Major market look ponderous this morning as the dust settles on yesterday’s dollar rebound and edge of risk aversion. Traders looking at their charts will see how these moves have been counter to recent trends. The dollar remains on a weakening path (as a safe haven), whilst recent updates on COVID-19 vaccines have encouraged a more positive risk bias to take hold. However, there is still an uneasy tone to relations between the US and China over a variety of issues (Phase One trade deal, Huawei, Hong Kong, interests in the South China Sea) which is holding back a sustainable move into risk. Furthermore, ever rising COVID infections (primarily in the US) add weight to the shackles too. Despite this though, in the coming days the EU Summit to discuss the EU Recovery Fund could be a game changer for sentiment, at least for the near term. If the EU leaders can find common ground to make progress in moves towards agreeing on the fund, there would be a narrowing of yield spreads, a supportive outlook for the euro, and European equities would certainly feel the benefit too. Major markets are all but flat this morning ahead of the summit, and we will not see the real impact until Monday morning. Later into today’s session, the US confidence gauge, Michigan Sentiment will take focus as it is for July and begins to account for the rising infection rates and threats of renewed lockdown.
Wall Street closed lower last night, with the S&P 500 -0.3% at 3215. However, futures are showing a balance to this today, with E-mini S&Ps +0.3%. Asian markets consolidated overnight, with the Nikkei -0.3% and Shanghai Composite flat. European markets are a shade positive today, following US futures, with FTSE futures and DAX futures +0.3%. In forex, a shade of risk positive with AUD and NZD rebounding slightly, being the only real movers. Commodities also show consolidation, with gold a tough higher, silver slightly lower and oil around flat.
The final reading of Eurozone inflation for June is first up on the economic calendar today. Final Eurozone HICP is at 1000BST and is expected to show no revisions to either the headline HICP at +0.3% (+0.3% flash June, +0.1% final May), or core HICP at +0.8% (+0.8% flash June, +0.9% final May). Into the US session, there is June housing data on the docket, with US Building Permits at 1330BST which are expected to increase by 6% to 1.290m (from 1.214m in May). US Housing Starts are expected to increase by 20% to 1.169m (from 0.974m in May). The key data will be the prelim Michigan Sentiment for July at 1500BST. Consensus expects a slight improvement in sentiment to 79.0 (78.1 in June). This is to be driven by an improvement in the expectations component outweighing a slight slip in the current conditions.
Chart of the Day – AUD/JPY
Market sentiment has been choppy over recent weeks, but there is now beginning to emerge a positive bias. This positive bias is reflected through AUD/JPY which is edging higher once more. Tracking along a three and a half month uptrend that has flanked the recovery (coming in today at 74.25), the market is making good ground again. Since the early June correction from 76.75 to 72.50, a run of higher lows and higher highs has formed a smaller uptrend. Subsequently, the market is now putting consistent pressure on initial resistance around 75.15. Momentum indicators are positively configured, with the RSI holding consistently above 50 and Stochastics also strong between 70/80. The bulls will now be looking for a decisive close above 75.15 to re-open the way to retest the 76.75 June high once more. If this break came with a bull cross on MACD lines it would add conviction too. Support around 74.00 is increasingly important as a higher low now too, whilst we look to buy into weakness with a near four week uptrend support at 74.50 today.
The euro bulls have been testing higher in recent days but certainly have one eye on the EU Recovery Fund discussions that take place over this weekend. Despite a minor slip back yesterday (driven primarily by a rebound on the dollar), the technical set up suggests that traders are taking a view that the EU talks will yield some positive news. The ECB meeting may have been entirely forgettable, but the euro bulls still seem happy to support into weakness now. Yesterday’s unwind towards $1.1350/$1.1375 breakout support looks to be a chance to buy. An uptrend channel of the past few weeks is still playing out as the market has been testing the waters above $1.1420. No conclusive breakout yet, but the medium term configuration of momentum indicators suggests that a move higher is building. Daily RSI is pulling into the high 60s (with upside potential), whilst MACD lines are rising off a bull cross. Stochastics have just crossed to reflect yesterday drop back, but nothing yet would suggest this is a significant negative signal. We position to buy into weakness to pull above $1.1420 in the coming days and to test $1.1490. A close below $1.1350 would be a disappointment, but the channel support is just above $1.1300 now and support at $1.1255 is a key higher low.
Despite a week of mixed candles for sterling bulls, Cable continues to hold above $1.2540 on a closing basis. This is a consolidation still in the upper regions of the medium term trading range (between $1.2075/$1.2810), and momentum indicators remain broadly positively configured. This suggests that weakness is building as a buying opportunity for tests of resistance. As such, the key for how sterling trades in the coming sessions, will continue to be the response around what is now confluence resistance at $1.2670. This is the key high from last week, and currently the resistance of the falling 7 month downtrend. The market has continually failed around here in the past week and is a considerable near term barrier to gains. Despite this though, there is a slight positive bias within the medium term range whilst the market continues to close above $1.2540. Although this has been tested in recent sessions, there have been positive reactions into the close to maintain the market above what is an old neckline of a base pattern. Closing between $1.2435/$1.2540 we are more neutral on Cable, whilst a breach of $1.2435 we turn more negative once more.