The breaking point for EUR/USD, the winners from Brexit: European session today (28.08.2018)

Asian shares continued drifting higher during today's Asian session; the MSCI Asia Pacific index rose 0,4% during today's session. The rise most likely reflects increased optimism after the US-Mexico trade deal. By the end of the session, however, Chinese stocks had erased most of their gains. USD/MXN fell 0,8% after yesterday's official announcement on the trade deal.

According to President Trump, it is still too early for negotiations with China. This undermined the greater part of today's optimism on Asian markets.

Yesterday's opening of Turkish banks after a week-long holiday caused the lira to continue sliding, finishing the day around 6,2 against the dollar. The fundamentals remain unchanged, and have in fact worsened. Turkey has sought to strengthen alliances with Russia and Iran, which makes an escalation of the conflict all the more likely. At this point, even increasing interest rates cannot save the lira.

Yesterday's US-Mexico deal also fed the hopes of a resolution of the trade conflict between the EU and the US. EUR/USD is testing the key resistance at 1,168: this is the resistance from the trend-line connecting the peaks in the dollar rally. A decisive close above this level could indicate a trend-reversal in EUR/USD.

The dollar index broke the key support at 95.00, and is currently trading at the 94.75 support level:

This is the support from the trend-line connecting the previous peaks. A breakout below this level will be bearish for the DX and very bullish for EUR/USD. This can also be seen on the daily graph:

A breakout below 94.7 would interrupt the upwards trend of DX that began in April of this year.

In the following weeks we expect the French government to issue a draft on preparations for a no-deal Brexit. This is not a tail-risk scenario, given Theresa May's insistence that no-deal is better than a bad deal. A hard Brexit would impel many companies to reorganize their supply chains and personnel. Consulting and outsourcing companies are most likely to benefit from this period of transition. One of these companies is Accenture plc (ACN.US):

Look for a break-out above $169 with strong RSI (above 70) for entering a long position.

Stop-loss: between 166.5 and 167. This represents a potential loss of around 2%.

European stock indices are expected to open slightly higher, driven by optimism on a potential trade deal with the US. The renewal of NAFTA is a key chapter in the US trade saga. An optimistic interpretation is that President Trump will strengthen his alliances with Europe, Canada and Mexico, in order to concentrate on the economic war with China, Russia and Iran. A more cynical interpretation is that he succumbed to the US auto industry lobby, whose supply chains are spread around the North American continent.

Source: Bloomberg Finance L.P.

Chart: Used with permission of Bloomberg Finance L.P.

Image: pixabay.com

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