The capacity for this bull run to continue higher has been given a boost once more as the European Central Bank announced a larger than expected increase to its pandemic support programme. The risk recovery is back in full swing after the ECB increased its Pandemic Emergency Purchase Programme by more than expected at a further €600bn. The euro has been a big beneficiary to this move, but risk appetite being strong is a big negative for the dollar right now, which is getting hit hard again across its major pairs. The one exception is versus the uber safe haven Japanese yen. The big story has now become just how far a recovery on the euro can go. The policy action of the ECB has suggested that the central bank will be the ultimate backstop during this pandemic and the prospect of massive purchasing of government debt for the next 12 months, it is significantly reducing the risk premia for the euro. It is leading to a key re-rating of the euro. However, with such a huge move, also comes the risk of near term profit-taking, but for now the run remains on track. Today the focus turns to the US labor market and Nonfarm Payrolls for May. The consensus expects another 8m jobs to have been lost and unemployment to have soared to close to 20%. However, unemployment is backward looking data, and the economy beginning to come out of lockdown will not be factored in to the data to any real extent. Whilst any negative surprise would still jolt the market, the appetite to buy into this FOMO (Fear Of Missing Out) rally will still be a dominant factor, especially as traders see central banks still willing to backstop the whole game.
Wall Street picked up off its lows of the session to close only marginally lower on the S&P 500 (-0.3% at 3112). US futures have also kicked on again today, with the E-mini S&Ps +0.8% initially. Asian markets have been positive with this, as the Nikkei closed +0.7% higher and Shanghai Composite +0.3% higher. European markets also retain positive momentum, with FTSE futures +0.9% and DAX futures +1.4%. In forex, the risk positive bias remains strong, with AUD and NZD once more soaring higher, whilst GBP is breakout out versus the dollar and EUR also continues to run. The big underperformer remains JPY. Commodities show and oil price which continues to run higher, whilst gold and silver are mixed.
Today’s economic calendar is dominated by US jobs report. The US Employment Situation for May is released at 1330BST and it is expected to show some eye watering numbers once more. The headline consensus is for Non-farm Payrolls of -8.000m (after an incredible -20.537m last month). The Unemployment rate is expected to increase as a result to 19.8% (from 14.7% in April). There is also expected to be another increase to the Average Hourly Earnings by another +1.0% on a monthly basis to a year on year +8.5% (+7.9% in April). Also watch for the laborforce Participation Rate which fell to 60.2% last month.
Chart of the Day – EUR/JPY
There is a massive re-rating of the euro underway. This is driving EUR crosses higher in unison, but one of the key movers has been EUR/JPY. The cross has smashed through months of resistance in recent sessions with what is now nine consecutive positive closes. The last three consecutive bull candles have been massive too. The move barely paid any notice to the resistance of the February highs around 121/121.40 and during yesterday’s latest smash higher, went through 122.85 which was the January high. In four weeks, the cross has moved from three year lows to a one year high, adding 9 big figures along the way (almost +8%). We turned bullish two weeks ago and the move has gone way beyond our near term expectations (which was 121.00/121.40). This is a market that pays little respect to resistance right now, with the next levels of note 125.20 and 126.80. It does though leave the market massively stretched near term and at risk of at least some initial profit taking in the coming sessions (even if this euro re-rating is an ongoing move). This leg of the re-rating will likely be a run ended by exhausted momentum and when bull runs go almost exponential, it is a time to be a little wary too, and to potentially tighten profit-trigger levels.. The volatility means that it is a difficult market to time, but looking for signs of negative divergence on the hourly chart may give a clue. The latest breakout support band 122.50/122.85 would need to hold to sustain the momentum of the bull run. A loss of 121.80 support (yesterday’s low) would likely induce a corrective move, but for now the bull run continues.
The rally on the euro has been incredible. It was clear from the price action yesterday that we were not the only ones in being a little nervous of how much further the move could go in the near run. Trading around -50 pips lower ahead of the ECB, the feeling was that the move had could be coming to a halt. However, with a larger than expected expansion of the ECB’s PEPP programme EUR got another boost from the jet-pack once more. The run formed another huge bull candle, for 8 consecutive positive closes in a row and is continuing higher today. Momentum is also extremely strong with RSI into the high 70s (the massive volatility of March saw the RSI top out at 80), MACD lines accelerating higher and Stochastics strong. Given the nature of this move, it now enters very difficult territory. Clearly the euro has gone a long way in a very short space of time. With the market now pricing in the ECB move, the run could now begin to be subject to profit-taking. SO we must look to the hourly chart for signals. There is no evidence of negative divergence yet though. Watch for hourly RSI dropping back below 40 and MACD lines below neutral for an indication. Initial support at $1.1310 may also be a gauge today. For now we run with this euro move, but it is with increasing caution and believe that tightening profit triggers may be wise.
The selling pressure on the dollar continues to pull Cable higher. It has looked in recent days though the bulls were losing steam, but once more this morning there has been another push higher. The move is now looking to break clear of the April highs of $1.2645. Already we have seen an intraday move above the resistance. A closing breakout would be a positive signal, but also leans the outlook into difficult territory. Right now the dollar weakness is relentless, and if this is part of the structural weakness of the greenback then Cable will be able to sustain the move higher. However, although near term technical signals are bullish, they have also gone a long way in a short amount of time. We have been wary of profit-taking in this rally and a closing breakout could be similar to the move which saw the $1.2160 support broken three weeks ago. This move will continue whilst risk appetite remains positive. But if the dollar begins to regain some support, then Cable will see a pull lower. A closing breakout above $1.2645 needs to hold that break to prevent profit taking. Watch for hourly negative divergences as early signals, but for now all technicals still point to the market moving higher. Initial support this morning at $1.2580 with $1.2500 as an initial higher low.
Dollar/Yen continues to track higher following the breakout of resistance at 108.10. The move (which is effectively a c. 200 pip base pattern) implies a run towards 110.00 in the coming weeks. A third consecutive positive close and positive candle reflects a growing appetite to buy the pair into weakness (or at least an appetite to sell the yen). The key test remains the how the market responds to the resistance of the April high at 109.35. This test is underway this morning. A closing break above 109.35 opens for the 110.00 target, whilst the next important resistance is not until 111.70. Momentum indicators are well set up for the test, with RSI into the mid to high 60s, whilst MACD and Stochastics pull higher into positive configuration. Weakness looks to be a chance to buy. Near term higher lows of 108.40/108.60 are growing in importance.
Following the breakdown of the 8 week uptrend and the support at $1693 we turned neutral on gold. Noting that the bulls are no longer in control, we see that upside traction is difficult to sustain and in the past couple of weeks the negative candles are more of a dominant force on the daily chart. Momentum indicators sliding back are a reflection of this. The RSI went below 50 for the first time since March this week, whilst MACD lines continue to fall and Stochastics are also their lowest since March. We have recently been talking about the $1722 old May pivot being a gauge for the market, and it was interesting to see yesterday’s rebound faltering at $1721 (the hourly chart shows a band of resistance now $1720/$1725). We believe that the price action of the last two weeks suggests that gold has developed into a trading range now, of around $100 between $1660/$1764. Effectively then, at current levels, the market is trading around the mid-point of this range. On the hourly chart we continue to note the slightly corrective bias that is in place, with eh hourly RSI stuck under 60, whilst MACD lines have crossed lower around neutral in the wake of the rebound failure at $1721. The market is in more of a choppy mid-range phase now. A negative candle posted today will continue the near term negative bias and increase pressure on $1689 (Wednesday’s low). If breached then it would suggest a negative drift back towards the $1660/$1668 range support band. Closing back above $1722 begins to edge more of an improving bias once more, but the market needs a pull above $1744 to end a corrective run of lower highs.
Brent Crude Oil
The oil price recovery continues. It had looked on Wednesday that there was a potential wobble coming in the wake of the doji candle. However, there is still intent to support even intraday weakness and the market continues to run higher. A succession of higher daily lows reflects this. Momentum is strong in the move, with RSI holding above 70, whilst MACD lines rise above neutral and Stochastics retain strong bull configuration. It all continues to suggest buying into weakness. With the price back above $40 there is an open path towards the big March gap down from $45.20 which still needs to be filled. The uptrend of the recovery since the late April low at $16.00 continues to flank the move higher and is supportive today at $37.35. There is a key band of medium term support now with the breakout at $33.55/$36.40. We look to buy into supported weakness.
Dow Jones Industrial Average
A pause for breath in the big run higher on equities has not taken the wind out of the sails of recovery on the Dow. A +12 tick gain on the day and at around 300 ticks of daily range, yesterday’s session was around two thirds the Average True Range of 453 ticks currently. The bulls are still firmly in control of the rally right now, with futures once more ticking higher today. The Non-farm Payrolls report could induce a near term wobble if it comes in significantly worse than expected today, but given the technical configuration we would still look to buy into weakness. The uptrend of the past three weeks comes in at 26,080 today and there is still a gap open around 25,745 that needs to be filled. However, with momentum so strong (RSI in the high 60s, whilst MACD and Stochastics rise in strong configuration) we still look to use any near term weakness to buy into this continued Wall Street recovery. The breakout above 24,765 implies a move towards 26,750 whilst the neat resistance is 27,100. We favour these to be seen in the coming sessions.