There have been key breakouts across major markets in recent days. The one recurring theme linking it all together seems to be one of selling pressure on the dollar. The puzzle pieces appear to have all fallen into place for selling the dollar. There are daily headlines of COVID-19 infection rates, accompanying increasing number of US states re-introducing lockdown procedures. This is coming just as the EU-27 have agreed on a fiscal stimulus package that involve the joint issuance of debt, a move that shapes a far more stable union moving forward, boosting the euro. Furthermore risk appetite has had a shot in the arm too from a series of positive COVID-19 vaccination/treatment tests. In the background too, tit for tat moves between the US and China (this time over shutting consulates) continue to play out. Subsequently we see a rare event where the market is buying US equities (on the risk positive lean) and buying US Treasuries (on fear of the impact on the US economy in the coming months). The dollar is getting hit across major currency pairs, and commodities are pulling sharply higher. The question though becomes whether there begins to be a bout of profit taking on these moves.
Wall Street closed higher once more, with the S&P 500 +0.6% at 3276. US futures are marginally higher once more, with the E-mini S&Ps +0.3% this morning. Asian markets were mildly lower overnight, with the Shanghai Composite -0.4%, whilst the Nikkei was shut for a Japanese public holiday today. In Europe, a mildly positive early move with FTSE futures +0.4% and DAX futures +0.5%. In forex, there is an ongoing risk positive, USD negative theme as we see USD underperformance across major pairs, with AUD and NZD performing well. In commodities, perhaps an early sign of stalling (or maybe reversal) with silver -0.7% lower, and gold +0.2% higher. The oil breakout is holding, another +0.5% higher today.
It is another quiet morning for the economic calendar. Into the US session, the US Weekly Jobless Claims are at 1330BST with another 1.300m claims expected in the past week (after 1.300m previously). Eurozone Consumer Confidence is at 1500BST and is expected to show a recovery in July to -12.0 (from -14.7 in June).
Chart of the Day – AUD/USD
As risk appetite has taken off and the dollar has sagged, a raft of major markets broke through key levels earlier this week. One key major which has confirmed its breakout was the Aussie. For the past month the market has effectively been in a consolidation range between 0.6775/0.7060. A shallow uptrend has been tracking the move higher since May, but Tuesday’s decisive move above 0.7060 confirms the market is pushing forward once more. Taken as a rectangle breakout or an ascending triangle, the implied target is similar, a move higher by around +285 pips towards 0.7350 in the coming weeks. Standing in the way is historic overhead resistance around big figure levels, with 0.7205 (April 2019 high), 0.7285 (January 2019 high) and 0.7395 (December 2018 high). However, momentum is strong still with the breakout, with RSI above 70, Stochastics above 80 and MACD lines rising off a bull cross. There is strong breakout support now between 0.7000/0.7060 which is a good are to look for opportunities on a pullback.
Following the breakout above key resistance of $1.1490/$1.1500, the euro just continues to climb. Another strong bull candle yesterday and the momentum with this bull run is still strong. There have now been four strong bull candles in a row, and eight of the past nine sessions too. The market seems to really have taken a view, and this is coming with both EUR strength and USD weakness. Given the strength of the bull run and clearance of such important resistance (even minor resistance at $1.1570 has also been cleared), we are happy to continue to back this bull run higher. The market has once more started well today and there is an appetite to continue to buy into even intraday weakness. The next key resistance is not until around $1.1800. However, even though momentum is strong we must also be mindful that the daily RSI is into the mid-70s now, a position which tends to be consistent with exhaustion. So, we must be on alert for potential exhaustion signals and profit-taking. There is initial support at $1.1560 today, whilst $1.1505/$1.1545 houses near term support from yesterday. Support is good in the band $1.1490/$1.1500 and further back at $1.1350/$1.1420.
Backing a sterling rally should still come with a health warning. Yesterday’s session reflects this, with an intraday drop of -90 pips, only to entirely retrace those losses and rebound +90 pips off the day low into the close. An almost perfect doji candle does serve as a warning for the run higher, but for now the bulls still have control as the market has opened marginally positively today. The move above the big seven month downtrend and resistance at $1.2670 was a key moment earlier this week, which effectively opens the door to a test of $1.2810. Given the ongoing dollar weakness, this is a move that still seems to be on. Momentum is positive, and for now, weakness is being bought into still. We prefer a test of $1.2810 but at this stage are wary of calling an upside break from the medium term trading range. The support of $1.2640/$1.2670 is growing in importance for the bulls to maintain momentum to put pressure on for a medium term breakout.