The dollar has come under increasing pressure in recent days in a move that has now driven the greenback down to levels not seen since Q2 2018. With Treasury yields falling along with a bull flattening yield curve, whilst fx futures positioning continue to reflect a market massively short USD, the dollar seems to be in the midst of a perfect storm right now. The lack of consensus amongst US politicians has certainly played a role in the dollar weakness, with a package of fiscal support measures still some way off. Perhaps though there is some movement to come on fiscal support, with the Democrats supposedly willing to cut their demands “in half”. It is interesting to see this has just steadied a rocky boat for the dollar this morning (pulling gold also lower), but the storm has not cleared yet. A weaker dollar helps to fuel US equities on a bull run, and we saw the S&P 500 touching all-time highs during yesterday’s session. The Fed minutes will certainly be eyed today, with traders looking for any signals of further imminent easing. Away from the US, Japanese trade data has come in slightly better than expected overnight. UK inflation has also surprised sharply to the upside this morning, similar to the US data surprise last week, and again likely to be a knee-jerk to economy re-opening and unlikely to be sustaining.
Wall Street closed slightly higher with the S&P 500 up by +0.2% at 3390, whilst futures are a touch higher with E-mini S&Ps up by +0.1%. Asian markets have been mixed to slightly positive overnight, with the Nikkei +0.3% higher whilst the Shanghai Composite -1.0%. In Europe, the shade of positive sentiment is meaning FTSE futures and DAX futures are +0.1% early this morning. The forex, majors reflect the risk positive angle, with JPY the primary underperformer, whilst USD is also still relatively weak. AUD and NZD are performing well. In commodities, there is a slight moderation of yesterday’s gains, with gold and silver around half a percent off. Oil is just under -1% lower as traders look to the OPEC+ meeting today.
There is little of real note on the economic calendar through the European morning aside from the final Eurozone inflation data for July. Eurozone final HICP is at 1000BST and is expected to be . In fact, there is not much until the EIA crude oil inventories at 1530BST which are expected to be unrevised. Headline HICP at +0.4% (+0.4% July flash, +0.3% final June), and core HICP is expected to be +1.2% (+1.2% prelim July, +0.8% final June). Into the afternoon, the EIA Crude Oil Inventories are at 1530BST and are expected to show a drawdown of -2.5m barrels (-4.5m barrels last week). The big focus of today comes with the FOMC minutes for the monetary policy decision of 29th July. Focus will be on any hints towards further policy easing measures.
Chart of the Day – AUD/USD
There are days when picking the “Chart of the Day” is somewhat of an onerous task. Today, there has been a plethora of options, but the Aussie is certainly one of the more interesting charts nonetheless. With the ongoing strength in performance of the Australian dollar against US dollar in recent weeks, the Aussie did not need much to drive for the next upside break. The original breakout above the old June high of 0.7060 held this perfectly as support in recent weeks as the market has built higher. Yesterday’s break above resistance at 0.7240 may not have held ground into the close (the session ended bang on 0.7240), but it does show that the bulls are ready to make the next move. A decisive move clear of 0.7240 would be the latest bull move that would open 0.7295 and 0.7395 which are resistance from late 2018. Momentum indicators are swinging higher in positive configuration with upside potential, all suggesting that intraday weakness is a chance to buy. The 21 day moving average (today c. 0.7165) has been supportive as a basis for the bulls to gauge their buying opportunities for several months now. Initial support is at 0.7130/0.7190 whilst it would need a close below 0.7060 to change the outlook now.
Breakout for EUR/USD. For the past few weeks a consolidation rectangle has been forming. The pattern threatened to form a top just over a week ago, but support at 1.1695 held firm. The threat could not be sustained and in the course of the past week, there has been a shift in sentiment. The euro has now put together five positive candles in a row, culminating in a closing break above 1.1915. This completes what looks to be a classic breakout from a consolidation rectangle. The move implies +220 pips of additional upside now towards 1.2135. The longer term chart suggests that once 1.2000 psychological resistance is cleared, there is little to really hold back a rally until 1.2170/1.2200 from early 2018 levels. Momentum is strong, with daily RSI swinging higher into the 70s, Stochastics pulling into the 80s and MACD lines ready to pull higher too. We look to use intraday weakness as a chance to buy now. The 1.1915 is initial breakout support, but 1.1865/1.1915 is a decent buy zone now. Initial resistance is at 1.1965 from yesterday’s high.
Breakout on Cable! The market has been edging higher in recent sessions, but the bulls really took off yesterday, forming an impressively strong positive candle in a session that closed around +130 pips higher. Not only has Cable broken through the near term resistance at 1.3385, but closed above 1.3200 in a move to clear the March resistance and take the market to a new high for the year. The inference of the breakout from a consolidation rectangle is +205 pips in the coming weeks, implying 1.3390 as a target. Momentum indicators reflect an increasingly strong outlook, with RSI is into the 70s, whilst Stochastics are bullish and MACD lines are threatening to move higher. It all points towards using intraday weakness as a chance to buy now. The old 1.3185/1.3200 resistance area is now supportive and an opportunity. The hourly chart shows stretched momentum but any unwind towards 50 on hourly RSI tends to be around where the bulls are re-ignited. Below 1.3130 would now be a disappointment. Beyond 1.3285 the resistance is the 1.3515 December high.
With a third decisive bear candle, the outlook for Dollar/Yen has taken a decided turn for the worse. The sharp closing breach of 106.00 confirms the renewed corrective outlook, whilst the deterioration in the momentum indicators shows a significant shift in sentiment. A bear cross on Stochastics is a third in the past three months and each time previously comes to call the market lower in due course. Although the market has engaged an intraday rebound this morning from 105.10, there has been a breach of the higher low support at 105.30 and we can now expect near term rallies to fade and the sellers to pounce upon any rebound opportunity. We expect further weakness below 105.00 and a likely move back to test 104.17 in due course. The old 106.00 floor becomes a basis of resistance once more. On a medium term basis, the band between 106/107 now represents a huge area of resistance that the bulls will find very difficult to overcome.
The renewed recovery on gold has been progressing well in recent sessions. Closing back above $2000 was a positive signal, and now we look to use near term weakness as a chance to buy. It was interesting to see that the intraday spike lower on gold rebounded from $1977, all but maintaining the support around $1980. Furthermore, this is an area where the recovery uptrend sits on the hourly chart today. It means that the near term support at $1977 will be an interesting gauge. If this is broken, it would effectively complete a small top pattern and could drag gold back towards the $1940 area of support again. Additionally, if this support is breached, then it would suggest that the bulls may not be about to have the gold market all to themselves. Perhaps a more choppy market would begin to develop. We would still favour buying into supported weakness in this market though. Given the longer term bullish outlook for the technicals (and fundamentals for that matter), we are far happier sitting long on gold. The daily chart shows $1929 is the first real support of note as a higher low, which is also around the 23.6% Fibonacci retracement of the 5 month bull run from $1451/$2072. Near term resistance is at $2015 from yesterday’s high now. This morning’s little decline may just be a near term blip still, but how the market responds around $1977/$1980 support could be very important for the near term outlook.
Brent Crude Oil
The oil price continues to struggle to push higher even in its ongoing positive configuration of higher lows. Breakouts lack traction, but equally there is a lack of selling pressure either. We favour long positions, but it really is a slow burn. Since the latest breakout began to fade at $46.25 a couple of weeks ago, the market has formed a consolidation band above $44.25. A couple of positive candles in the last two days give hope that perhaps something is building once more, but the market has opened cautiously today. The OPEC+ meeting will certainly be eyed for potential volatility today. Closing below $44.25 would be a disappointment, but as long as $41.30 remains intact, then the bulls will still have their higher lows intact. They will instead be looking to test $45.80/$46.25 for the next breakout which would take the market clear of resistance and open the $50s. Momentum is positive but muted.
Dow Jones Industrial Average
The Dow continues to struggle as the drift back of the past week has unwound the breakout. Pulling back from last week’s high of 28,155 the market has again closed slightly lower. An unwind back to the breakout support at 27,580/27,625 is now being seen. We discussed yesterday as to what the implications of this mild negative drift would be. We still believe that it is nothing to be overly concerned by and will likely be a move to renew upside potential. Momentum indicators are still positively configured even if the RSI is just tailing off slightly. Ideally the market will look to use 27,580/27,625 as a basis of support and platform for the next leg higher. However, whilst the support above 27,070 remains intact then the bulls will be in a good position to use near term weakness as a chance to buy. Resistance at 28,155 is clear, whilst yesterday’s high bang on 28,000 adds to the near term barrier to gains. We continue to look towards the bulls being in control to push the recovery forward in due course.