The Congressional testimony of Fed chair Jerome Powell could be crucial for markets today. There has been a significant shift in outlook in the wake of the stronger than expected Non-farm Payrolls report on Friday. Yields and the dollar have jumped higher as traders rush to scale back their pricing for potential rate cuts from the FOMC. How Powell comes across today could cement expectations for the next three weeks ahead of the next Fed meeting at the end of July. Markets have been gradually consolidating and ahead of the testimony this is likely to continue. Powell will have several factors that he needs to weigh up. There is a slowing global economy, but the US continues to hold up relatively well. Is there really a need to rush ahead with an insurance rate cut? Even then, it could be one and done (at least for now). Powell will likely tread a careful line, but he could see this as an opportunity to usher the market into a less dovish positioning so that the Fed can keep its powder dry without causing a huge stir. Furthermore, today is a political tightrope too, with President Trump (and Larry Kudlow) seemingly trying to put pressure on for lower rates. It could be an uncomfortable day for the Fed chair. Away from the US, Chinese inflation for June was mixed. Chinese CPI stayed at 2.7% in line with expectations (+2.7% exp, +2.7% in May), however, there was a larger than expected drop in Chinese PPI to 0.0% (+0.3% exp, +0.6% in May). This reduces the pressure on the PBoC to ease, but there has been little market reaction on markets.
Wall Street was mixed into the close last night, with the Dow a shade lower, whilst the S&P 500 was +0.1% at 2979. US futures have continued this theme of consolidation, currently around -0.1% weaker. This has impacted on Asian markets which have been slightly weaker overnight with the Nikkei -0.2%, and Shanghai Composite -0.4%. European markets are also set to be a touch lighter today with FTSE futures -0.1 and DAX futures -0.1%. In forex trading, there is a mixed outlook across the majors, however, there is ongoing underperformance of GBP. In commodities, the intraday rebound from gold yesterday is slipping back again, whilst the big mover today is a bounce on oil after the surprise API inventory drawdown.
After a quiet couple of days, the economic calendar starts to ramp up somewhat today. Starting with UK monthly GDP for May at 0930BST is expected to have improved by +0.3% (from a decline of -0.4% in April) whilst this means the year on year reading remains at +1.3% (+1.3% in April). UK Industrial Production also at 0930BST is expected to bounce back by +1.5% in May (after a huge monthly drop off of -2.7% in April) with the year on year rebounding to +1.0% (from -1.1% in April). The Bank of Canada monetary policy decision is not expected to show any change in rates at +1.75% (+1.75% last). EIA oil inventories are at 1530BST which are expected to show crude oil stocks in drawdown of -3.6m barrels (-1.1m barrels last week), with distillates stocks building by +1.4m barrels (+1.4m barrels last week) and gasoline in drawdown by -1.2m barrels). The FOMC meeting minutes for the June meeting are at 19000BST with traders looking for further hints as to the potential for members to waver into cutting in the next meeting.
Even though there is a more significant economic calendar today, the big focus comes with the Congressional Testimony of Fed Chair Powell at 1500BST. Chair Powell speaks before the House Financial Services Committee (on Day 1 of 2), with this likely to be a perfect platform for Powell to guide for the next move of the Fed. With a rate cut in the meeting at the end of July decisively priced in, will Powell use this as an opportunity to guide the market back a little? The FOMC’s James Bullard (voter, dove) is also due to speak at 1830BST.
Chart of the Day – AUD/USD
The dollar strength is hitting on the Aussie once more. We have written previously about the long term pivot resistance around $0.7000, but in fact this is a band between $0.7000/$0.7050 and once more this capped the recovery. The market has subsequently topped out a recovery and a close below $0.6950 now implies 100 pips of correction to $0.6850. This comes with momentum sell signals. A bear cross on Stochastics is tracking lower, whilst also now followed by a sell signal on MACD lines. RSI below 50 all now confirmed that intraday rallies are a chance to sell. All come with downside potential. It means that the key May and June lows between $0.6830/$0.6860 are now likely to be tested. The neckline of the near term breakdown at 0.6950 is now a basis of resistance. The hourly chart shows a strongly negative configuration now and hourly RSI around 50 or MACD lines around neutral would be a chance to sell. There is minor initial support at $0.6900.
The renewed dollar strength continues to weigh on EUR/USD, forming another (marginally) negative candlestick yesterday and testing the resolve of the key support at $1.1180. Technical signals are still corrective, with the MACD and Stochastics lines falling towards negative configuration, but it is interesting to see the RSI continuing to hold above 40. The daily chart shows a run of lower highs and lower lows in the past two weeks, in a move taking the market below all the moving averages. With correctively configured momentum indicators, this suggests selling into strength. There is a degree of consolidation this morning (caution in front of Fed Chair Powell’s testimony) and this is beginning to test the downtrend on the hourly chart. Resistance at $1.1235 and more importantly at $1.1265 is a barrier to any recovery, with further test of $1.1180 preferred. Powell is a clear risk to near term positioning today and needs to be watched.
The medium to longer term outlook took another hit yesterday as the support band $1.2505/$1.2475 was decisively broken. The run of negative candlesticks over the past couple of weeks continues to build and intraday strength is a chance to sell. With strongly negative momentum configuration, the prospect of further downside is high. The only caveat could be the RSI which is now around 30. Given the breakdown, this should not necessarily be restrictive, and there could easily be some volatility around Jerome Powell’s testimony today. We continue to view any move to unwind on Cable as a chance to sell. The hourly chart shows resistance sitting between $1.2480/$1.2500 (effectively the old floor), with the falling 55 hour moving average also a good gauge (around $1.2490). The hourly RSI tends to run out of steam around 50/55. Initial support at $1.2435, but ultimately the breakdown has opened $1.2350 and $1.2100.
The improvement continues to develop and a second decisive close above 108.50 increases the prospect that this is a base pattern formation. We have discussed about closing above 108.80 completing the turnaround and this is now coming. With momentum indicators pulling the market higher, the outlook is increasingly turning a corner. The market just needs to decisively pull clear of 108.80 now to really break the shackles. It would imply 200 pips of further recovery target and suggest that a return to test the medium to longer term pivot band 109.70/110.00 is forming. With Powell’s testimony today, this could be a crucial session as to whether the green light on this move comes. Initial resistance is at 109.00. There is a slight caveat with the very marginal negative divergence on the hourly chart momentum indicators, which needs to be watched. Powell could be pivotal today.
The threat of correction is still present, but the bulls responded well yesterday to close marginally higher on the session. However, the weight of correction is growing on the momentum indicators with RSI faltering below 60, whilst MACD and Stochastics deteriorate from their bear crosses. The importance of support at $1381.50 is significant now. A closing breach would complete a double top pattern and imply around $55 of correction. It seems as though the 23.6% Fibonacci retracement is providing a basis of resistance now around $1398. The negative bias is reflected in the hourly chart with the series of lower highs and corrective configuration on momentum indicators adding pressure with intraday rallies being sold into. Jerome Powell could be a defining factor for the near term outlook, but it would need a decisive move above $1410 to drive a move positive move now. Pressure on $1381.50 is still preferred. A closing breach of $1381.50 opens the next support band $1348/$1358.
The oil price has taken a boost from the larger than expected API crude inventories drawdown overnight. This means the market is this morning testing the technical resistance overhead. The ten week downtrend is now at $58.90 whilst the falling 55 day moving average is a basis of resistance at $58.65 today). Momentum indicators have been slightly uncertain recently, but are responding well to the uptick this morning. However, the bulls will be concerned that traction of the recovery has been lacking in recent sessions and a failure to hold on to this early jump could add corrective pressure. This is all coming under the trend and 55 day ma, whilst also the strengthened resistance around $60 (and the 50% Fibonacci retracement at $59.60). Can the bulls breakout? There is key near term support at $56.05 whilst $57.30 is a minor higher low. How the market reacts in the coming sessions could be crucial to the near to medium term outlook.
Dow Jones Industrial Average
The Dow continues its recent lull as support of the three week uptrend has been broken. The bulls have taken their foot off the gas and the run higher that moved the market to all-time highs is now slipping back. However, there is still yet to be any real corrective signals. The RSI remains above 60, whilst MACD lines have converged (yet to turn down) and Stochastics simply suggest caution. This just looks to be a drift off during a quiet period of trading on Wall Street. A breach of the higher low at 26,465 would be the trigger signal for a growing correction, but for now this is just wait and see mode. Yesterday’s third successive negative close coming with a marginally positive candle suggests the bulls are not quite ready to give in. Resistance is growing at 26,966, but real direction is yet to come.