Summary:

A tepid response from the US calmed financial markets

US dollar recovers vs. yen, euro – can we see a turnaround?

Gold may retest $1300, this time as a support

Pyongyang reminded the World and the markets that it’s not going to seat quiet and just digest the August UN sanctions. The latest missile test and shows that the Korean threat cannot be neglected. But investors cannot wait years for a resolve and this explains why an initial panic was contained so quickly. In this analysis we take a look at 3 markets that could see a turnaround and also discuss how the situation around the Korean peninsula could evolve. 

Market 1: USDJPY

We highlighted this pair yesterday as the “panic move” drove yen higher but the pair failed to crack through the key 108.25 support. We pointed out that a positive close on a day could herald a turnaround and keep the USDJPY within a broad 108.25 – 114.30 range and this is just what has happened. A lot will now depend on the US data (ADP today and especially NFP Friday) but for now the pair is officially in a range mode and could revisit higher layers of this longer term consolidation.

USDJPY has managed to defend a low and has stayed in a longer term consolidation. Source: xStation5 

Market 2: EURUSD

EURUSD surge yesterday was a bit surprising. Normally we would expect bond yields to tank in both US and Europe leaving EURUSD broadly unaffected but this has not been the case. While the US bond yields declined towards ’17 lows, German yields barely moved as traders await the ECB meeting in September. This was an opportunity for the EURUSD and the pair rallied. However, as fears subsided we can see how they 1.2050 level has been rejected with a shooting star on a D1 interval. This alone could be a good reason for a correction. What is more, we can have a similar formation on the W1 chart and it would be more powerful. Let us recall that the latest phase of the EURUSD has not been backed by the bond market as bund yields remained low. 

There are meaningful reversal signals on the EURUSD. Could the pair witness a correction? Source: xStation5 

Market 3: Gold

Gold prices are dependent on US bond yields so a spike above $1320 didn’t come as a surprise. The key question for now is, if a broken $1300 level can act as a support. Gold prices are in the upper range from the past few years but for as long as $1300 lasts the outlook could be bullish. 

Gold traders should watch the key $1300 level. Source: xStation5 

What next for Korea?

Just because the fear has vanished it does not mean that risks evaporated. Do notice that a tepid response from the US could be because of the floods that haunted Huston area and drew nearly all the media attention. Meanwhile, for Kim this rocket launch is just one episode in the game that he’s playing, trying to increase a stake amid a trust that China does not allow for a military interventions of the US coalition. For as long as this game of chess takes place, market reactions will be short lived. However, there is always a possibility that things could spin out of control. One of the scenarios that could warrant a more serious reaction is another launch over Japan, this time with the Japanese military shooting the missile down. So while market are in a recovery mode, investors should stay alert.