Market Overview
Once more the daily see-saw of risk appetite has taken affect as sentiment picks up again. Could it be that this time drives a decisive move? The swing back to positive risk has been driven by the results of a COVID-19 vaccine by US pharma company Moderna. Results were “robust” with antibodies present in all 45 test subjects. The development of a reliable vaccine is the key to opening the door to a serious recovery for markets and traders will need to assess the implications of these results. Previous positive vaccine results have seen risk appetite peter out quickly in recent months. It is interesting to see that there was a decisive swing higher on Wall Street, that is continuing on futures today. The US dollar is under pressure across the major currency pairs. Higher beta majors are performing well. Is this move set to break markets out of their month long consolidations? There have been some early calendar events that could also forge moves today. As expected, the Bank of Japan sat on its hands for its monetary policy decision, with no shift on rates or its yield curve control. However, UK inflation has ticked higher than expected (on both core and headline) leading to an uptick on sterling today. For later today, the survey data from the New York Fed could give an early insight into July and will be an interesting watch.
Wall Street closed strongly into the end of the session, with the S&P 500 +1.3% at 3198. US futures are continuing this move today, with E-mini S&Ps +0.8%. This is helping a positive Asian session (Nikkei +1.6%, Shanghai Composite -0.6%), although some of this move was tempered by the further escalation of tensions between the US and China as President Trump signed legislation on removing Hong Kong’s special status. European markets look set fair this morning, with FTSE futures +0.9% and DAX futures +1.3%. In forex, there is a risk positive, USD negative bias as USD, JPY and CHF all underperform, whilst AUD, NZD and GBP all pull higher. In commodities, there is consolidation on the precious metals, whilst oil has managed to pick around +0.5% higher.
There is a North American bias to the data on the economic calendar for the rest of today. The New York Fed’s Empire State Manufacturing for July is at 1330BST and could be an extremely interesting release. Consensus forecasts expect the continued recovery to +10.0 (from -0.2 in June). The US Industrial Production for June is at 1415BST and is expected to show recovery of +4.3% on the month (after a rebound of +1.4% in May). Capacity Utilization is also expected to recover back to 67.7% in June (from 64.8% in May). The Bank of Canada monetary policy decision is not expected to cause too many surprises today with rates forecast to be held at +0.25% once more. The EIA Weekly Crude Oil Inventories at 1530BST are expected to show a drawdown of -2.3m barrels (following a surprise build of 5.6m barrels last week).
Chart of the Day – EUR/JPY
It has been a slow burn for EUR/JPY longs in recent weeks. However, after two strong bull candles and a close above 122.10 resistance, there are finally signs that the upside move is developing. However, this is still a market prone to intraday swings and retracements. Subsequently, chasing a breakout may not be the best timing, and we prefer buying into weakness. We discussed Euro/Yen longs last week on the break above 121.40, but a choppy week of trading broke a two month uptrend before the market swung higher once more. A close above 122.10 (mid-June high) has confirmed the bull control now, also being a move through the resistance of the 23.6% Fibonacci retracement (of 114.40/124.40). This means that the market can begin to use this Fib level as a basis of support and re-open the key June high of 124,42 once more. Momentum indicators are positively configured, with the RSI confirming the break to a one month high, Stochastics turning higher again in strong configuration, and most interestingly a bull cross on MACD lines. We look to use intraday weakness as a chance to buy now. The 121.40 breakout is now a good basis of support (and was once more yesterday almost to the pip), leaving a mini buy zone 121.40/122.10 now. Strong support has formed at 120.25 and is now a key higher low,
The euro bulls have taken a decisive step forward in the past couple of days. The outlook on EUR/USD has begun to really take on a positive bias once more. Strengthening over the past two weeks, a decisive bull candle with a close above $1.1350 has cleared a key band of near term resistance and means that the bulls are now primed to test the June rally high of $1.1420. A run of higher lows and higher highs have formed a mini uptrend channel which today crosses the $1.1420 resistance. It is interesting to see that the market has already had a look early this morning at the resistance before just backing off slightly. Daily momentum indicators are increasingly positively configured now, but also retain further upside potential. Stochastics have only just crossed into bullish territory, whilst RSI is strong in the mid-60s and MACD lines have only just bull crossed higher. Given the momentum set up, we would view near term weakness as a chance to buy. The old key breakout resistance of $1.1350 is now a prime area of underlying demand, and any supported dip back into $1.1300/$1.1350 is a good buying opportunity now. A close above $1.1420 opens $1.1490 which is the key March spike high and the long term resistance around $1.1500 which we expect to be tested in due course. The higher low at $1.1255 is now key support.
The outlook for Cable has become somewhat mixed in recent sessions. With the recent rally failing at $1.2670, under the resistance of the falling seven month downtrend (today at $1.2680), the fear would be that the near term recovery would begin to retrace back within the medium term range once more. This could still be yet to play out, however, the bulls fought back yesterday into the close and are pulling Cable higher once more today. This has left a low and support at $1.2480 (above the $1.2435 support) and back above the $1.2540 old near term base neckline. Taking a step back to assess the indicators, we see only a mild positive bias within the medium term range now. RSI is fairly steady in the mid-50s, with MACD lines flattened a shade above neutral. Cable is also trading within a bunch of flat moving averages. This all points to a lack of trend and a market that is likely to throw up mixed signals in the days ahead. It points to a period of difficult trading, false moves and lacking conviction. A closing breakout above $1.2670 would encourage the bulls, whilst below $1.2435 would be disappointing now.
The rebound from 106.60 has just begun to stutter in the past 24 hours. After Monday’s strong bull candle, the move higher looked to be gathering momentum, but a small bodied “spinning top” candlestick has halted the progress around the resistance of a near term two week downtrend. This comes as momentum indicators once more begin to flatten off around neutral positioning. The market once more looks to be in wait-and-see mode, something that Dollar/Yen traders will be experienced with. The hourly chart shows that whilst the two week downtrend is breaking, this consolidation is also breaking the support of a shorter recovery trend. The market is neutralising around 107.10/107.40. We would see a decisive move either side of these levels as generating near term direction, but once more the lack of conviction is damaging the potential for decisive moves on Dollar/Yen. Under 107.10 re-opens 106.60, whilst above 107.40 opens 107.75/108.15 resistance.
The consolidation that has set in on gold is into its fifth session now. The latest break to multi-year highs hit $1818 a week ago, but has since stalled. We view this stalling as being a pause for breath rather than being any negative signal and still back moves for further multi-year highs above $1820 in due course. The breakout from the April to June consolidation range derived an implied target area of between $1820 (a conservative target) and $1858 over the coming weeks. The extent of this target area has yet to be seen. Given the bullish configuration of technical, we continue to expect further gains will be seen. Momentum remains strong, with RSI in the high 60s and Stochastics holding well above 80. There was a good reaction by the bulls yesterday, with weakness to the support of the five week uptrend (today at $1796) and the breakout support (of $1789) being bought into. The hourly chart shows that perhaps the market is not quite ready (yet) for a breakout, as a mini range $1791/$1810 has formed, but we favour an upside break to continue the run of the trend higher. Even if this trend is breached, we would still look to use any supported weakness into the support band $1764/$1789 as a chance to buy.
Brent Crude Oil
This is a difficult period of trading on Brent Crude as a number of contradictory signals are being thrown around. Daily candlesticks have fluctuated between positive and negative for seven sessions in a row now, as any sense of decisive direction keeps being snuffed out. However, despite the two month uptrend having been breached last week, there is still little real appetite for a correction. It is as though the market is in wait and see mode. This is leaving momentum indicators consolidating their continued positive configuration, in a moderating mild drift back. Given the lack of selling pressure, this unwinding drift is a move to renew upside potential in due course. For now though, this remains a waiting game. The resistance at $43.95 remains the key barrier, and the big March gap at $45.20 would also be a significant resistance that the bulls need to take out in order to continue for a bigger recovery. This ranging period sees $39.50 as initial important support, whilst last week’s reaction low at $41.30 comes in as a gauge for the bulls.
The bulls responded strongly to the announcement of encouraging COVID vaccine test results and suddenly there is potential for an upside break of the recent consolidation phase. Over the past four weeks, repeated rallies have failed at 26,300/26,610 resistance. In most of these cases the resistance has been punctuated by a failure candlestick. However, the buying pressure developed throughout yesterday’s session and a decisive positive candlestick has now closed above 26,610 resistance. This is the first close inside the big gap and with futures strongly higher again today, there is a very good prospect of the Dow now finally “closing” the gap at 26,940. This would be a key signal that the bulls have played out their period of consolidation and are ready to push on once more. The technical indicators are looking that way, as the RSI confirms the four week high, Stochastics swing higher towards bullish configuration and MACD lines look to bull cross higher. The old resistance at 26,300/26,610 now becomes are area of support with the move too. “Closing” the gap at 26,940 would open the key June rebound high of 27,580 whilst the support at 25,525 is now a key higher low.
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