The bounce in global equities and the US dollar is relatively large in comparison with the cooling of the volatility index (VIX). It would suggest that there is still a fairly large amount of fear still in the markets, and until that dissipates it would be wise to avoid going long the indices or the greenback.
Buying the dip works well when the economic and political outlook appears to be positive, but given the uncertainty that surrounds Donald Trump you can see why we have only seen a small drop in the VIX. The scandal in Washington DC hasn’t gone away and neither has traders' nerves. Going long too soon could prove to be costly.
A political scandal of this scale is going to stay hanging over Mr Trump for some time, and even if nothing comes of it in the end, it’s going to be a long and drawn out process. Having this story lingering away will be enough to unsettle traders.
The dip in US jobless claims from 236,000 to 232,000 that was announced yesterday, along with the surge in the Philly Fed manufacturing report from 22 in April to 38.8 in May adds weight to the economic argument for a rate hike next month. The probability of a hike remains high, but it has been in retreat recently. It would be a very risky move by the Fed to raise interest rates while the political landscape isn’t very stable.
Later today the UK will release the Confederation of British Industry (CBI) industrial order expectations for the month of May, the consensus is for a reading of 4, and that compares with a reading of 4 in April. The impressive UK retail sales report yesterday, coupled with the decline in unemployment and a jump in inflation during the week paints a rosy picture of the British economy. The positive run of economic indicators from the UK would have been welcomed by some members of the monetary policy committee (MPC) more than others.
The eurozone will report the consumer confidence announcement this afternoon, and traders are expecting a reading of -3 for May, and that would be a slight improvement from April’s reading of -4. The CPI figures during the week showed that the headline figure is currently at 1.9%, which is probably too close for comfort for Mario Draghi, seeing as the European Central Bank’s (ECB) target is 2%.
EURUSD – the upward trend is still in place and the next levels to watch for are 1.12 and 1.13. Support could be found at 1.1020, but should we go through it the next level to watch will be 1.0950.
GBPUSD – while it holds above 1.2840 another attempt on 1.30 seems likely, and beyond that traders will look to this week’s high of 1.3047 (a level not seen since September), and then onto 1.3120. The next level of support below 1.2840 is 1.2750, and should we go below that we could fall back to the 1.26 region.
EURGBP – while the support at 0.8524 holds a move towards 0.86 (the 200-day MA) seems probably. A close above that mark will bring 0.8720 into play. A break below 0.8524 will put 0.8457 on the radar.
USDJPY – 111.60 is acting as resistance and if it can’t be taken out a move down to 110.20 is possible, and should we go through that level it will bring 109.78 (the 200-day MA) into play. A move above 111.60 will put 112.40 and 113 on the map.
FTSE100 is expected to open 33 points higher at 7,469.
DAX is expected to open 18 points higher at 12,608.
CAC40 is expected to open 16 points higher at 5,305.
DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.
No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.