The risk recovery is once more approaching an intriguing crossroads. The bullish forces of ever greater stimulus from central banks (this week the Fed and BoJ have expanded their range of support) are being met by the bearish threat of second wave COVID-19 infections in Beijing. Wall Street has certainly felt the benefit of the Fed announcement on corporate debt purchases, but this positive mood is being tempered somewhat as China has announced it is raising its emergency response in Beijing back to level 2, closing schools and cancelling flights. There is a very real concern that if these infection rates cannot be kept under control, it would be the source of fear back into markets. How the newsflow develops in the coming days could be crucial. However, slightly tipping the balance to the risk positive side of the equation, rumours of a $1 trillion package of support measures being formulated by the US Government, including infrastructure spend and employee support. The announcement of this could once more boost confidence in the US economic recovery. So this morning, we see a state of calm and consideration across major markets. US futures tick mildly higher, but there is and edge back lower on yields. Forex majors show an edge of risk positive, but recent sessions have seesawed for the dollar (both on a closing basis and intraday). UK inflation coming in a shade softer than expected on CPI (and weaker on PPI) has been a drag on sterling early today (not helping the prospects of a recovery in our Chart of the Day).
Wall Street closed strongly back higher last night, with the S&P 500 +1.9% (at 3124). US futures are shading mildly higher this morning (E-mini S&Ps +0.1%) but this has not helped Asian markets with the Nikkei -0.6% and Shanghai Composite flat). European markets are taking it as glass half full initially, with the FTSE futures +0.5% and DAX futures +0.1%, but it tends to raise an eyebrow when FTSE futures outpace the DAX futures on the upside. In forex, there is a shade to USD underperformance, with the dollar struggling across the forex majors, with the one notable exception of GBP weakness. In commodities, the consolidation continues on gold and silver, whilst oil is a touch lower in early moves.
On the economic calendar, there are a few minor data releases but nothing to get overly worked up by. The final Eurozone inflation for May is at 1000BST and not expected to show any surprises, with the data unrevised from the flash readings. , Headline Eurozone HICP is expected to be at +0.1% (down from +0.3% final in April) with core Eurozone HICP at +1.1% (final April at 1.1%). Then into the US session, look out for US Building Permits at 1330BST which are expected to bounce back strongly in May to 1.228m (from 1.066m in April), with US Housing Starts at 1.095m (up from 0.891m in April). The EIA Crude Oil Inventories are expected to show a build of just +0.5m barrels (after last week’s surprise build of 5.7m barrels).
Also it is important to be aware that Fed chair Powell has day 2 of his Congressional testimonies, this time to the House Financial Services Committee, at 1700BST. He gives the same written testimony but then will be responding to questions. He is unlikely to be anything other than cautious again.
Chart of the Day – GBP/AUD
For over 10 weeks, the Aussie has lorded it over sterling on the performance charts. However, could there about to be a shift in this relationship? As support has formed at 1.8055 in the past couple of weeks, the cross of GBP/AUD recently broke a well-defined downtrend. The recent re-emergence of positive candlesticks in the past week or so have helped to bolster this support. The question is whether this is a consolidation before the next lurch lower, or the start of a recovery. For that, sterling bulls must look to a breakout above 1.8450 which, if seen on a closing basis, would be a pivot resistance breakout, but also complete a small base pattern which would imply around +400 pips of further recovery. Already we see leanings towards improving momentum indicators. The RSI and Stochastics have both picked up but it is a bull cross buy signal on the MACD lines which is really notable. However, for the recovery to really get going, the RSI needs a position above 50 to suggest the bulls are backing the move. They can start, with a close above the falling 21 day moving average (today around 1.8360) which has been a strong gauge for the outlook of GBP/AUD pretty much throughout 2020. The hourly chart suggests that current outlook is one of consolidation. However, building higher lows from support at 1.8145 will help to improve confidence now. It is still very early for the prospects of recovery on Sterling/Aussie, but the interesting developments suggest it is a market that could well be on the turn and is definitely one to watch.
As the near term outlook increasingly becomes rangebound, the mix of signals on EUR/USD continue to come. Sharp moves higher and lower in recent sessions reflect a lack of traction either way and a market which is being pulled around by uncertainty. There is support at $1.1210 and resistance at $1.1420. The daily technical signals are moving into reverse as RSI and Stochastics slide and MACD lines threaten to bear cross. However, the lack of conviction in these moves would suggest this is still more a function of unwinding the sharp late May rally than anything more malign. A consolidation back towards the five week uptrend (which rises at $1.1125 today) is more the likely bias, and even if this choppy consolidation were to breach $1.1210 support, it would still likely to be playing out this consolidation. We would subsequently see near term unwinding moves towards the breakout support at $1.1145 as a chance to buy for what we see as the next bull leg. The hourly chart shows hourly RSI oscillating between 30/70 for most of the past eight sessions as this choppy consolidation has taken hold. With hourly signals swinging back higher once more today, it sets up a mild positive bias within this range this morning. Support has built at $1.1210/1.1225, with moves towards $1.1350 resistance likely to struggle near term.