Selling pressure on the dollar has been a huge factor across major markets in recent sessions. However, with month-end, a Fed meeting and subtle shifts in the COVID outlook, is this move about to see a retracement and a near term dollar rally? There are signs that perhaps the increase in US COVID infections may be flattening off, we are beginning to see rates pick up across the Eurozone once more. Could this subtle shift be enough to take focus away from the perception of US economic underperformance? The FOMC begins its two day meeting today and the July meeting contains no projections and traders will be wondering where the dovish surprise could come from that would drive renewed selling pressure. Furthermore, can Congress come to an agreement on the latest round of US fiscal stimulus? The paycheque support from the CARES Act expires this week and Congress will be eager to see a replacement agreed. As this all comes together, it is interesting to see some of these extremely overbought markets threatening to pull back this morning. Gold is -$40 off its overnight high of $1980, whilst EUR/USD, USD/JPY and Cable are all back from their extremes too. Is this a moment where profits are taken? Month-end positioning also becomes a factor too as the week develops.
Wall Street closed solidly higher last night with the S&P 500 +0.7% at 3239, whilst futures (E-mini S&Ps) are all but flat this morning. Asian markets have again been stable overnight, with the Nikkei -0.3% and Shanghai Composite +0.2%. European indices follow a similar path, with FTSE futures +0.3% and DAX futures +0.4%. In forex, there is an early hint of a USD rebound, albeit only slight, with EUR and NZD the main underperformers initially. In commodities, the hint of dollar rebound is also reflected through gold trading -$4 lower (-0.2%) but also around -2% off its earlier highs), whilst silver is around -1% lower today. Oil is around the flat line.
There is a US focus to data on the economic calendar today. The S&P Case Shiller House Price Index for May is at 1400BST and is forecast to remain at +4.0% once more (+4.0% in April). The main data for the day will be the Conference Board’s US Consumer Confidence which is at 1500BST and is expected to deteriorate in July to 94.5 (down from 98.1 in June). Also keep an eye out for the Richmond Fed Composite Index at 1500BST which is expected to improve to +5 in July (from 0 in June).
Chart of the Day – EUR/AUD
We have been following the development of a potential recovery on Euro/Aussie for a while. With the euro taking off in the past week, this recovery potential is growing. It is taking several weeks, but a rebound from the June low at 1.6030 has found a second low around 1.6100, which means that a move above a prospective neckline at 1.6585 would complete a base pattern. This pattern is still some way from completion, but the market has now broken the last of any downtrends that remained and has moved above initial resistance at 1.6445 which has been holding back the bulls in the past five weeks. The way is now open for a test of 1.6585 key near term resistance which is a neckline of the base and also a pivot resistance. The momentum indicators give real encouragement, with the RSI above 50 for the first time since April, whilst Stochastics are also increasingly positive and MACD lines improving. This looks to be a market ready to make the next key step in the recovery. A close above 1.6585 would imply c. +580 pips towards a test of the April rebound high of 1.7195. Increasingly we see near term weakness within the base being a chance to buy for the recovery. Initial support band 1.6280/1.6400 holding would be something for the bulls to now build from.
After such a huge run higher, the question will inevitably be how much further the EUR/USD rally can go. A market so liquid as this will very rarely see the 14 day RSI at 70, let alone closing at 81 yesterday. To put into context, before the March spike higher, the last time the RSI was above 80 was back in 2008. So despite being an incredibly strong bull run, it is clearly overbought too. This leaves it at risk of a near term retracement. Does yesterday’s high of $1.1780 mark a key turning point? It is far too early to say, but the euro is actually trading lower this morning. We have been cautiously bullish of this run higher for a few days now, keeping a close eye on the hourly chart for exhaustion signals. The rising 55 hour moving average has been a very good gauge (coming in at $1.1685 this morning) for the reaction lows of the past week. We also see that 40 on the hourly RSI has consistently been an area where the bulls have re-entered. If these indicators begin to be broken, then a corrective move could be developing. The hourly chart shows an intraday low at $1.1680 is the first real support of note too. A breach of $1.1680 could quickly see the market back towards $1.1580/$1.1600, whilst a retracement towards the old key breakout area $1.1490/$1.1500 could easily be seen as such extreme overbought momentum unwinds. Resistance is at $1.1800 from September 2018.
Despite a decisive positive candlestick yesterday which included a closing breakout above $1.2810 to a four month high, the dollar is seeing at least a little respite coming in today. This is seeing a pullback from the early high of $1.2905 and questions will begin to be asked whether this is the early knockings of a dollar technical rally that could pull Cable back near term. The daily RSI is over 70 currently (which is rare) and confirms the breakout, but equally is looking stretched. Signals on the hourly chart are inconclusive, but the reaction around the $1.2810 breakout could be a telling signal. So far this morning, support is holding around $1.2840 and the breakout is being defended. However, a close below $1.2810 would be a rejection of the breakout and likely see Cable back around the $1.2670 pivot. We tend to lean towards caution when it comes to apparent sterling strength (due to Brexit trade concerns and potential for negative interest rates) and this breakout does not change this.
Such a decisive breach with a run of increasingly bearish candlesticks to break 106.00 key support has opened the move lower for Dollar/Yen. The concern is that a downside break from a 385 pip consolidation range implies 102.15 as a potential target now. Aside from a spike low at 103.30, there is a lack of real support until the key March low at 101.20. Furthermore, with the shift in momentum configuration, we now see near term technical rallies as a chance to sell. This morning’s rally will be eyed as being such an opportunity. There is key resistance between 106.00/106.60 which is a sell-zone now. However, the overhead supply would likely limit the extent of a bounce before the sellers resume. There is a hint of initial support around 105.00 (which was an old support area back from August last year) and the market has ticked higher today. Mild positive momentum divergences on the hourly chart have come before a minor pick up, however the market needs to make it through 105.65 pivot for a technical rally to take hold. We would be looking for renewed selling opportunities in the 106.00/107.00 band once the technical rally impetus has settled down.
Throughout the bull moves of 2020 on gold, almost all have culminated in an intraday bull failure and an exhaustion candle on the daily chart. So, with the daily RSI at 85 (massively stretched now) and coming into the European session with a potential “shooting star” candlestick, the potential for a reversal is growing. Hitting a high of $1980 early this morning, the market has already unwound $40. We have been looking for potential reversal signals on the hourly chart for a few days, but none have been confirmed. However, the warning signs are there again, as a negative divergence on the hourly RSI has formed, but also with the hourly RSI dropping now to its lowest in over a week. The support at $1930 held very well throughout yesterday’s session and will be an important near term gauge. There is also an uptrend of the past week on the hourly chart coming in at $1928 this morning. Already, we are seeing this early pullback has broken the 21 hour moving average (which has been a very good basis of support for the past six sessions of this bull run. A decisive breach of $1930 support would open $1898 as the next near term pivot. Given how overbought this move has become, the potential for a retracement is certainly elevated. Completing a shooting star candlestick today would add to that near term corrective potential.
Brent Crude Oil
The bull control on oil is being tested, but so far is holding. Throughout the rebound since the April low of $16.00, the recovery uptrends have been constantly broken and subsequently been re-drawn with an ever-shallower trajectory. So it has been the support of the rising 21 day moving average (today around $43.10) that has become a mainstay in flanking the move higher. There has not been a closing breach of this moving average since the May rally really kicked in, and although there was another significant test yesterday, once more the indicator held as a basis of support. However, as the market has again failed to decisively push on in the past week, the recovery (and moving average) is flattening. We are becoming sceptical over the positive configuration of momentum being able to sustain the drive higher too. The overhead barrier of $45.20 (the old key March bear gap resistance) is sizable. The tendency too for small-bodied candles now also suggests a lack of conviction (either way) in the market. It is becoming a market in need of a catalyst again. Given the recovery, and continued run of higher lows, we still see a mild positive bias in the market for a test of $45.20, but it really is a tough trade to back with conviction. Support initially at $42.35 above the $41.30 first real higher low. A close above $45.20 would open $48/$50.
Dow Jones Industrial Average
A day of mild gains has just eased the selling pressure which has been threatening to build over recent sessions. Ticking higher by just over +100 points, the Dow has sustained its uptrend since the April low and helped to bolster the support band 26,300/26,610. It is interesting that the bulls could not see the market close above 26,610 and if the market just slips back from here again today it would introduce the prospect that 26,610 is becoming a basis of a new pivot. Around the support of the near 4 month uptrend and the 26,610 potential pivot, this suggests the market still looks to be trading around a crossroads. The importance of resistance at 27,070 will be growing all the time it remains intact. Momentum has notable tailed off in the past week and unless the bulls look to re-assert themselves soon, this phase of trading will suggest that the recovery is waning and this could be turning into a bigger range play.