The near term recovery on the dollar continues for a third session, in a move which is impacting across major forex and precious metals. Dovish steers from FOMC members in recent days have played into this, as has a rather downbeat assessment of the US economic recovery from the Fed’s Beige Book last night. However, the strengthening also has origins from the corridors of the European Central Bank. With the euro hitting $1.20 this week, there has been a range of briefings to relay the concerns that the Governing Council has around these levels. ECB chief economist Philip Lane noted that the exchange rate “does matter” and there have been other briefings to suggest that a strong euro could hurt export growth and dampen inflation further. The near term impact is hitting euro and by association strengthening the dollar, which is knocking through major forex. For now, these moves are simply near term and counter to a bigger dollar downtrend, however there are some key levels approaching on major markets. How the dollar reacts in the coming days to these level could be key to the medium term outlook. Focus today will be on any further ECB board member comments, whilst services PMIs and the ISM Non-Manufacturing will also be eyed.
Wall Street closed another big session higher, with the S&P 500 +1.5% at 3580. US futures are a shade lower today though, with E-mini S&Ps -0.2%. Asian markets were generally positive overnight, with Nikkei +0.9% but Shanghai Composite -0.7%. In Europe, futures suggest a marginally positive start, with FTSE futures +0.2% and DAX futures +0.7%. In forex, the USD rebound continues to run, with GBP and EUR both around half a percent lower, whilst similar slips on AUD and NZD, whilst JPY holds up relatively well. In commodities, the USD rebound is weighing again on gold (just over half a percent lower) and silver (-2.5%). Oil fell sharply yesterday and is down another -0.3% today as demand concerns weigh.
Today is a day of services PMIs on the economic calendar. Eurozone data is first up at 0900BST, where the final Eurozone Services PMI for August is expected to be unrevised at 50.1 from the flash (flash August 50.1, final July 54.7). This would leave the final Eurozone Composite PMI at 51.6 (51.6 flash August, 54.9 final July). The UK data is at 0930BST and is expected to show final UK Services PMI confirmed at 60.1 (60.1 flash August, whilst the final July reading was 56.5). This would leave the final UK Composite PMI at 60.3 (60.3 flash August, up from 57.0 final July). Eurozone Retail Sales for July are expected to grow by +1.5% on the month meaning a year on year growth of +3.5% (up from +1.3% in July). Into the US session, first up there is the Weekly Jobless Claims at 1330BST which is expected to fall further to 950,000 (from 1.006m last week). The US Trade Balance is expected to see the deficit widen to -$58.0bn in July (from -$50.7bn in June). The key focus will be on the US ISM Non-Manufacturing at 1500BST which is expected to slip back slightly in August to 57.0 (from 58.1 in July).
There is also a key central banker to watch for today, with the Bank of England Governor Andrew Bailey speaking at 1500BST.
Chart of the Day – NZD/USD
We are gradually turning more positive on the Kiwi once more. Throughout August, the Kiwi had a real struggle on a relative basis against major forex, but the tide seems to be turning now. After a series of strong bull candles, the breakout back above 0.6715 has signalled a decisive shift in sentiment. It effectively completes a two month range breakout and implies around +225 pips of upside now. The near term USD rebound is weighing on the outlook and a drag back towards the 0.6715 breakout (old resistance becomes new support) would represent a buying opportunity. Throughout July and August a mid-range pivot formed around 0.6600 and any supported weakness into 0.6600/0.6715 which is now a near term buy zone, should be considered an opportunity. The long uptrend dating back to March comes in around 0.6570 today. Momentum is just fading on a near term basis, but the big bull cross on MACD lines around neutral is a strong medium term positive signal. Initial resistance hit 0.6790 (an old high from July 2019) but we expect further upside in due course.
As the dollar continues its near term rebound, EUR/USD is being dragged back. This unwind is now into its third session, where into European trading, another -50 pips has been shaved off the price. For now, we still see this as a near term correction within the big three and a half month uptrend (which sits at 1.1720 today). However, a big test of this outlook is looming. The key support remains between the 1.1695 old range low and 1.1750, meaning that with the confluence of the uptrend too, this is a massively important medium term area now. Momentum indicators are near term corrective within ongoing positive medium term configuration. However, the RSI is now around the 50 mark, where previous corrective moves have begun to form support. It all points to the importance of how the market responds to this zone of support 1.1695/1.1750. The hourly chart shows how all the old near term breakout levels have been breached as support and are now becoming pivot resistance levels again. Initially around 1.1850 and 1.1880 as barrier to renewed recovery. We are wary of this move, but for now are still confident of our medium term positive outlook. A closing breach of 1.1695 would change this though.
The dollar rebound kicking in is a drag on Cable near term. It is interesting to see that sterling has held up relatively well in the past couple of sessions (at least compared to the euro). Subsequently, the technical outlook on Cable looks less corrective near term than it does on EUR/USD. Despite this, a near term pull lower continues, and this has breached an initial one week uptrend (no real drama for the bulls) and the slip back is now eyeing the breakout support around 1.3265. There is a band of breakout support between 1.3185/1.3265 on Cable, which is a confluence of support with the two month uptrend (today at 1.3195). Also add in the support of the rising 21 day moving average (currently 1.3170) which has been a basis of support since early July. A near term rolling over on momentum indicators sees the market near term corrective, but for now we see this as all being contained within the positive medium term out