Fed chair Powell’s Congressional testimony effectively confirmed that the Fed was to start a rate cutting cycle in the July meeting. This means that the dollar has now likely peaked in 2019. However, equally, given the US economy remains the best of a bad bunch, the dollar will play out as a range trade in the coming months. There will be noise, mostly given the fact that US data broadly remains positive. However, the Fed is looking overseas where central banks are throwing off dovish signals left, right and centre. The South Korean central bank overnight is the latest to cut rates. Back in the US, President Trump continues to discuss the prospect of tariffs on China, and the reported lack of progress in the trade talks add into the feeling that there is no quick fix to the slowing global growth environment. This means that the safe haven plays such as gold, the yen and Treasuries continue to have their appeal. Yesterday’s negative US housing data and concerns over the progress of US/China discussions have driven the latest move into safety, but also seen the dollar slip back again. Until we know exactly how the Fed is set to guide for monetary policy in the coming months, these conditions are likely to hold. One move overnight has been interesting, with the Aussie moving on Australian employment data. Whilst unemployment stayed at 5.2% (5.2% exp, 5.2% last), and the employment change was just +500 (+9,100 exp), with underemployment falling more than expected this has supported AUD (apparently an important indicator for the RBA).
Wall Street closed solidly lower as a near term correction has set in with the S&P 500 -0.7% to 2984 and US futures a further -0.2% lower today. This has hit Asian markets overnight with the Nikkei -2.2% and Shanghai Composite -0.8%. European markets are also following suit with FTSE futures -0.4% and DAX futures -1.0% in early moves. In forex, there is a continuation of yesterday’s move against USD, with broad underperformance across the majors (with the exception of CAD), whilst AUD is the outperformer. In commodities, there is a slight unwind of gold after yesterday’s strong gains, whilst oil is trying to find some support after recent selling.
For the economic calendar, the final of the three major UK data points comes in the form of UK Retail Sales at 0930BST. The month on month ex-fuel data for June is expected to show a decline of -0.2% in June (having dropped by -0.3% in May. This would however, with a hugely strong May 2018 dropping out of the data, this translates to growth of +2.7% on a year on year basis in June (+2.2% in May). Later in the session, the US Philly Fed Business Index is at 13330BST which is expected to improve back to +5.0 in July (up from the +0.3 from June). Weekly Jobless Claims are at 1330BST and are expected to increase to 216,000 which remains low on an historic basis.
Chart of the Day – German DAX
In the past week we have been discussing the prospect of the DAX topping out. The price action in the recent sessions has continued to play into this prospect. Topping out at 12,656 the market breached support an old breakout around 12,440 and this has now a pivot level acting as a basis of resistance this week. Yesterday’s decisive negative candle bolstered this resistance as the rally failed at a high of 12,465. Early selling today has added to the corrective momentum and increases the prospect that the market is forming a reversal pattern. The importance of the support at 12,300 (last week’s low) has been growing in importance as this protects the more considerable support at 12,190. Already we see the RSI at 5 week lows and a close under 50 would add to growing negative momentum. Furthermore, MACD lines are continuing to slide with Stochastics subdued below neutral. Momentum indicators are set up for continued near term retreat back to test 12,190. The hourly chart shows the market turning corrective as it falls back below the hourly moving averages. RSI failing at 60 and a bear cross on hourly MACD lines (the last one came at the 12,656 high). A close below 12,300 would now form a near term lower high (at 12,465) and a lower low.
For the past week, we have been discussing about the dollar having lost its outperformance across major currency pairs. This will be a choppy trading phase now (much of which data driven) but the dollar will lack a consistent trend now. Price action on EUR/USD reflects this. A sharp move lower earlier this week (on positive retail sales) and now a rebound (on weaker housing data). Technically, once more we see the support of $1.1180/$1.1190 (two recent key lows) holding. A positive candle yesterday is being followed by additional gains early today as the market is supported above $1.1200. This is a market lacking direction for now, with mixed technical signals. The RSI is oscillating around 50 (latterly pulling slightly higher towards 50) whilst MACD lines are relatively calm around neutral. We spoke yesterday about how the bulls needed to reclaim above $1.1235. After an initial test yesterday, this has been achieved today and the market is edging back towards $1.1265, the old pivot line. The choppy neutral outlook continues.
We continue to see rallies as a chance to sell. Lower highs and lower lows form on a consistent basis on Cable. Yesterday’s rebound and mild positive candle was on a dollar unwind across the majors. The weakness on sterling is set to continue and this will prevent any sustainable recovery. The market has bounced back into the band of overhead supply between $1.2435/$1.2505 which is a sell zone now. Any move that helps to renew downside potential is an opportunity for the Cable bears. On the hourly chart there has been a move to unwind momentum back towards neutral and this should help to enable the next lower high into resistance. The reaction high at $1.2580 is key resistance near term.
The dollar has come back under pressure in the past 24 hours, forming a negative candle in yesterday’s session and additional downside this morning. The move has also breached what had been growing support at 107.80 in a move that brings the pair to the brink of another decisive technical shift. The higher low at 107.50 is a key support that has been holding a neutral outlook within the range 106.75/109.00. However, in the wake of renewed selling pressure, the momentum indicators are turning sour once more. MACD lines are on the brink of a bear cross under neutral, whilst Stochastics are falling too. A move on the RSI under 40 would really put the pressure on. A close under 107.50 would re-open the 106.75 key low and turn the outlook negative again. Initial resistance at this week’s high of 108.35.
It would appear that the bulls need an excuse, any excuse, to go on a run again. Yesterday’s session shows that this trading range of recent weeks is still charged with underlying positive intent. We have been discussing about the pivot support at $1400 and the 23.6% Fibonacci retracement at $1399 as being a key near term gauge. These levels produced the springboard for another leap higher, adding a strong close and a bullish engulfing candle. Closing at a two week high, the move has broken a mini run of lower highs and puts the bulls back in the driving seat again. The key now is their response. Previously within this range, a strong bull session has been followed by retracement. Although the market is holding on to the break above $1400, there has been a lack of trend to continue the bull run. However, momentum has unwound and looks ready to go again. What we have seen though is a close at multi-year highs and this could help the bulls to find conviction to test the intraday highs of $1436/$1439. The importance of support at $1400 is growing.
As oil formed a fifth consecutive negative candle yesterday, the corrective aspects of the near to medium term outlook continue to grow. Momentum indicators are deteriorating, with the Stochastics accelerating lower from a bear cross and the RSI below 50. The MACD lines are also threatening what would be the first bear cross since the top back in April. An intraday rally petered out into the close yesterday and the downside pressure is growing. Initial support at $57.05 was breached and becomes a basis of resistance now today. There is a band of resistance $57.00/$58.40 now. The market is eyeing a test of the key higher low at $56.05 and a breach would be a significant blow for the bulls, should it occur.
Dow Jones Industrial Average
The breakout to all-time highs has just gone into reverse in that past few sessions. Yesterday’s second successive negative session, with a bear candle closing at the low of the day suggests the bulls have gone into retreat for now. As yet, this is all playing out within the scope of being a near term unwind back towards a four week uptrend. There is good support around the latest breakout at 26,965 which is around the trend support too (c. 26,950 today). Momentum has just ticked a shade lower, but again nothing that should be considered too worrying for the bulls. RSI back under 70 is not an issue unless it dropped back into the 50s. MACD and Stochastics remain positively configured too. Resistance is at 27,399 which is the all time high. For now we continue to see corrections into support as a chance to buy. This would change on a breach of 26,665 higher low.