There has been a notable shift back into the dollar in the past few days. The euro is feeling the pressure ahead of the ECB meeting on Thursday. Expectations of a 10 basis point cut to the deposit rate have been borderline, but a dovish shift to forward guidance is the expectation. Sterling is under pressure with Boris Johnson set to be confirmed as Prime Minister today. Boris comes with a harder “do or die” attitude to Brexit than Theresa May. Something that has dragged on sterling in the past couple of months since Mrs May announced that she was stepping down. Although the market is extremely short on sterling, but there are no signs of any technical rally yet. Furthermore, risk appetite has taken a bit of a shot in the arm again, with the announcement of a deal for the US debt ceiling has been reached, whilst face to face trade talks between the US and China are set to resume on Monday. With safe haven plays slipping back on this, the yen and gold have come back, Treasury yields have (at least at the long end of the curve) ticked higher and equities are finding support again. There could be further impact on risk appetite and yields today as the flash PMIs (forward looking growth indicators) are released for the Eurozone and US. Expect movement on the euro and US dollar to come today ahead of a more pensive look towards the ECB meeting tomorrow.
Wall Street closed solidly higher last night with the S&P 500 +0.7% at 3005, whilst US futures are just tempering these gains early this morning, around -0.1% lighter. Asian markets have moved higher overnight (Nikkei +0.4% and Shanghai Composite +0.6%). European indices are looking more cautious though, with the FTSE futures -0.2% and DAX futures all but flat. In forex majors, there is a mixed outlook for USD this morning, unwinding some of yesterday’s gains versus GBP and JPY, whilst performing better against the commodity currencies. AUD is the main underperformer on increased expectations of an RBA rate cut. In commodities, the slide on gold looks to be finding a degree of support, whilst oil continues to edge tentatively higher on a larger than expected API crude inventory drawdown.
The flash PMIs are a big focus for the economic calendar today. Eurozone readings come at 0900BST with the flash Eurozone Manufacturing PMI which is expected to remain steady at 47.6 (from 47.6 final reading in June). The final Eurozone Services PMI is expected to slip a shade to 53.3 (from 53.6 final reading of June) all of which will pull the final Eurozone Composite PMI back to an expected to slip to 52.1 (from 52.2 final in June). Into the US session , the flash US Manufacturing PMI is at 1445BST and is expected to improve slightly to 51.0 (from 50.6 as a final reading in June), with the flash US Services PMI expected to shade higher to 51.7 (from 51.5 final in June). The US New Home Sales are at 1500BST and are expected to improve by 6% in June to 660,000 (from 626,000 in May). Oil traders also will be keeping an eye on the EIA oil inventories at 1530BST which are expected to show crude oil stocks in drawdown of -4.2m barrels (-3.1m barrels last week).
Chart of the Day – USD/CAD
A sharp recovery on Dollar/Loonie in the past few days brings the pair to the brink of an interesting turnaround. Three positive sessions in a row and a move to an intraday four week high. Although a breakout could not be sustained into the close yesterday, the bulls are again having a look early today. The interesting aspect of the move is that momentum indicators have swung decisively higher to confirm the improvement. Both Stochastics and MACD lines are accelerating higher in the wake of an earlier bull cross. The RSI is also pulling higher into the 50s. However, the daily chart shows the importance of a closing breakout above 1.3145, a resistance which has held back recoveries in recent weeks. A closing breach is needed to complete a small base pattern and imply 110 pips of further recovery towards 1.3250. Interestingly enough, the overhead pivot band of numerous turning points throughout 2019 comes in at 1.3225/1.3250. An unwind into this pivot band is becoming increasingly likely now. The hourly chart shows intraday weakness that finds support between 1.3090/1.3110 will be seen as a chance to buy.
The euro has come under increasing pressure throughout the past few days, ahead of what is going to be a crucial ECB policy decision on Thursday. We have been discussing the near term importance of the band $1.1180/$1.1200 as support, but this failed decisively yesterday with a sharp bear candle. The closing breach has opened $1.1110 which is crucial medium term support of a five month trading range. The deterioration on momentum indicators confirms the breakdown and preference for a test of $1.1110 now. The RSI into the mid-30s is the lowest since April, whilst MACD lines are accelerating lower from a fall below neutral. Intraday rallies are a chance to sell today. The hourly chart shows resistance of overhead supply between $1.1180/$1.1200. The closer we get to the ECB decision (tomorrow at 1245BST) the more the market should begin to consolidate, but for now the downside momentum continues to pull for a test of $1.1110. A close below $1.1110 opens $1.1000.
Sterling remains under pressure as the market continues to price for the increased prospect of a no deal Brexit that comes with the new Prime Minister Johnson. Interestingly, there was little real response from sterling (around 10 pips higher and lower) on the announcement of Boris yesterday. That aside, normal service resumed, and that is to sell Cable into the uncertainty. Three negative candles in a row and the market is eyeing another go at last week’s $1.2380 low. Technical signals are certainly looking that way, as the RSI slides back under 40 again (moves that tend to hit the low 30s), whilst Stochastics cross back lower and MACD remains subdued. Intraday rallies remain a chance to sell. The resistance of a five week downtrend at $1.2510 today caps the main upside for now. On the hourly chart though there is a minor pivot at $1.2450 providing resistance. With hourly indicators negatively configured (hourly RSI & Stochastics struggling around 50/55, MACD under neutral) we continue to see any rebounds as a selling opportunity for pressure on $1.2380. Initial support at $1.2420 today.
Dollar/Yen will be an interesting gauge of the longevity of the dollar rebound. This is a chart that runs closely off interest differentials (bond yield spreads) and yesterday’s dollar bounce was not borne of moves in yields. On the technical, a bounce that has broken a two week mini downtrend channel needs to continue through the lower high of 108.35 for the bulls to gain in confidence. A tick higher on the Stochastics is encouraging, but the RSI is stalling back around 50 (neutral) this morning and the MACD lines remain flat. The rebound simply looks to be neutralising the near to medium term outlook within what is increasingly becoming a two month trading range between 106.75/109.00. Essentially where the market is sitting now, comes within a neutral zone of the range. Above the higher low at 107.20 and below the lower high at 108.35 would provide a near term bias, but as the market has tailed off this morning, the market is still struggling for traction.
The slide back to the support of the six week uptrend has held, for now. The crossroads we discussed previously, is still being pondered. The bulls need to act fast, otherwise the strong technical outlook is in danger of turning corrective again. The 21 day moving average is losing its impetus at $1413 and this has supported previous corrections within the uptrend. The uptrend itself sits at $1415 today and is at risk of being broken. A broken uptrend is not the end of the world, but if it comes as momentum indicators continue to deteriorate then there is an increasing risk that the bulls turn into reverse. The support at $1400 remains the first key gauge, being psychological but also the floor from last week which was a higher reaction low. A closing breach of $1400 would be a real outlook changer. The hourly chart shows momentum is less positively configured now, with the hourly RSI struggling under 60 and pushing 30, whilst MACD lines sit under neutral. The initial resistance at $1429 needs to be broken for the bulls to regain some momentum. Initial support at $1414.
Given that the geopolitical tensions in the Persian Gulf should have provided oil with a decisive boost in recent days, the formation of the daily candlesticks will still be considered as slightly disappointing for the bulls. Despite this, the market is pulling higher, but the move still lacks conviction, at least for now. The market is edging higher again today, and there is a mild improvement on momentum indicators, but nothing to suggest the bulls are in real control. Reaction around the old $58.00 pivot will be an interesting gauge now. However, the hourly chart shows the first resistance of note is at $57.30. Initial support is now at $55.70, above the reaction low at $55.00.
Dow Jones Industrial Average
There are signs to suggest the recent corrective phase for Wall Street has played out. The bulls are preparing to break new high ground once more. The unwinding move back over the past week pulled the Dow back to the support of its five week uptrend from where the bulls are again looking to push higher again. The RSI unwound into the mid-60s and have ticked higher, whilst the Stochastics are also looking set to tick higher again. With a solid bull candle now eyeing the 27,399 all time high, the bulls are ready. The last two breakouts, of June and July have seen the market driven 700/850 ticks higher, which would give a ball park of c. 27,750 area as a target zone. A close above 27,399 would be the move the bulls are looking for. The hourly chart shows upside potential in the current move higher, whilst 27,200/27,300 is a support band.