There has been a degree of uncertainty that has taken over markets as this week has developed. The change factor seems to have been a recovery on Treasury yields, which has in turn stabilised the dollar. Yields have picked up as a run of data out of the US has come in ahead of expectations. Starting with a surprisingly positive Nonfarm Payrolls report, inflation for both consumer and producers has been positive. There is a sense that the previous move into Treasuries and out of the dollar has been overdone. Coupled with a huge supply of Treasury issuance on the market this week, yields have pulled strongly higher (10 year yield up 20 basis points in just over a week). This stabilising of the dollar is also generating an uncertain outlook on Wall Street, and holding patterns across major forex. The huge corrective profit taking on gold looks to be a little more stable, even if the market is lower today. After wild volatility and a 10% correction on gold, the dust is still settling. However, the question of whether this is the end of the correction is still likely to be determined on the composition of any US fiscal support program (if one can be agreed). Risk appetite has also not been helped overnight by the announcement of Chinese data where industrial production and retail sales both missed expectation, suggesting the recovery is not going to be smooth in China either. This is something that could play into the near term dollar bounce back.
Wall Street closed marginally lower with the S&P 500 -0.2% at 3373 and still off its all-time highs. Despite this, the US futures are unwinding these losses early today with the E-mini S&Ps bouncing +0.3%. Asian markets have been mildly positive overnight, with Nikkei +0.2% and Shanghai Composite +1.0%. European indices are though looking a touch cautious, with FTSE futures and DAX futures marginally lower. In forex, there is a shade of risk aversion creeping in, with the slightest USD gain. It is interesting to see AUD performing well again, whilst NZD continues to struggle. In commodities, Gold is back lower by -0.5% but silver sharply down again -4%. Oil is once more mixed.
Friday is a day packed with data on the economic calendar. Eurozone Flash GDP for Q2 at 1000BST is the second reading of Eurozone growth and is expected to be unrevised from the “Preliminary Flash” reading of -12.1% (after a Q1 decline of -3.8%). Into the US session, the tier one data comes thick and fast. First up at 1330BST the US Retail Sales which are expected to show ex-autos sales being +1.3% in the month of July (after a +7.3% bounce in June). US Industrial Production for July is at 1415BST and is expected to grow by +3.0% on the month (after +5.4% growth in June). Capacity Utilization is expected to improve to 70.3% (from 68.6% in June). Finally the Michigan Sentiment at 1500BST is expected to decline slightly to 72.0 in August (from 72.5 in July). This is expected to be driven primarily by a deterioration in the current conditions component to 81.8 (from 82.8) whilst the expectations component is expected to improve slightly to 66.7 (from 65.9 in July).
Chart of the Day – AUD/JPY
With the increase in bond yields hitting the yen and risk appetite remaining broadly positive, Aussie/Yen has regained some upside momentum this week. However, as this market seems to still be fairly uncertain right now, we see a slight pullback in the past couple of sessions. Despite this, the trends remain positive and the bulls will be eyeing the next opportunity to buy into the weakness to test key resistance 76.85 for a move to the highest level since May 2019. The resistance of the June/July highs at 76.75/76.85 are under pressure after a series of higher lows throughout the past couple of months. A closing breakout would be the next step forward for the recovery. Strong momentum configuration is seen through RSI and Stochastics indicators suggesting weakness is a chance to buy (although there is a slight caveat with a lack of traction in the MACD lines). There has been a consistent use of the rising 21 day moving (today at 75.78) as a basis of support for the past six weeks. The hourly chart shows initial support around 75.85/76.25. Breaching 75.65 as an initial higher low would be disappointing now, whilst below 74.80 would mean the bulls lose control. We look to buy the weakness for a breakout above 76.85 which opens 77.50/78.85 as the next resistance band.
There is a sense of uncertainty as EUR/USD has re-asserted the trading range 1.1695/1.1915 in recent days. However, the improvement that has come in the past couple of sessions has been gradually fizzling out. We continue to view 1.1800 as a key near term gauge for this range and the retreat back towards this seems to be once more using this as a pivot support this morning. Hourly technical indicators suggest that this continues to play as a near term trading range. This means that the next break (either below 1.1685 or above 1.1915) is clouded in uncertainty. We are still minded of the huge run of dollar weakness and euro strength in recent weeks, which has not yet had any real corrective pressure. This lends us to prefer pressure on 1.1695. Technical momentum signals have tailed off on a near term basis, but remain positive on a medium term outlook. How the market reacts around 1.1800 pivot will determine our view, but for now the outlook has become somewhat neutral. Initial resistance at 1.1850/1.1865.
Cable continues to exhibit very similar traits to that of EUR/USD. Ranging for the past couple of weeks, Cable is holding support at 1.2980 but below resistance of 1.3185. Momentum indicators have tailed off and are retreating from their extremely strong positions of the late July bull run, but for now this is a consolidation. Within the range we continue to view initial resistance between 1.3100/1.3130 which has seen minor rebounds fail this week. Candlesticks with long upper shadows but small bodies imply a market were the bulls just cannot get traction. If this is followed by negative can