Middle East tension set to continue to weigh on markets

When you consider how uncertain the current geopolitical backdrop is, it was surprising that markets in Europe managed to hold as well as they did last week with the DAX finishing the week modestly lower, while the FTSE100, and US markets managed to hang onto some weekly gains, although well off their peaks.

Friday’s sell-off came about primarily over concerns over further escalation in the Middle East which kept investors cautious, while better than expected US bank earnings numbers helped US markets to hang onto their weekly gains.   

Crude oil prices surged, finishing the week strongly higher, although not managing to reverse the losses of the previous week, while natural gas prices finished at their highest levels since February, prompting concerns over stickier inflation in the weeks and months ahead.

We also saw a flight to safety with gold prices surging on Friday, posting its biggest weekly gain since March, while the US dollar also had a strong week, as markets priced for a further deterioration in risk sentiment.

Weekend events are unlikely to assuage concerns that the crisis might spread, with Hamas firing rockets into Israel from Gaza, and as Israel gears up for its own incursion into Gaza to root out Hamas, as well as look for hostages.

This in turn could prompt the opening of another front from Hezbollah in Lebanon, which is already testing Israeli defences there, or more ominously Iran, which warned that it could intervene if, and when, a ground invasion of Gaza begins.

With a US battlegroup already in the Mediterranean, and a 2nd aircraft carrier strike group led by the USS Dwight D Eisenhower, joining the USS Gerald R Ford battle group, the message to Iran and potentially other third parties appears to be, watch your step.

As a result of this continuing uncertainty and the war of words being played out in plain sight it’s hard to see much in the way of upside for stock markets unless there is a dialling back in the tension which is currently convulsing the region, with markets in Europe set to open modestly higher, despite a weak Asia session.

On the data front it’s a big week for the UK with the latest inflation and wages numbers as well as China Q3 GDP and US retail sales, while in the US bank earnings season continues tomorrow with the release of Goldman Sachs and Bank of America tomorrow, however these are likely to play second fiddle to the ongoing tension in the Middle East.       

EUR/USD – failed at trend line resistance from the July highs at 1.0640, last week keeping downtrend intact. A break of 1.0650 targets the 1.0740 area. The main support remains at the October lows at 1.0450, as well as the 1.0400 area which is 50% retracement of the 0.9535/1.1275 up move.  

GBP/USD – failed at the 1.2340 area last week, undermining the potential for a move to the 1.2430 area and 200-day SMA. A move below 1.2000 targets the 1.1835 area, 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145.    

EUR/GBP – currently have trend line support from the August lows, now at 0.8625 and which is currently intersecting just above at the 50 and 200-day SMA. Resistance at the 200-day SMA at 0.8720 area.  

USD/JPY – still have major resistance at the highs this month at 150.16, with a break of 150.30 targeting a move towards 152.20. Below 147.30 signals the top is in and a possible move towards 145.00.

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