Market Overview
After pretty much the whole trading world hit the pause button yesterday for Independence Day (record low daily ranges seen on EUR/USD and USD/JPY) attention turns to a crucial Non-farm Payrolls report. With the Fed monetary policy on negative watch, the data is all important.
According to interest rate futures, the question of rate cuts is not one of “when” but of “by how much”. Today’s payrolls report could go a long way towards answering that question. But, if expectations are hit today, then one might be forgiven for questioning why this is the case.
Consensus of 160,000 jobs would be very solid considering the late cycle tight nature of the labor market. With unemployment at record lows of 3.6% a shrinking pool of labour to choose from pulls the headline number lower. It also generates decent wage growth, of which the consensus of 3.2% is also solid. US data has rolled over in recent weeks and the economy is not immune to the global slowdown, however, a decent/solid payrolls report would certainly rule out a 50 basis point cut for July (which some have called for, but we see as wholly unjustifiable). A positive report would also give the Fed pause for thought in cutting at all. It is our feeling that markets have gone too far in pricing for Fed rate cuts and the risk will be for an unwind from low yields and the dollar.
A payrolls report that does not reflect a deterioration in the US economy that would justify such dovish positioning, could drive some retracements. We will know a lot more after today’s payrolls report. However, the key markets to watch will be Dollar/Yen (due to interest rate differentials) and gold (which has been seeing elevated levels of volatility in recent weeks). Furthermore, how would Wall Street indices, at all-time highs on the premise of decisive Fed easing, cope with a strong payrolls report?
Wall Street was shut for public holiday yesterday, with US futures cautiously higher by +0.1% early today. Asian markets have been equally circumspect overnight with the Nikkei +0.1% and Shanghai Composite +0.1%. European markets are looking at an equally quiet open with FTSE futures and DAX futures all but flat.
In forex, there is a mild degree of USD clawing back any modicum of yesterday’s losses, but again these moves are tiny.
In commodities, in line with a mild dollar bounce we see gold slipping slightly by -$1 lower, whilst oil markets are flat to lower (WTI is a percent lower playing catch up on yesterday’s move back on Brent Crude).
The US Employment Situation report for June dominates the economic calendar today. Headline Non-farm Payrolls are expected to recover back to +160,000 (from 75,000 in May’s report). This would be around levels that can be expected as the increasingly tight labour market faces a lack of supply. Average Hourly Earnings are expected to grow by +0.3% on the month, which would pull the year on year growth to +3.2% (+3.1% last month).
The US Unemployment rate is expected to stay at 3.6% (3.6% in May) but there will be added focus on the labor force participation rate which has dropped back to 62.8% in recent months. If this starts to pick up again, this could pull the unemployment rate higher (more workers tends to increase the level of those registering for unemployment benefits), but also could restrict wage growth too.
Chart of the Day – EUR/CHF
The euro is under pressure and safe havens are consistently outperforming. This adds up to Euro/Swiss trending lower. Looking at the technicals this is the medium term outlook. The big broad 9 month trading range between 1.1160/1.1500 broke down in June and this has been a crucial outlook changer. The old range floor of lows between 1.1160/1.1180 has now become a crucial area of overhead supply with rallies seen as a chance to sell. Last week’s rally failed again at this overhead supply and subsequently formed an eight week downtrend. This trendline comes in at 1.1150 today. Momentum indicators remain negatively configured on a medium term basis and the tepid nature of the recent unwinding rally suggests it is a key chance to sell now. RSI is struggling in the low 40s, with MACD lines making little headway in recovery, whilst the Stochastics are set to cross back lower. Three negative closes in a row suggest the bears are ready to grasp control again. Looking to sell for a retest of a minor higher low at 1.1080 before a retest of the June two year lows at 1.1055 in due course. The hourly chart shows negative configuration on momentum and initial resistance at 1.1140.
EUR/USD
The less said about yesterday’s non-event of a session the better. At just 24 pips in range this was the smallest daily range for years. Consolidation with public holiday in the US but also a crucial payrolls report today. Traders are keeping their powder dry. Suffice it to say that at the close tonight, there will not be a repeat of yesterday’s tight range. For the past few sessions the market has been consolidating above $1.1265 old breakout support and holding the uptrend channel support (today at $1.1255). On a medium term basis there is still a positive configuration. The RSI is holding around 50, with Stochastics again bottoming around 40 (similar to the June higher low). Whilst this support at $1.1265 is intact the outlook will remain fairly positive still. However, in the near term basis there has been resistance building at lower levels which is putting the squeeze on for the bulls. The market comes into this payrolls report at a crossroads. A positive report will drive a move below $1.1265 which if completed with a closing breach opens $1.1180. The hourly chart shows pivot resistance at $1.1310, which if breached improves the outlook again. Above $1.1350 and the bulls are away.
Yesterday’s consolidation was more due to the public holiday and caution before Non-farm payrolls, rather than any real sense of support formation. The outlook remains corrective within the seven week range and a bias towards a test of $1.2505. Momentum remains negatively configured medium term but also with further downside potential. There is resistance at $1.2650 from a mid-range pivot breakdown and rallies remain a chance to sell whilst this pivot remains an overhead barrier. It is difficult for the Cable bulls to find too much encouragement whilst the market continues to leave lower highs, the latest at $1.2735. The hourly chart reflects the negative near term configuration. Below $1.2555 opens the $1.2505 low, with $1.2475 still likely to see pressure at some stage soon.
USD/JPY
A very forgettable session yesterday produced the smallest daily candlestick range in over two months (just 15 pips). Consolidation on a US public holiday in front of Non-farm Payrolls is not to be unexpected though. It should be seen as no exaggeration to say that today’s payrolls report could be crucial for near term direction on Dollar/Yen. The fluctuations of the past week have seen key gauges developing. Support at 107.50 is a near term floor that if breached (confirmed on a closing basis) would re-engage bear control and re-open the 106.75 lows. It also significantly increases the prospect of a further decline towards 104.50/105.00 long term support area. Momentum indicators are negatively biased to suggest that there is a downside pull on the pair. A bear cross sell signal on Stochastics adds conviction to this. A redrawn downtrend comes in around 108.25 today under the key near to medium term resistance around 108.50. The hourly chart shows initial resistance of a pivot band at 107.90/108.15 is restrictive early today.
Gold
Taking a step back and the price moves on gold in the past couple of weeks have fluctuated wildly. However, within the roller coaster ride, there is an uptrend in place of the past five weeks now. Furthermore, whilst momentum indicators hold their current configurations, the outlook remains positive. However, the failure to breach $1439 is a concern, seeing as it has been met with a corrective unwind. How gold comes out of today’s payrolls report could though be a decisive defining move for the outlook. An Average True Range of c. $22 is the highest since November 2016 and reflects the elevated levels of volatility now on gold. Initial support at $1410 will be pressured on any positive payrolls surprise, whilst the confluence around $1400 will still be considered a gauge for the outlook. The five week trend comes in at $1395 today. Momentum indicators are also worth watching as the MACD lines have converged to threaten a bear cross. Emerging out of this payrolls report above initial resistance $1421/$1424 opens the highs again.
WTI Oil
The rally on oil has rolled over at a level that will be seen as a concern for the bulls. The reversal form having consolidated around the 50% Fibonacci retracement at $59.60 was a notable move. This completed the formation of a ten week downtrend. With the RSI failing at 60 and back under 50, whilst MACD lines have unwound to falter around neutral and Stochastics are tracking lower from a bear cross, this paints a picture of a failing rally. Whilst resistance around $58.00 continues to build, this will continue. Initial support at $56.05 is preventing a retest of the 38.2% Fib at $55.55 and an old breakout support at $54.85. The bulls will need to work very hard now to prevent renewed retreat.
With Wall Street shut for the Independence Day public holiday yesterday, below is our latest analysis.
A bullish upside gap, a solid positive candlestick, a close at the day high along with intraday and closing all-time highs. The Dow has broken out. The move comes with the upswing on Stochastics with upside potential, whilst RSI pushes into the 70 with its strongest level since September 2018. A move to new all-time highs means no resistance overhead, so it will be important to keep an eye on momentum indicators now, especially on the short term charts. We remain bullish, but there is a gap open at 26,788 (from yesterday’s open) and this is still likely to be filled. As yet there is nothing to really be concerned about on the hourly chart for the bulls. Configuration remains positive on hourly RSI and MACD. Weakness remains a chance to buy and with hourly RSI above 70 and Stochastics above 80, there is likely to be an opportunity, perhaps the gap fill? Look out for bearish divergences to suggest slowing momentum before a corrective move, but for now we remain bullish.
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