Market Overview
After the elevated levels of volatility across major forex pairs and commodities (precious metals primarily) in recent sessions, we see markets relatively settled this morning. This comes ahead of the July meeting of the Federal Reserve’s FOMC. Markets have taken a view on selling the dollar recently. Huge increases in COVID-19 infections and deaths have driven several US states to reverse their economy re-opening procedures and reintroduce containment measures. The impact this is expected to have on US economic underperformance in the coming months has driven yields lower and the dollar selling pressure. How the Fed reacts today could be a significant driver of either confirming this dollar sell-off, or potentially reversing it, at least near term. An allowance for higher inflation, and yield curve control are all potentials, but will this happen in a summer meeting? There has been such a swathe of dollar selling (to extreme near term oversold technical levels), so there may need to be a significant dovish lean from the Fed to drive further downside potential. Does this set up for a “sell on rumour, buy on fact” near term dollar rebound? This morning, we see little direction on yields, however, an edge of dollar selling is still present. Yesterday’s larger than expected miss on US Consumer Confidence has not helped, neither has news overnight that even the Republicans are against their own fiscal support package. It will be interesting to see if this dollar selling will continue in the wake of the Fed later today.
Wall Street closed lower last night with the S&P 500 -0.6% at 3218, whilst futures are settled this morning (E-mini S&Ps +0.1%). In Asian, there was a mixed look to trading, with Nikkei -1.2% but Shanghai Composite +1.8%. European markets look slightly cautious into the European open, with FTSE futures -0.1% and DAX futures -0.3%. In forex, the edge of USD underperformance has continued today, with EUR being the main outperformer. In commodities, after a hugely volatile session yesterday, there is a slight stalling of the bull runs on gold and silver, whilst oil continues to oscillate without any real direction.
We are once more looking towards the US session for the economic calendar today, with the Fed meeting of primary focus later in the day. The US Trade Balance for June at 1330BST is expected to show the deficit widening to -$75.5bn (from -$75.2bn in May). Pending Home Sales at 1500BST are expected to show a sizeable recovery of +15.0% in June. The EIA Crude Oil Inventories at 1530BST are expected to show stocks building by +1.0m barrels last week. However, the key announcement is with the FOMC monetary policy decision at 1900BST. There is no change expected on rates, whilst it will be interesting to see if the statement contains any dovish leans. The FOMC Press Conference with Fed chair Powell at 1930BST is likely to be interesting too, with focus on the prospects for yield curve control and forward guidance.
Chart of the Day – Silver
Silver volatility has gone through the roof in the past week and a half. Since the breakout above $19.64 (the old key 2019 resistance), the market has skyrocketed to levels not seen since 2013. At the high of $26.18 yesterday, silver had added +35% across seven sessions. However, it has been the manner of the moves in recent days which is so incredible. Yesterday’s intraday range of $3.85 was the widest of any session since 2011. Moves like these tend not to come in the middle of a trend, and will often be more the culmination of an exhaustion move. Additionally, the RSI is at 87, which aside from the all-time high of April 2011 is the most overbought it has ever been. It seems unlikely that silver will just consolidate for a while to calm the market down. As the market begins to slip back today, we see a retracement as increasingly likely now. There was an initial move intraday yesterday, but the bulls were not quite ready to give up yet. An intraday rebound of over +10% to leave an incredible “long legged doji” candlestick leaves significant uncertainty in the bull run. Initial support at $22.25 is now in place and although way back from current levels, we see it likely that this will be tested again by an incredibly overbought market. A breach would open a deeper corrective move. The $18.94/$19.64 breakout support would be a prime area for an unwinding retracement. On the hourly chart the fizzle looks to have going out of the move, with resistance forming $24.74/$24.87.
There has been a pause in the accelerating bull run, as EUR/USD yesterday posted a first negative candle in eight sessions. How the bulls react today could determine whether this is now set up to be a retracement move or just a consolidation. With the RSI reaching 81 on Monday, this was the highest level since 2008, and is clearly stretched. Second successive negative candlestick today would be the first instance in over a month and increase the retracement potential. Yesterday’s low around $1.1700 will also become a gauge, for if the market begins to form lower highs and lower lows, this will add weight to corrective pressure. On the hourly chart we have been seeing the 55 hour moving average as a basis of support throughout the bull run, and could give a first indication of bull control easing. There is a support band too, between $1.1680/$1.1715 which if breached would confirm a retracement. For now though, the market has ticked higher this morning and holding a move above $1.1745 would certainly encourage the bulls to have another go at $1.1780 and continue their run.
We hold a broadly negative dollar outlook, but there are still likely to be some retracements within this weakness. On Cable there was a key break higher above $1.2810 on Monday, in a move which continued yesterday as the bulls still saw intraday weakness as a chance to buy. Cable bulls are not ready to take profits quite yet. Technically, this move above $1.2810 has opened $1.3000 initially, but the key March high of $1.3200 is also now open. Momentum is strong with this move, but immediate upside potential could be limited by the RSI which is stretched at over 70. There is a near term uptrend which comes in at $1.2870 today which can now be used as a gauge for the strength of this bull run. As the market begins to consolidate moving into the European session this morning, the hourly chart is hinting at negative divergences, but as yet no decisive signals. A failure to continue the run higher and post another higher high above $1.2950 will begin to pose questions of the longevity of this bull run. If the mini trend is breached, a retreat to $1.2810 initially could be seen and if broken a deeper move back towards $1.2670 again. The Fed meeting tonight will add uncertainty.
A technical rally had been threatening yesterday morning, but the yen strength seems to be increasingly taking hold now. With the consistent selling pressure on the dollar, there is still no sign of a technical rally. The breakdown below 106.00 was a key move which implies potentially back towards 101.15 in the coming months. On a nearer term basis, the intraday rallies are still struggling for traction as there has been a decisive shift in momentum. The RSI below 30 is a signal of intent (got to 19 back in March), whilst MACD lines and Stochastics are accelerating lower. This is a decisive bear move developing now, with little real support until 101.20, the key March low. How the market responds to FOMC announcement will be interesting, but even if there is an unwinding move, we would be looking for this to be near term and look for renewed sell signals around 106.00.
With volatility elevated on gold, we are seeing sharp intraday swings now. In yesterday’s session, it looked as though the profit-taking was kicking in with a -$73 decline from the $1980 session high. However, a swing back higher into the close leaves the rally at an intriguing point. The reaction into the close last night would suggest that the bulls are not quite ready to give in. Despite this, the daily chart shows another positive close last night and a run higher that continues. However, momentum is incredibly stretched on a near term basis (RSI in the mid-80s is record levels). This leaves the gold bull run in its maturity and at risk of near term profit-taking. This is reflected in momentum signals on the hourly chart, which suggest a loss of impetus. All this coming ahead of the FOMC meeting tonight leaves traders in a sticky position. Whilst gold continues to tick higher, it is hard to back against the run, but once there is a decisive move to take profits, there could also be a sizeable retracement (which we would still ultimately see as another chance to buy). The market held up at $1907 yesterday and support at $1898 was intact. We still see that $1930 could also be seen as a near term gauge of initial support. Initial resistance at $1963 protects the all-time high of $1980.
Despite the threat to the recovery that was seen during Monday’s session, Brent Crude continues to hold up. However, oil has become a stagnant market in recent weeks. As the market has effectively flattened off, it is increasingly becoming one devoid of any decisive signals. Small candlestick bodies are now commonplace, whilst momentum signals give a little real indication. We continue to monitor the 21 day moving average (currently $43.20) as it has acted as a great basis of support over recent weeks. We have describe this moving average as “rising” but perhaps now this should be “barely rising”. Despite this, there is still a run of higher lows in place on Brent Crude, with $42.35 and $41.30 being the initial gauges of support. However, as the market has struggled to sustain positive traction in recent weeks, failing once more under the $45.20 key gap resistance, there will be growing questions over whether the bulls can continue this move higher.
As the Fed announcement approaches, the bull trends on the Dow are increasingly creaking. We continue to look at the near term importance of the 26,300/26,610 support band which has been tested over the past three sessions. However, yesterday’s -205 tick decline is also now breaking the a four month uptrend. A breach of 26,300 would confirm the trend breach now. It would also suggest that the price action over the past seven weeks is in fact a big range play between 24,765/27,580. In breaking the long uptrend and moving below what is effectively the mid-range pivot band would mean that the impetus of the long recovery would have been lost. It would then imply pressure towards the first important higher low support at 25,525. Momentum indicators have tailed off recently and are also pointing to this now being a medium term range, albeit with a mild positive bias still. The RSI has spent the past six weeks between 45/61, whilst MACD lines are now simply consolidating a shade above neutral. In this, we would still prefer to buy into weakness within the medium term range. For now though, there is a growing risk of a near term decline.
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