It is a fairly quiet start to the week as traders look pensively at the impact of the moves in recent days. The dollar remains subdued as the bulls lick their wounds in the wake of Fed chair Powell’s dovish testimony. Markets continue to price for Fed rate cuts, but the question is now of how many. It is interesting to see that there is more of a consolidation that has developed in recent days on major markets such as EUR/USD and gold. However, with Treasury yields having picked up, the market seems to be leaning towards more positive risk appetite too. The relative outperformance of the Australian and New Zealand dollars seem to be a reflection of this. Similarly, the attitude is positive on Wall Street as markets push ever further into all-time highs. This is continuing to impact this morning. Today’s Chinese economic data has been encouraging risk too. Although China Q2 GDP fell to 6.2% as expected (+6.2% exp, down from +6.4% in Q1), the sector performance has been boosted in June. China Industrial Production for June jumped to 6.3% (+5.2% exp, +5.0% last) whilst China Retail Sales were strong at +9.8% (+8.3% exp, +8.6% last). This reflects the positive feedthrough of stimulus measures earlier in the year and that the government can still see the positive aspects of turning on the taps when needed. This is helping to feed into positive risk plays such as the Aussie and Kiwi this morning.
Wall Street closed again in all-time highs with the Dow +0.9% higher and the S&P 500 +0.5% at 3013. With US futures edging higher again today (currently around +0.1%) the move is helping Asian markets higher (Nikkei +0.2% and Shanghai Composite +0.1%). European markets are also edging higher with FTSE futures and DAX futures both around +0.1% higher. In forex, there is strong performance from AUD and NZD, with JPY being the underperformer. In commodities, the risk positive vibe is a minor drag on gold, whilst oil is also just edging marginally lower too.
The only data of any real significance on the economic calendar today is the US Empire State Manufacturing (New York Fed) at 1330BST which is expected to turn back positive in July to +0.5 (having dropped to -8.6 in June, which was the worst reading since October 2016).
It is also worth keeping an eye out for the comments of FOMC’s John Williams (who is a permanent voter on the committee and leans hawkish) who is speaking at 1350BST.
Chart of the Day – AUD/JPY
Markets have taken the Fed chair’s Congressional testimony with a risk positive outlook, but can this be sustained? The improvement on Aussie/Yen of late June has yet to see decisive renewed selling pressure and ticked higher again since Wednesday last week. This has allowed the market to form and maintain a tight range of the past couple of weeks above support at 75.10. This pair tends to be taken as a gauge for risk appetite, and another rally this morning shows the continued improvement. The question is whether the bulls can complete a potential two month base pattern. As the market has moved to a two week high above 75.90 this morning, the resistance band 76.25/76.40 is a crucial barrier here. Could momentum indicators hold the key? The RSI is rising again and a move into the 60s would be a signal of strength. The MACD lines are moving above neutral and Stochastics are ticking higher again. The importance of support at 75.10 is growing ever greater. Closing above 75.90 today would certainly be another encouraging step towards the test of key resistance. The hourly chart shows support 75.75/75.90.
There is a slight positive bias that runs through EUR/USD for now, which has neutralised the outlook. Holding the support of the key reaction low at $1.1180 was crucial last week, whilst closing above the old pivot at $1.1265 is also a gauge for the market. The hourly chart shows that $1.1235 is now a new basis of support to work from too. However, this is still a market almost too close to call. The pair is trading almost bang in the middle of the 300 pip five month range, trading in the midst of moving averages which are all but flat. Momentum indicators have ticked higher in recent days, but again for now, lack conviction. Initial resistance at $1.1270/$1.1285 is holding back the bulls, whilst overhead supply between $1.1310/$1.1350 is also restrictive. A difficult play right now.
Cable remains in recovery mode, however, the move higher is now beginning to move into questionable territory once more. There is a band of resistance starting around $1.2600 up towards $1.2650 which will gauge the strength of the recovery. With the RSI into the mid-40s this is beginning to be a move into an area which is seen as exhaustive for any potential rally. Given the strength of Friday’s session, but also recent history, there could be further momentum in the move. The Stochastics have recent moved higher, whilst MACD lines have also edged higher. The June rebound added over 250 pips and RSI to the low 50s before failing. This current move is less than that (c. 150 pips) and still looks to have upside potential. We continue to view rallies as a chance to sell, so this is a rebound that needs timing. The hourly chart still looks to be positively configured for the bounce. Initial support at $1.2545, with $1.2505 now key.
It has been a choppy few sessions, but there is a real struggle now for the dollar bulls to hold on to gains. The recovery trend has been decisively broken and the strength of Friday’s decline into the close reflects a new outlook that rallies are being seen as a chance to sell. This comes with the momentum indicators all rolling over around levels where the medium term sellers will be interested. The RSI back under 50, whilst the MACD lines also failing around neutral and Stochastics also bear crossing lower. The key resistance is 109.00 but the reaction of Thursday into Friday for a lower high at 108.60 reflects that the old band around 108.50 is again restrictive. The initial support is at 107.80 and needs to protect 107.50 as a breach of what is now the July low and a higher low (above 106.75) will be a key gauge to reflect renewed bear control. Another failure under 108.50 would be a real concern for the dollar bulls now.
The mid-range consolidation above the old near term pivot at $1400 is helping the bulls to settle down after a tumultuous few weeks on gold. The market is holding on to support just as the momentum indicators drift off. Coming in a rising market, a negative divergence would be a concern. However, the bulls will be encouraged that they are managing to hold support in a consolidating market, which is allowing overstretched momentum to renew upside potential. Bolstering the support at $1381.50 was key last week and now the support building above $1400 (and the 23.6% Fibonacci retracement at $1398) is key. For now, this is a neutral position within the range, however, all the time the bulls restrict selling pressure, their confidence will grow. Initial resistance is at $1426 and for now there is a lack of direction. However, holding support will be all important for the bulls now, with $1401 (Thursday’s low) adding conviction. Gold may be in wait and see mode for now, but the bulls will be the happier still.
The consolidation from the breakout above the resistance band $59.60/$60.30 continues, with a second small bodied, small ranged candlestick completing on Friday. How the bulls respond around the breakout support is the initial test of their control. The 50% Fibonacci retracement at $59.60 is supportive, as it provided the basis of resistance in late June, and the old resistance has become new support. For now, they are hanging on in there, but the very slight negative lean on the candles shows that this test is growing. The marginal positive configuration on momentum is still there, but again, the bulls need to be careful not to let the unwind develop too much. For now, the outlook is to look at weakness into support as a chance to buy. The support of the uptrend comes in at $58.70. Initial resistance is at $60.95.
Dow Jones Industrial Average
The Wall Street bulls are gathering momentum as the market gallops into further new high ground. Another solidly strong session, with a candlestick opening at the lows and closing at the highs. Confidence is high and on a technical basis there is little to be concerned by. The strength of the run higher has taken the RSI into the mimd-70s now, which is the highest since September. The bulls will though be mindful of this, as these moves on the Dow are rare and profit-taking to skim some of the cream off the top is increasingly likely at this stage. A minor retracement would give the bulls a chance to re-assess. There is a gap open at 27,088, whilst the recent breakout at 26,965 is the first line of support now. The uptrend of the past four weeks comes in at 26,820. The strength of momentum suggests that corrections are a chance to buy. Such is the strength of the run higher, there is no overhead resistance right now.