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EUR/USD Daily Forecast – Rally Stalls as Trade War Fears Lessen

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Chinese yuan consolidates losses

It’s not often that EUR/USD traders look to the Chinese exchange rate for clues on where the single currency might go next, but such is the case this week as the trade battle between the US and China is dominating the financial markets.

Initially, it was a tweet from the US president about more tariffs that spooked the financial markets. A drop in the yuan below the key 7 level versus the greenback back intensified fears.

The decline in the Chinese currency stirred up speculation that China is fighting back by devaluing the yuan. However, it seems that there is an attempt to contain the drop in the yuan as the exchange rate has fallen into a range.

I think it is important to have a correct assessment of sentiment here. While equities have bounced back and the dollar decline looks like it has stalled out a bit, I don’t think the backdrop has changed in such a manner that warrants a reversal to erase the price action across financial markets in the early week. At least not in the 

Although there was an intraday push above the resistance level, the pair closed below it on an intraday basis. Not only that, a doji candle was posted in the process which signals exhaustion and builds towards the case for a pullback.

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GBP/USD Daily Forecast – Range Emerges as Dollar Weakens

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After a sharp drop early last week, GBP/USD has fallen into a range while the dollar eases lower.

GBP/USD Consolidates Losses

If there was a clear theme in July for the FX markets, it was that the British Pound was weak. Although Sterling has been able to hold the downside a bit over the past few sessions, there is no reason to believe this theme has not carried over into August.

A weaker dollar over the past few sessions has triggered a range in GBP/USD. This is not all that surprising after the sharp earlier fall in the pair. However, while the technical outlook for EUR/USD shows that that the near-term trend has shifted upwards, GBP/USD does not share the same bullish sentiment.

The pair has been weighed by concerns over a no-deal Brexit as the new Prime Minister has not convinced UK citizens that he can pull off an exit with a deal in place. He has vowed to leave the European Union whether a deal is made or not which has caused the markets to reprice Sterling.

For this reason, I don’t expect that GBP/USD is trying to carve out a bottom here. Unless there are some developments that will boost confidence that a deal will be made, I think the natural course for the pair is lower.

Technical Analysis

I think it is important to keep in mind that there is significant support in play here. On the chart below, I have marked it off at 1.2150. However, I think we can extend a bit below the level even as it was around this area that GBP/USD bottomed in late 2016 to early 2017.

Because of the underlying support, and as the dollar as trending lower, I think GBP/USD will try to move to upper bound of the current range. I think it’s possible the pair attempts to break higher from the range. But as mentioned, I don’t think a catalyst is in place for the pair to bottom here.

Resistance has come into play from the 100 moving average on an hourly chart. If the pair pushes through it, I expect it will attempt to trigger stops above Friday’s high of 1.2188.

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AUD/USD at the Possible Fragile 0.6800 Support

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Long-term perspective

The steep decline that came after the confirmation of the double resistance etched by the upper line of the descending channel and the 0.7055 with 0.7013 resistance area managed to bring the price under the 0.6858 major support level, pausing at the 0.6800 psychological level.

This movement, besides taking out the previous low that falsely pierced the 0.6858 level, is composed of strong bearish candles — the only one which does not have a long body, although is bearish, is the one on July 29, 2019, the reason being that the bulls were trying to halt the decline around an important psychological level, 0.6800, respectively.

From here, the price could consolidate above 0.6800 and then continue the downwards movement. Another possibility is the one of a throwback. In this case, the price might retrace towards 0.6858. This could end up with the actual confirmation of 0.6858 as a resistance, followed by a new leg down. Another possible scenario is a confirmation as a resistance of the projection of the 0.6831 low. Also to be considered is a false break of 0.6858 — the price might get above it but fail to confirm it as a support, with the consequent fall beneath it and the continuation of the decline.

So, as long as the price does not confirm 0.6858 as support, the movement towards south is natural, being the materialization of the impulsive wave that pertains to the descending trend. A first target is represented by 0.6700, with a possible extension on the first run to 0.6650.

Short-term perspective

The price is in a clear descending movement and, as long as it continues or as long as its change prints a continuation pattern, it is expected to continue.

The first sign of a pause could be offered if the price gets above the 0.6865 level — which corresponds to the 23.6 level of Fibonacci retracement. But even in this case the other projections — preferably up to 50.0, which corresponds to the 0.6935 level — are well suited short-term areas from where the price to continue declining. The first target is represented by the 0.6700 psychological level.

Australian Dollar Suffers from Risk Aversion

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The Australian dollar tumbled today. While macroeconomic data, both domestic and from China, was not particularly bad, risk aversion on the Forex market hurt the Australian currency.

The Australian Industry Group Australian Performance of Manufacturing Index climbed to 51.3 in July from 49.4 in June. Climbing above the 50.0 level, the indicator suggests that the sector returned to expansion.

The import price index rose 0.9% in the June quarter from the previous three months, two times less than analysts had predicted — 1.8%. The index fell 0.5% in the previous quarter.

The Index of the Commodity Prices rose 16.1% in July from a year ago. The index increased by 13.9% in June.

The Caixin China Manufacturing PMI was at 49.9 in July, up from 49.4 in June. It was above the level of 49.6 predicted by analysts and just a notch below the 50.0 level of no change.

But risk aversion caused by a tweet of US President Donald Trump about new tariffs on Chinese goods did not allow the Aussie to profit from the relatively positive macroeconomic releases. The news was negative for riskier currencies in general, but especially for those of China’s trading partners, including the Australian dollar.

AUD/USD dropped from 0.6843 to 0.6805 as of 20:16 GMT today. EUR/AUD jumped from 1.6176 to 1.6295. AUD/JPY plunged from 74.42 to 73.09

Earlier News About the Australian Dollar:

  • AUD/CAD Looking for 0.9000 (2019-07-29)
  • Australian Dollar Falls After PMI Releases (2019-07-24)
  • AUD/USD Not Ready Yet for 0.7200 (2019-07-24)
  • AUD/USD Facing an Important Test Before Continuing Towards 0.7200 (2019-07-18)
  • Weak Employment Data Doesn't Prevent Rally of Australian Dollar (2019-07-18)

Forex - Dollar Down vs Havens, Up vs High-Yielders on Tariff News

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 The dollar fell against safe havens such as the yen and Swiss francin early trading in Europe Friday, but was higher against most other currencies after President Donald Trump announced a sharp escalation of the U.S.’s trade war with China.

The yen had its best day against the dollar in two years on Thursday after the announcement of a new 10% tariff on $300 billion worth of imports from China. By 3 AM ET (0700 GMT), it was at 106.95 to the dollar, having risen to its highest since April 2018 against the greenback earlier.

The dollar was also lower against the franc at 0.9880, as traders unwound carry trades in a broad risk-off move across all markets.

Trump’s announcement shattered a fragile truce with China over trade that had been hastily put in place ahead of the G20 summit a month ago. It represents a sharp escalation of the conflict, by extending tariffs to effectively all U.S. imports from China. As such, the risk of them feeding through to higher prices for U.S. consumers is markedly higher.

Analysts from the Peterson Institute in Washington estimated that the move will raise the average tariff on Chinese products to 21.5%, from barely 3% in 2017 when Trump took power.

Trump’s move came only a day after Federal Reserve chairman Jerome Powell had pointed to the trade dispute as the biggest single risk facing the U.S. and global economies – observations that drew criticism from Trump show said that Powell had “let us down.”

“Ironically the Fed’s easing gives the President the breathing space to now play hard ball,” Megan Greene, a senior fellow at the Harvard Kennedy School, said via Twitter.

The dollar surged against high-yielders overnight, hitting a 10-year high against the Aussie and rising sharply against the Korean won and kiwi. It also surged 1% against the offshore Chinese yuan, although China’s central bank restrained the drop in the official rate.

The impact on the euro and British pound was less severe, although reports that Trump may make an announcement on trade with the EU later Friday added to the general sense of unease.

The dollar index, which tracks the greenback against a basket of currencies, hit its highest level since May 2017 at 98.697 overnight, before retracing to 98.105 in European trading.

The escalation of the trade war threatens to overshadow what would normally be the main event of the monthly economic calendar – the release of the U.S. labor market report for July. Nonfarm payroll growth is expected to have slowed to 160,000 from 224,000 in June.

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Inflation Report August 2019

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In order to maintain price stability, the Government has set the Bank’s Monetary Policy Committee (MPC) a target for the annual inflation rate of the Consumer Prices Index of 2%. Subject to that, the MPC is also required to support the Government’s economic policy, including its objectives for growth and employment. The Inflation Report is produced quarterly by Bank staff under the guidance of the members of the Monetary Policy Committee. It serves two purposes. First, its preparation provides a comprehensive and forward-looking framework for discussion among MPC members as an aid to our decision-making. Second, its publication allows us to share our thinking and explain the reasons for our decisions to those whom they affect. Although not every member will agree with every assumption on which our projections are based, the fan charts represent the MPC’s best collective judgement about the most likely paths for inflation, output and unemployment, as well as the uncertainties surrounding those central projections. This Report has been prepared and published by the Bank of England in accordance with section 18 of the Bank of England Act 1998. The Monetary Policy Committee: Mark Carney, Governor Ben Broadbent, Deputy Governor responsible for monetary policy Jon Cunliffe, Deputy Governor responsible for financial stability Dave Ramsden, Deputy Governor responsible for markets and banking Andrew Haldane Jonathan Haskel Michael Saunders Silvana Tenreyro Gertjan Vlieghe

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Get Ready for a Weaker U.S. Dollar... And Stronger Gold

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Unemployment in the U.S. is at a half-century low and the S&P 500 is trading at near-record highs. Nevertheless, the Federal Reserve today trimmed interest rates for the first time since the financial crisis on stalled manufacturing growth and an anticipated world economic slowdown.

The easing cycle may be the catalyst gold needs to outperform the market and retrace its monster bull rally in the 2000s, according to Bloomberg Intelligence strategist Mike McGlone.

“Gold prices appear on a similar launchpad as 2001 when the Fed began an easing cycle,” McGlone writes in a note dated July 29. “The greatest bull market of this millennium so far began about the time of that first rate cut, following an extended gold-price downdraft and rally in the dollar.”

With the Fed having locked in a rate cut, the question now is: What happens in the months to come? Is this simply a one-off, or is it indeed the start of a new easing cycle?

Markets appear to have priced in three cuts by year-end. As a result, I would expect to see the dollar trade lower, which in turn should allow the price of gold—the classic anti-dollar—to soar.

As I shared with you earlier in the month, a weaker greenback is one of three “key ingredients” for a gold bull market, according to research firm Alpine Macro, the other two being a more accommodative Fed (check) and rising geopolitical risk

As Europe faces prospects that negative rates might become a long-term fixture in the euro region, concerns are mounting in the U.S. that a global slide toward negative yields could infect the market for Treasury securities, should the U.S. slip into a recession,” writes Guggenheim Investments Chief Investment Officer Scott Minerd. “These concerns are well founded.”

Minerd reminds readers that, during economic slowdowns in the past, the Fed reduced rates by an average of 5.5 percentage points. Today, as you well know, we don’t have those 5.5 percentage points—unless rates were allowed to fall below zero.

Yields turning negative here in the U.S., as they have in Europe, Japan and elsewhere, would mark the start of a “paradigm shift” that billionaire hedge fund manager Ray Dalio alluded to in a recent LinkedIn post.

According to Dalio, lower-for-longer rates and other unorthodox monetary policies “will produce more negative real and nominal returns that will lead investors to increasingly prefer alternative forms of money (e.g., gold) or other storeholds of wealth.”

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US Dollar Rallies on Better-Than-Expected Q2 GDP

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The US dollar is rallying against a basket of currencies to close out the trading week, driven by a better-than-expected but slower than usual second-quarter economic report. The gross domestic product cooled down in the April-to-June period, but there were some bright spots in the overall report, including a surge in consumer spending.

According to the Bureau of Economic Analysis (BEA), the gross domestic product advanced a 2.1% annual clip in the second quarter, down from 3.1% in the first three months of 2019. This was higher than the market forecast of 1.9%.

Despite the disappointment behind the report, a deep dive into the numbers do paint somewhat of a positive portrait of the US economy from a consumer standpoint. In the April-to-June period, consumer spending surged 4.3%, driven by greater automobile, food, and apparel purchases. But it was not good news for businesses because fixed investment slipped 0.8%, investment dropped 11%, spending on equipment edged up just 1%, and outlays fell 1.5%.

Researchers say that if inventories would have remained neutral instead of declining $44.3 billion, then the economy would have expanded at a 3% rate in the second quarter.

Elsewhere in the report, the trade deficit impacted GDP as imports decreased and exports soared 5.2%. Federal government spending spiked 5%. Inflation, using the Personal Consumption Expenditures (PCE) index, clocked in at a 1.4% pace year over year. 

Researchers say that if inventories would have remained neutral instead of declining $44.3 billion, then the economy would have expanded at a 3% rate in the second quarter.

Elsewhere in the report, the trade deficit impacted GDP as imports decreased and exports soared 5.2%. Federal government spending spiked 5%. Inflation, using the Personal Consumption Expenditures (PCE) index, clocked in at a 1.4% pace year over year.

Since Federal Reserve officials have made public their concern about a potential slowdown, the latest economic figures could push the Eccles Building to impose a 25-basis-point cut to interest rates from the current target range of 2.25% to 2.50%. More than half the market anticipates two rate cuts this year, according to the CME Group FedWatch tool.

Although this report does suggest that the US economy might expand more slowly in the second half of 2019, some financial institutions believe that this is just a slight bump in the road. Goldman Sachs is prognosticating that growth will return to normal in the second half.

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China gives up two of its best-kept forex reserve secrets

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  • The country’s holdings of foreign currency generated an annual average return of 3.68 per cent from 2005 to 2014
  • By the end of 2014, US dollar assets accounted for 58 per cent of China’s total foreign exchange reserves, down from 79 per cent in 2005

China has for the first time disclosed its return on investment of its foreign exchange reserves and the share of US dollar-denominated assets in the stockpile.

Foreign exchange reserves generated an annual average return of 3.68 per cent from 2005 to 2014, according to the 2018 annual report released by the State Administration of Foreign Exchange (Safe) on Sunday. The agency did not provide more recent figures.

By the end of 2014, US dollar assets accounted for 58 per cent of China’s total reserves, down from 79 per cent in 2005, the administration said, adding that the share of the assets in the US currency was lower than the global average of 65 per cent in 2014.

“The currency structure of China’s foreign exchange reserves has been increasingly diversified, and it is more diversified than the international average,” 

GBP Slumps as CBI Warns Neither UK nor EU are Ready for No-Deal

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  • CBI warns neither UK nor EU are ready for the disruption that a no-deal would cause
  • GBP faces further losses as Boris Johnson appoints hard-line Brexiteers as cabinet members to ensure Brexit is delivered by October 31
  • BoE expected to keep rates unchanged at 0.75% on Thursday as Brexit uncertainty continues

Increasing talks of a no-deal Brexit are not boding well for the pound as GBPUSD fell to 28-month lows and EURGBP surpassed the psychological 0.90 line. Since Johnson was appointed as PM last Tuesday the pound has fallen 1.5% against both the dollar and the euro, as he formed his cabinet with hard-line Brexiteer members, putting everyone on notice that he is serious about his “do or die” stance on Brexit.

In recent news, Business Industry experts CBI have warned the government that neither the UK nor the EU are prepared to face the consequences of a no-deal Brexit, where almost every sector of the EU and UK would face disruption. The report suggests that despite UK businesses having spent billions of pounds already on contingency plans in case of a hard Brexit, the uncertainty and lack of clarity about dates and costs has left most of them feeling like there are not enough measures in place to counteract the disruption.

But instead of pressuring the PM to work together with the EU to achieve amendments to the current deal, Boris Johnson could use this information as leverage to continue his “deal or no-deal stance” if he believes that the EU will give in to pressure because they are also considered to be unprepared for a hard Brexit. But given the repeated warnings by EU commissioners that there is no possible amendment that can be made to the current withdrawal deal, it is unlikely that a new deal will be reached before the October 31 deadline.

Jean-Claude Juncker told Boris Johnson last week that the EU would analyse any proposals put forth by the UK as long as they were compatible with the terms set out in the agreement initially negotiated with Theresa May. The main point of divergence between both sides of the agreement is the Irish backstop, which would leave the UK abiding by EU rules unless another arrangement is found. Boris Johnson has said that the only way to avoid a no-deal Brexit would be to abolish the backstop from the agreement, which the EU has rejected.

The Bank of England will release its inflation report on Thursday ahead of its interest rate decision with expectations that rates will remain unchanged at 0.75% as MPC officials stick to their wait and see what happens with Brexit before adjusting its monetary policy rhetoric, given that both inflation and the jobs market are behaving well.

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