Market Overview
The dollar regained strength yesterday as Fed chair Jerome Powell intimated that the path of rate hikes would continue to be 'gradual' and there was as yet no great concern for the impact of the trade tariffs.
The US economy is progressing well, with Q2 growth stronger than Q1 whilst unemployment is expected to continue to fall and inflation is around target. Interestingly, his assessment that wages are not causing inflationary pressures will just put extra emphasis on the monthly earnings growth numbers in the payrolls reports and when they do start to tick decisively higher, this could cause a reaction in the market. For now though it seems that market is on track for another rate hike in September (c. 90% probability on Fed Funds futures) and still more likely than not in December (around 60% probability).
The dollar remains strong again today and there have been some key breaks on major markets. There seems to be little by way of safe haven bias at the moment as the Japanese yen continues to underperform, with Dollar/Yen at its highest in six months. However most stark has been the breakdown in gold to almost 12 month lows yesterday. Equities seem to be getting a lift, certainly in the US as the S&P 500 breaks out to a new five month high. US assets seem to be in vogue amid a shift out of emerging markets benefits US equities but also plays into the reason behind why the US 10 year yield remains subdued. Today we are likely to see more of the same with the second day of Powell’s testimony.
On Wall Street the S&P 500 +0.4% at 2810, whilst S&P futures show further mild gains today which have given supportive element to Asian markets (Nikkei +0.4%) and European markets today.
In forex the broad dollar strength has continued, albeit in a relatively contained fashion. Sterling will be in focus today given the sharp decline of yesterday (due to uncertainties over Brexit) and the UK inflation data out this morning.
In commodities the dollar strength and breakdown on gold yesterday sees the yellow metal continue to edge further lower today. Oil also remains under pressure as the API inventories showed a surprise build.
It is day two of Jerome Powell’s Congressional testimony today but there are also other major data releases that traders need to be aware of on the economic calendar. Initially the UK CPI for June is at 09:30 BST which is expected to show headline CPI rising to 2.6% (from 2.4%) which would signal a turnaround again having fallen over the past six months. However the core CPI is still expected o remain at +2.1% (+2.1% in May), and also look for the PPI input prices which are expected to jump to 10%.
The final reading of Eurozone inflation at 10:00 BST is not expected to contain any significant surprises, with both headline inflation expected to remain at +2.0% and core inflation expected to remain at +1.0% the same as their flash readings. US Building Permits are at 13:30 BST and are expected to increase marginally to 1.33m (from 1.30m last month), whilst Housing Starts are expected to slip back to 1.32m (from 1.35m last month). The EIA oil inventories are at 1530BST and are expected to show crude stocks in drawdown by -4.1m barrels (-12.6m barrels last week), whilst distillates are expected to increase by +1.0m barrels (+4.1m last week) and gasoline stocks are expected to increase by +0.1m (-0.7m last week).
Chart of the Day – EUR/CHF
The outlook for Euro/Swiss has been gradually improving over recent weeks. The market has been trending higher and on Thursday last week broke out to a new seven week high. A move above resistance at 1.1660 was a upside break from an ascending triangle, and even though the market has slipped back in the past couple of sessions this looks to be another chance to buy into this improving market. The question would then be when would be a good time to buy? The market is now looking to use the band of support 1.1615/1.1660 as a potential near term buy zone and this was last week’s reaction low and the neckline of the breakout. The uptrend is also supportive at 1.1590 today. There is a more positive configuration now to the RSI, with the MACD lines edging above neutral, however, there is a caveat with the Stochastics which are threatening to cross back lower. The hourly chart also needs to be watched as if the RSI begins to turn a near term slip into something more corrective then a move below 30 is likely. Ideally the market will begin to find support and then resume trading above 1.1660 once more, so the price action in the coming days will be key.
The dollar strength has resumed in the past 24 hours and this is dragging EUR/USD lower once more. Yesterday’s negative session turned out to be a bearish engulfing candle and the selling pressure has continued again today. The mixed outlook of the range has flipped negative once more and the market is shaping up for a retest of the $1.1610 low again. This is a support that protects the market from a move back towards the key range lows at $1.1505 once more. For now the momentum indicators are not especially concerning, however could be on the brink of a key deterioration. The MACD lines are flattening around neutral RSI is still above 40 and Stochastics above 50, however it may not take much for these levels to be lost and the outlook turn negative again. The bulls will again need to fight hard to prevent a negative configuration from taking hold and the support at $1.1610 could be key to this. The hourly chart shows initial resistance at $1.1665 today as momentum is increasingly negative and moving averages all fall in bearish sequence.
The consolidation on Cable has taken a turn for the worse once more as the biggest one day decline since early May was seen yesterday. This move has scuppered the prospect of a base pattern recovery, in one decisive bear candle. The momentum indicators are a concern now as the RSI has dropped back below 40 for the first time in two weeks, whilst the Stochastics are accelerating lower and the MACD lines are threatening to cross lower. The risk is growing for a retest of $1.3050 and the key October/November lows at $1.3025 (not to mention the psychological $1.3000 level). The pivot around $1.3200 is a basis of resistance but the selling pressure has continued again today and there is no real sign of any buyers willing to drive an intraday recovery quite yet. There is initial resistance at $1.3100/$1.3115 for any mild unwinding move early today. The UK CPI may have a part to play in forming support (watch for a possible upside surprise) however, in the absence of any surprises then the pressure is taking the market lower still.
The renewed dollar strength during yesterday’s session meant that the buyers returned to support Dollar/Yen perhaps a touch earlier than thought. The two mildly corrective candles (Friday and Monday) once more gave way to another decisive bull candle yesterday to take the market to close at its highest level since early January and the market is eyeing the resistance band of highs from around the turn of the year between 113.35/113.75. Momentum has once more taken off with the RSI into the mid-70s now and the strength of the trend has resumed to again be its strongest since December 2016. Sticking with the trend seems profitable for now, but traders will be mindful of the RSI which is historically stretched. Leaving behind Monday’s low at 112.20 means that this is an important level now near term and a breach would certainly re-open a retreat into 111.15/111.40 which would again be a chance to buy on support.
Gold
Gold has made a decisive, outlook changing breakdown! The support of the December low at $1236 has been holding for the past couple of weeks but pressure has been mounting and yesterday, as the dollar once more strengthened the support has given way. This has broken not only a key higher reaction low in the recovery from the $1047 December 2015 low, but also breaks the long term recovery uptrend. The move lower has continued today and already the market is eyeing the $1204.50 key July 2016 low as the next test. Momentum indicators are decisively negative once more with the RSI which failed under 40 now back below 30, whilst the Stochastics are in bearish configuration and the MACD lines have again crossed back lower. The old support at $1236 is now a key basis of overhead supply, as is the old long term uptrend as rallies are now a chance to sell.
WTI Oil
Yesterday was another session of consolidation in the wake of Monday’s huge bear candle. In effect, therefore it is as you were, with the momentum indicators all still corrective and little really to influence the outlook being seen yesterday. A very small gain on the day with a tiny candlestick body and a small daily range. However, the support around $67.15 effectively held firm and the market did see an intraday rebound from $67.03. However this will now be a key area for the outlook near term as a break back below $67 would be the sellers having tested the level only to break back below again. This would then open $63.60 as the next key support. Main resistance remains the old pivot around $69.55 but initially today $68.55 is worth watching. The EIA inventories will once more be in focus for volatility today.
It was interesting to see the Dow posting another positive candle, however the initial slip early in the session means that the eight session uptrend has now been broken. This is the first warning sign that the bulls may be tiring, however the later reaction suggests there is still some gas left in the tank for the bulls. It is also interesting to see that the 50% Fibonacci retracement at 24,980 has played the basis of support for the past two sessions now, meaning it is taking on increased importance near term. The bulls will now be thinking of a session trading clear of the 50% Fib level opens 61.8% Fib at 25,367 as the next target. Momentum indicators remain positive with the MACD, RSI and Stochastics all still advancing, whilst intraday weakness remains a chance to buy.
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