Market Overview
The drivers of the key breakouts on major markets in the past few days have been a surge of positive risk appetite from progress on COVID vaccination trials and the market taking a view on dollar weakness. However, the risk positive outlook is turning a little sour in the last 24 hours as diplomatic tensions between the US and China continue to escalate. Tit-for-tat consulate closures have been announced, whilst the rhetoric of US Secretary of State Mike Pompeo referring to China as being a threat to the world order, sees relations becoming ever less cordial. The strengthening of the Chinese yuan below 7 to the US dollar is beginning to reverse. Equity markets are seeing some profit-taking on their breakouts, whilst risk currencies (AUD and NZD) are slipping back. However, the dollar remains under pressure. Despite a surprise deterioration in Eurozone Consumer Confidence, EUR/USD continues to climb. The breakout on gold is also holding as US Treasury yields continue to fall and the US yield curve “bull flattens” (something which tends to be dollar negative and we see the strains of this through a sharp decline on Dollar/Yen today). These moves do though look increasingly stretched and the potential for a near term snap back is growing. Sterling could fine a basis of support with UK Retail Sales for June coming in way ahead of expectations.
Wall Street closed strongly lower last night with the S&P 500 -1.2% at 3235, whilst US futures are falling further today (E-mini S&Ps -0.4%). This has weighed on Asian markets, with the Nikkei -0.6% and Shanghai Composite -3.1%. European indices are also looking under pressure early today, with FTSE futures -1.2% and DAX futures -1.2%. In forex, there is risk negative bias with JPY performing strongly, but USD also continues to be pressured as EUR holds up well and GBP feels the benefit from the retail sales data. In commodities, the sharp run higher on silver is beginning to drop back, whilst gold is beginning to also stall slightly. Oil is stable after its fall back yesterday.
The Flash PMIs for July dominate the economic calendar today. Eurozone flash Manufacturing PMI is at 0900BST and is expected to improve to 50.0 (from a final 47.2 in June). Eurozone flash Services PMI is expected to improve to 51.0 (from a final 48.3 in June), meaning the Eurozone flash Composite PMI is expected to improve to 51.1 (from 48.5 final June). The UK flash Manufacturing PMI is at 0930BST and is expected to improve to 52.0 (from 50.1 final June), whilst UK flash Services PMI is expected to pick up to 51.5 (from a final 47.1 in June). This would leave the UK Flash Composite PMI improving to 51.1 (from 47.7 final June). Into the afternoon, the US flash Manufacturing PMI is at 1445BST and is expected to improve to 51.5 in July (from the final reading of 49.8 in June), whilst US flash Services PMI is expected to pick up to 51.0 (from a final reading of 47.9 in June). US New Home Sales for June are at 1500BST with consensus expecting an improvement of 4% to 700,000 (up from 676,000 in May).
Chart of the Day – NZD/USD
The period following a key breakout can often be an uncertain one for traders. Do you chase a breakout, or wait for a pullback? In the case of the Kiwi, after two days of breakout, the bulls are stuttering somewhat and the pullback is taking shape. A bearish outside day session formed yesterday and the market is ticking lower today. However, we see this will likely be the source of the next opportunity to buy. The upside break above 0.6585/0.6600 was a key breakout from a consolidation rectangle that implies 0.6830 in due course. However, with this stalling occurring as the RSI hit 70 and the MACD lines have been a little underwhelming, there is room for a near term pullback. The 0.6585/0.6600 old resistance is now a basis of initial support and a prime zone for a pullback. Given the mid-July congestion area between 0.6500/0.6600, this is a key area of support now and we would be looking for another higher low to find support above 0.6525. The bulls would still be in control whilst support of a higher low at 0.6500 is intact. If breached, it neutralises the outlook until 0.6370. Looking forward, given the breakout and strong medium term indicators, we expect the December high of 0.6755 to be tested at least in the coming weeks.
After such a strong run higher of the past two weeks, there are just a few signs that EUR/USD could be close to a near term pullback. We see the breakout above the long term resistance of 1.1490/1.1500 as being an outlook changing move. However, the near term overbought position is beginning to weigh slightly. Looking at the last three daily candlesticks. The breakout candle was huge, but since then, the magnitude of the candles (Wednesday and Thursday) have been reducing. This comes with the daily RSI into the mid-70s which is historically very stretched for a market as liquid as EUR/USD. There are no sell signals (or profit-taking signals) yet, but the hourly chart is beginning to show this slowing of the run higher. Small negative divergences are appearing on hourly RSI and hourly MACD. Divergences are warning signs and are not outright signals (as the divergence can continue to form). So we begin to look for little breached of support. The rising 55 hour moving average has been a basis of support for the past week (currently c. 1.1575) and would be another early warning of exhaustion if broken. The key reaction low at 1.1540 being broken would confirm a corrective move. For now, the bulls are still in control and will be eyeing further gains above yesterday’s 1.1625 high and there is little real resistance until 1.1800. However, this run higher is becoming ever more susceptible to a correction now.
The last two daily candlesticks have been intriguing. We have discussed recently the importance of the support band 1.2640/1.2670. Both Wednesday’s and Thursday’s sessions tested this support band only to rebound and retrace losses onto the close. The continuation of support is encouraging, but the fact that the market is repeatedly testing lower is a concern. Small candlestick bodies reflect this uncertainty too. It means that the near term importance of a breach of this support would be elevated. For now though, the market seems happy to still buy into near term weakness and this lends a bias towards testing the 1.2810 key June high. Momentum remains positively configured with RSI into the mid-60s, MACD lines rising and Stochastics strong above 80. An initial push above 1.2765 this morning has been knocked back, but the bulls are still threatening. We remain unconvinced that Cable will be moving decisively through 1.2810 resistance which is the key medium term range high, but we position for the test. Our outlook would become more neutral on a closing breach of 1.2640.
The outlook for Dollar/Yen has been steeped in uncertainty recently, but this morning there seems to be a negative bias developing. For the past seven sessions, there have been alternating positive and negative candles, with the market consolidating above support at 106.60. However, a decisive early breach of 106.60 support is a four week low and now opens a test of the key medium term range floor at 106.00. Momentum indicators are making notable deteriorations too. If the RSI closes below 40 it would be a signal for the bears to increasingly take control. We continue to note how support between 106/107 has been a consistent feature of the trading range over the past four months, but with this latest development, negative pressure is mounting. A decisive close below 106.00 would be a big outlook changing move and open initially 105.00 but potentially the March spike low of 101.20 comes into play. Resistance is mounting between 106.60/106.90 and is a near term Sell zone now.
The run higher on gold has posted three huge bullish candles in a row since breakout out above resistance at $1818. The market has come up just shy of the psychological $1900 barrier (with a high of $1898 yesterday) and is one bullish session away from the all time high of $1920. Whilst we back this bull run higher, we continue to be mindful of what could still be a bout of profit-taking which, given the acceleration higher, could be a painful near term slip back. Momentum signals remain strong but stretched. The 14 day RSI is now over 80, and interestingly, the Stochastics are just beginning to cross. We are still looking for signs of exhaustion in this move. The hourly chart has been showing developing negative divergences on hourly RSI and hourly MACD lines over the past two days. As the market has consolidated overnight, the rising 21 hour moving average (which has been a very good gauge of support) is now being tested. There has been a run of higher lows in recent days which have been using old resistance as a pivot. Initially we are looking at a decisive move below $1880 as an early warning, whilst a move below $1868 (intraday low from yesterda0 would begin to add to corrective pressure. Seeing the hourly RSI below 50 would be a confirmation too. If momentum gets behind a correction, we cannot rule out an unwind towards $1840/$1845 or even to the $1818 breakout.
Breaking through the resistance at $43.95 has not managed to release the shackles for the bulls as the resistance of the key gap at $45.20 remains intact. It does seem to be a case of two steps forward and one step back right now. Yesterday’s negative candle has dragged the bulls back once more and it does seem as though the (gradually) rising 21 day moving average which is today around $42.95 remains an important gauge. Given that this moving average is a basis of support, there is still a run of higher lows which has been intact since the March low. Support at $42.35 being broken would begin to question bull control, whilst below $41.30 would turn the market corrective. Until then, little negative candles such as yesterday will still represent an opportunity to buy again. Resistance of this week’s high at $44.90 adds to the big gap resistance of $45.20 which the bulls need to take out to really open the next leg higher.
The bulls have just been reined back in the past 24 hours as the move to break higher has just been reversed slightly. Despite finally “closing” the gap at 26,940, yesterday’s negative candle is something of a fly in the ointment of the bull run. As yet it is nothing too bearish and we are still looking to use near term weakness as a chance to buy. We continue to note the importance of the support band 26,300/26,610 whilst also noting the well-defined near four month uptrend (a shallower trend than the original recovery from the March low) which comes in as support today at 26,270. So we see this move lower as an opportunity once more. A failure of this trend and support band would suggest that this is turning into a bigger medium term consolidation range between 24,845/27,580. The support at 25,525 then becomes the key near term gauge. For now, momentum indicators remain positively configured although they have tailed off slightly. The RSI holding above 50 would sustain the positive bias. Resistance at 27,070 needs to be broken for the bulls to feel in control once more.
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