Market Overview
Major market look ponderous this morning as the dust settles on yesterday’s dollar rebound and edge of risk aversion. Traders looking at their charts will see how these moves have been counter to recent trends. The dollar remains on a weakening path (as a safe haven), whilst recent updates on COVID-19 vaccines have encouraged a more positive risk bias to take hold. However, there is still an uneasy tone to relations between the US and China over a variety of issues (Phase One trade deal, Huawei, Hong Kong, interests in the South China Sea) which is holding back a sustainable move into risk. Furthermore, ever rising COVID infections (primarily in the US) add weight to the shackles too. Despite this though, in the coming days the EU Summit to discuss the EU Recovery Fund could be a game changer for sentiment, at least for the near term. If the EU leaders can find common ground to make progress in moves towards agreeing on the fund, there would be a narrowing of yield spreads, a supportive outlook for the euro, and European equities would certainly feel the benefit too. Major markets are all but flat this morning ahead of the summit, and we will not see the real impact until Monday morning. Later into today’s session, the US confidence gauge, Michigan Sentiment will take focus as it is for July and begins to account for the rising infection rates and threats of renewed lockdown.
Wall Street closed lower last night, with the S&P 500 -0.3% at 3215. However, futures are showing a balance to this today, with E-mini S&Ps +0.3%. Asian markets consolidated overnight, with the Nikkei -0.3% and Shanghai Composite flat. European markets are a shade positive today, following US futures, with FTSE futures and DAX futures +0.3%. In forex, a shade of risk positive with AUD and NZD rebounding slightly, being the only real movers. Commodities also show consolidation, with gold a tough higher, silver slightly lower and oil around flat.
The final reading of Eurozone inflation for June is first up on the economic calendar today. Final Eurozone HICP is at 1000BST and is expected to show no revisions to either the headline HICP at +0.3% (+0.3% flash June, +0.1% final May), or core HICP at +0.8% (+0.8% flash June, +0.9% final May). Into the US session, there is June housing data on the docket, with US Building Permits at 1330BST which are expected to increase by 6% to 1.290m (from 1.214m in May). US Housing Starts are expected to increase by 20% to 1.169m (from 0.974m in May). The key data will be the prelim Michigan Sentiment for July at 1500BST. Consensus expects a slight improvement in sentiment to 79.0 (78.1 in June). This is to be driven by an improvement in the expectations component outweighing a slight slip in the current conditions.
Chart of the Day – AUD/JPY
Market sentiment has been choppy over recent weeks, but there is now beginning to emerge a positive bias. This positive bias is reflected through AUD/JPY which is edging higher once more. Tracking along a three and a half month uptrend that has flanked the recovery (coming in today at 74.25), the market is making good ground again. Since the early June correction from 76.75 to 72.50, a run of higher lows and higher highs has formed a smaller uptrend. Subsequently, the market is now putting consistent pressure on initial resistance around 75.15. Momentum indicators are positively configured, with the RSI holding consistently above 50 and Stochastics also strong between 70/80. The bulls will now be looking for a decisive close above 75.15 to re-open the way to retest the 76.75 June high once more. If this break came with a bull cross on MACD lines it would add conviction too. Support around 74.00 is increasingly important as a higher low now too, whilst we look to buy into weakness with a near four week uptrend support at 74.50 today.
The euro bulls have been testing higher in recent days but certainly have one eye on the EU Recovery Fund discussions that take place over this weekend. Despite a minor slip back yesterday (driven primarily by a rebound on the dollar), the technical set up suggests that traders are taking a view that the EU talks will yield some positive news. The ECB meeting may have been entirely forgettable, but the euro bulls still seem happy to support into weakness now. Yesterday’s unwind towards $1.1350/$1.1375 breakout support looks to be a chance to buy. An uptrend channel of the past few weeks is still playing out as the market has been testing the waters above $1.1420. No conclusive breakout yet, but the medium term configuration of momentum indicators suggests that a move higher is building. Daily RSI is pulling into the high 60s (with upside potential), whilst MACD lines are rising off a bull cross. Stochastics have just crossed to reflect yesterday drop back, but nothing yet would suggest this is a significant negative signal. We position to buy into weakness to pull above $1.1420 in the coming days and to test $1.1490. A close below $1.1350 would be a disappointment, but the channel support is just above $1.1300 now and support at $1.1255 is a key higher low.
Despite a week of mixed candles for sterling bulls, Cable continues to hold above $1.2540 on a closing basis. This is a consolidation still in the upper regions of the medium term trading range (between $1.2075/$1.2810), and momentum indicators remain broadly positively configured. This suggests that weakness is building as a buying opportunity for tests of resistance. As such, the key for how sterling trades in the coming sessions, will continue to be the response around what is now confluence resistance at $1.2670. This is the key high from last week, and currently the resistance of the falling 7 month downtrend. The market has continually failed around here in the past week and is a considerable near term barrier to gains. Despite this though, there is a slight positive bias within the medium term range whilst the market continues to close above $1.2540. Although this has been tested in recent sessions, there have been positive reactions into the close to maintain the market above what is an old neckline of a base pattern. Closing between $1.2435/$1.2540 we are more neutral on Cable, whilst a breach of $1.2435 we turn more negative once more.
Throughout this week, we have been discussing the consistent support that Dollar/Yen is generating between 106/107. This has be the case for several months now, and once more has kicked in as a solid positive candle pulled the market higher yesterday. It has been notable in recent days, that although the market had been trending lower, momentum showed a lack of selling intent. With yesterday’s positive candle now breaking a two week downtrend, momentum indicators are hinting at a potential move higher. The key would be a close above resistance at 107.40. This would complete a small base pattern (which shows up well on the hourly chart) and would imply a +80 pip move higher. It would suggest a rebound back towards the middle of the medium term range once more and a look at the resistance around 108.15. The hourly chart shows near term support now 107.00/107.10 needs to hold, but a more encouraging set up is now beginning to form again for the bulls. A decisive move below 107.00 defers the immediate recovery prospects, but the medium term band 106/107 would still be a basis where support forms.
The bulls have just taken a step back in recent days, and this has led to a consolidation that has now broken the support of what was a six week uptrend. We have been mindful that a continuation of the consolidation may lead to this trend breach, but how the bulls respond now is important. A trend breach through consolidation, does not necessarily mean that the market will be moving into freefall. Holding on to the support of the breakout at $1789, we still see the bulls in control. There has been a slight deterioration in the medium term momentum signals, primarily with the MACD lines crossing lower. This may still weigh on the price on a near term basis, and even if there were to be a move below $1789 we would still be bullish on gold whilst the breakout at $1764 is intact. After yesterday’s solid negative candlestick, the bulls need a reaction today. Another solidly negative candle today would be the firs time in six weeks this would have been seen. Early signs of support though are encouraging. Although this trend breach means that we are a little more cautious of the immediate state of the breakout above $1789, we would still be looking to buy into supported weakness. Our strong bull medium term outlook would change below $1744.
Key resistance continues to be tested on Brent Crude, but for now, the bulls just cannot make the break through. Consolidation may have broken the support of recovery uptrends in recent weeks, but the market does continue to form higher lows, as the market repeatedly tests $43.95 resistance. Technically, momentum indicators remain set up in positive medium term configuration, and the bulls have held up well as MACD lines have gradually unwound. In managing to continue to form higher lows, this unwinding of MACDs, whilst RSI holds on to solid positive configuration (between 50/60) suggests that the bulls are in good shape for another leg higher. The resistance at $43.95 is important, but closing the gap at $45.20 would be the really key move. For now, the market continues to test resistance and post higher lows. Last week’s $41.30 is initially the gauge, whilst $39.50 remains key. A closing break above $45.20 opens the way towards $50 (with next resistance $48.40 before $53.10/$53.90).
There have been signs in recent days that the Dow is moving towards a more positive phase once more. The period of consolidation for the past month broke to the upside on Wednesday and how the bulls react to near term weakness will be a key indication of whether this move was false or not. A closing break above 26,610 was followed by a move to “fill” the gap at 26,940. With yesterday’s candle all but a doji, back in an area of uncertainty (between 26,610/26,940) it leaves the Dow very much at a crossroads still. If the bulls can now pick themselves up and achieve a close above 26,940 it would be a really strong signal now, as it would have been down under consideration. Momentum indicators are suggesting a bull move is developing now, as Stochastics pull strongly above 80, RSI sits at a one month high and MACD lines have crossed higher. Futures are ticking positively today in early moves. We discussed previously about 26,300/26,610 acting as underlying demand and a near term buy zone. Yesterday’s unwind into the support and a pick up today is a positive signal. A close above 26,940 opens the key June resistance at 27,580. Under 26,300 would now be a disappointment but the bulls are essentially in control whilst above 25,525.
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