleration in EUR/CHF, while resuming the long-term downtrend. In this bearish case, the 61.8% forecast of 1.1149 to 0.9407 from 1.0095 to 0.9018 would be the next target.

GBP/CHF also broke out of the one-year range to the downside last week. The near-term outlook remains bearish as long as support-turned-resistance at 1.1058 remains in place. The immediate focus is on the 100% forecast from 1.1574 to 1.0987 from 1.1502 to 1.0915. A sustained break could result in a downward acceleration to the 161.8% forecast at 1.0552.

It is still premature to conclude whether GBP/CHF is ready for a long-term resumption of the downtrend. But the previous rejection by 55W EMA is clearly a bearish sign. Pay attention to the downward momentum of the next move to assess the chance of hitting 1.0183 (2022 low) again.

WTI Crude Oil Experiences Significant Recovery; Supports Canadian dollars

WTI crude oil staged a notable recovery last week, showing resilience despite stronger gains in gold and the Swiss franc. Recovery ahead of 77.95 support keeps 63.67 advance alive. Therefore, price movements above 95.50 are seen as a consolidation pattern rather than a trend reversal for now.

In the short term, further recovery suggests a retest of 95.50. But even in the event of a breakout, key resistance lies at the 50% retracement from 131.82 to 63.67 at 97.74. This resistance is not expected to be significantly broken in the near future, considering that demand is weakening due to the global economic slowdown. In summary, WTI is currently in a rising sideways trend that is likely to continue for a while.

In parallel with these developments, the Canadian dollar was boosted by the rise in oil prices. The sharp decline in AUD/CAD towards the end of the week suggests rejection from the 55D EMA (now at 0.8727). The immediate focus now is the 0.8562 support. A decisive break there will extend the full decline from 0.9545 as well as the downtrend from 0.9991 (2021 high). The next target will be a 100% forecast of 0.9545 to 0.8781, starting from 0.9054 to 0.8290.

Complex dynamics in the US due to elevated Treasury yields, geopolitical tensions and persistent inflation

The US financial markets are currently entangled in a complex web of influencing factors. Fed officials have been increasingly vocal about the impact of rising Treasury yields, suggesting that their rise could reduce the need for further monetary tightening. However, geopolitical unrest has led to a flight to the relative safety of government bonds, putting downward pressure on yields. Amid these opposing forces, the robust headline CPI data is a stark reminder that the fight against inflation remains in full swing. Despite these challenges, the lack of a large-scale exodus from equities underlines the resilience of investor sentiment.

The 10-year yield fell as low as 4,532 last week before stabilizing. With support at 4.508 intact, price action from the short-term peak of 4.887 is more of a sideways consolidation pattern with a range between 4.5 and 4.9. There could be more sideways trading in the near term, probably until the FOMC meeting on November 1st. After that, a breakout to the upside is likely, subject to Fed forecasts as well as the next set of nonfarm payrolls and consumer price index data. However, a firm break of 4.508 suggests that it is already a complete correction from 3.253. A deeper decline would then be seen until the 38.2% retracement from 3.253 to 4.887 at 4.262.

After rising to 13714.13 last week, the NASDAQ reversed and closed the week slightly in the red at 13407.23. With the index still remaining well within the short-term descending trend channel, the corrective decline from 14465.55 could extend even further lower. But in this case, strong support could be seen from the 38.2% retracement of 10088.82 to 14446.55 at 12781.89 to contain any downside and complete the correction. A break above 13714.13 will extend the short-term increase and retest the high of 14446.55.

However, sustained trading below 12781.9 suggests that the entire advance from 10088.82 has ended and leads to a deeper decline to the 61.8% retracement of 11753.47 and below as the third leg of the pattern of 16212.22 (2020 high).

The dollar index rebounded after briefly breaking the 105.65 support. Nevertheless, a near-term top is likely to form at 107.34 and there could be more corrective trading in the near term. In the event of a further decline, the downside should be contained by a 38.2% retracement at 104.37 from 99.57 to 107.34 to trigger a recovery. On the other hand, above 107.34, the increase from 99.57 to 61.8% of the retracement from 114.77 to 99.57 at 108.96 continues.

To reiterate the previous view, a rise from 99.57 is seen as a reversal of the overall downtrend from 114.77. However, to make a decisive break in the dollar index to 108.96 and have enough momentum to challenge 114.77 would require a prolonged sell-off in the stock market or a rise in benchmark yields, or even both together.

AUD/USD weekly report

With the late decline last week, AUD/USD’s recovery from 0.6284 should already be complete at 0.6444. This week’s decisive break of 0.6284 will extend the entire decline from 0.7156. The next target is a 100% forecast of 0.7156 to 0.6457 from 0.6894 to 0.6195, which is close to intermediate-term support at 0.6169. In the event of a recovery, the outlook remains pessimistic for now as long as resistance at 0.6444 holds.

Broadly speaking, the downtrend from 0.8006 (2021 high) may still be underway. A decisive break of 0.6169 will target a 61.8% forecast from 0.8006 to 0.6169 to 0.7156 at 0.6021. In the event of a strong recovery, this remains the preferred case now until 0.6894.

In the long term, while the decline from 0.8006 could extend further to the downside, the structure argues that it is simply a correction towards a rise from 0.5506 (2020 low). In case of an extension lower, strong support should emerge above 0.5506 to trigger a reversal. Nevertheless, the dynamics of the next step will be monitored to adjust the assessment.