The is plenty for markets to contemplate as trading begins for August. The dollar has been under huge pressure in recent weeks as traders have factored for an underperforming US economy due to the alarming second wave COVID infections. However, as other countries increasingly find their own problems with second waves (the Australian state of Victoria going back into lockdown), perhaps the US dollar may begin to find some respite? Could a rebound on the dollar become an August story? Hints of a dollar rally this morning, but as yet nothing confirmed. It may depend upon leaders in Congress coming to an agreement on how to react as emergency US employment support expires. As yet, there is no consensus of how to push forward, but another fiscal package to support the labor market would help to allay fears of faltering consumer confidence. Risk appetite has certainly been wavering in recent sessions, but the better than expected China Caixin Manufacturing PMI has helped to prop up sentiment this morning. The manufacturing PMIs for July could be a driving factor through today’s session, with eyes on the ISM data later today.
Wall Street closed a tumultuous session on Friday with S&P 500 gains of +0.8% at 3271, whilst futures are a touch weaker today with the E-mini S&Ps -0.1%. Asian markets took the lead from the Chinese PMIs with the Nikkei +2.2% and Shanghai Composite +1.4%. In Europe there is a mixed look to early moves, with FTSE futures -0.2% and DAX futures +0.2%. In forex, USD is climbing through the majors, with CHF and AUD primarily weaker. In commodities, hints of a dollar rebound are weighing slightly on gold and silver, whilst oil is just under -1% lower.
The first trading day of the month is PMI day for the economic calendar. The Eurozone final Manufacturing PMI for July is at 0900BST and is expected to be unrevised from 51.1 (flash July 51.1 up from 47.4 final June). UK Final Manufacturing PMI is at 0930BST and is expected to also be unrevised at 53.6 (53.6 flash July, up from 50.1 final reading of June). The US ISM Manufacturing at 1500BST is expected to improve to 53.6 (up from 52.6 in June).
Chart of the Day – German DAX
After coming under increasing selling pressure in recent sessions, there needs to be a significant response by the DAX bulls early this week. Having seen the risk rally fall over at a July high of 13,314, almost every session in the past eight have seen the bears prevailing to leave a negative candlestick formation. This has really ramped up as the market has now broken the first really important support if the mid-July low at 12,416. With a decisive breach of the old pivot at 12,470 the bears now look to be in near term control. Accompanied by increasingly deteriorating momentum, with the MACD lines accelerating lower, RSI and Stochastics are falling at their lowest level for several months. With Friday’s failure of an attempted rally, there is now a band of resistance 12,416/12,525 that needs to be overcome to suggest the bulls are fighting back. Given the recent run of bear candles and intraday failed rallies, there is a downside bias towards testing the old June supports now. Initial support is 11,957 but the crucial support on a medium term perspective is now at 11,598. To break what is now a corrective phase, the bulls need to move back above resistance in the band 12,745/12,915.
The euro has rallied a long way in the past month. An accelerating bull move added over 700 pips but the move looks to be beginning to stall now. We see similar hallmarks to the move of early June, where an acceleration higher stuttered initially before one more pull higher prior to an unwind. With the RSI recently peaking over 80 and beginning to tail off, along with bear crossing on Stochastics, we see this as being a similar situation now. Friday’s -70 pip decline and decisive negative candle suggests that a degree of corrective slide could be developing. The hourly chart is beginning to threaten a correction and how the bulls respond to Friday’s sell-off could be key today. There has not been two consecutive negative sessions since late June. A move under 1.1730 would complete a near term topping pattern, breaking the run of higher lows, and develop a new negative trend set up. Below 1.1680/1.1700 would open a deeper corrective unwind. Today’s intraday high of 1.1795 is the first line of resistance.
With momentum stretched after an accelerating bull run, the bulls will need to react to Friday’s stalling candlestick to prevent what could be a corrective move developing on Cable. A candlestick that hinted at exhaustion on Friday, was arguably a shooting star, came after a succession of strong bull sessions. The RSI is historically stretched around 80 and with traders coming back in on Monday morning to see a consolidation, there is a battle for control. Can the bulls prevent the urge to take profits now on an impressive run higher? The hourly chart is hinting that the set up is less positive than it has been for over a week, but is still relatively positive. The support of a two week uptrend comes in around 1.3000 this morning, and hourly chart moves show that there is a basis of support 1.2950/1.3000 which would be the first real band of support to be tested. Coming into the European session, there is a lack of conviction in moves and a lack of direction. The resistance at 1.3200 was considerable earlier in the year, and could again be the excuse for Cable bulls to take a step back once more. As yet though, no conviction.