Once more the daily see-saw of risk appetite has taken affect as sentiment picks up again. Could it be that this time drives a decisive move? The swing back to positive risk has been driven by the results of a COVID-19 vaccine by US pharma company Moderna. Results were “robust” with antibodies present in all 45 test subjects. The development of a reliable vaccine is the key to opening the door to a serious recovery for markets and traders will need to assess the implications of these results. Previous positive vaccine results have seen risk appetite peter out quickly in recent months. It is interesting to see that there was a decisive swing higher on Wall Street, that is continuing on futures today. The US dollar is under pressure across the major currency pairs. Higher beta majors are performing well. Is this move set to break markets out of their month long consolidations? There have been some early calendar events that could also forge moves today. As expected, the Bank of Japan sat on its hands for its monetary policy decision, with no shift on rates or its yield curve control. However, UK inflation has ticked higher than expected (on both core and headline) leading to an uptick on sterling today. For later today, the survey data from the New York Fed could give an early insight into July and will be an interesting watch.
Wall Street closed strongly into the end of the session, with the S&P 500 +1.3% at 3198. US futures are continuing this move today, with E-mini S&Ps +0.8%. This is helping a positive Asian session (Nikkei +1.6%, Shanghai Composite -0.6%), although some of this move was tempered by the further escalation of tensions between the US and China as President Trump signed legislation on removing Hong Kong’s special status. European markets look set fair this morning, with FTSE futures +0.9% and DAX futures +1.3%. In forex, there is a risk positive, USD negative bias as USD, JPY and CHF all underperform, whilst AUD, NZD and GBP all pull higher. In commodities, there is consolidation on the precious metals, whilst oil has managed to pick around +0.5% higher.
There is a North American bias to the data on the economic calendar for the rest of today. The New York Fed’s Empire State Manufacturing for July is at 1330BST and could be an extremely interesting release. Consensus forecasts expect the continued recovery to +10.0 (from -0.2 in June). The US Industrial Production for June is at 1415BST and is expected to show recovery of +4.3% on the month (after a rebound of +1.4% in May). Capacity Utilization is also expected to recover back to 67.7% in June (from 64.8% in May). The Bank of Canada monetary policy decision is not expected to cause too many surprises today with rates forecast to be held at +0.25% once more. The EIA Weekly Crude Oil Inventories at 1530BST are expected to show a drawdown of -2.3m barrels (following a surprise build of 5.6m barrels last week).
Chart of the Day – EUR/JPY
It has been a slow burn for EUR/JPY longs in recent weeks. However, after two strong bull candles and a close above 122.10 resistance, there are finally signs that the upside move is developing. However, this is still a market prone to intraday swings and retracements. Subsequently, chasing a breakout may not be the best timing, and we prefer buying into weakness. We discussed Euro/Yen longs last week on the break above 121.40, but a choppy week of trading broke a two month uptrend before the market swung higher once more. A close above 122.10 (mid-June high) has confirmed the bull control now, also being a move through the resistance of the 23.6% Fibonacci retracement (of 114.40/124.40). This means that the market can begin to use this Fib level as a basis of support and re-open the key June high of 124,42 once more. Momentum indicators are positively configured, with the RSI confirming the break to a one month high, Stochastics turning higher again in strong configuration, and most interestingly a bull cross on MACD lines. We look to use intraday weakness as a chance to buy now. The 121.40 breakout is now a good basis of support (and was once more yesterday almost to the pip), leaving a mini buy zone 121.40/122.10 now. Strong support has formed at 120.25 and is now a key higher low,
The euro bulls have taken a decisive step forward in the past couple of days. The outlook on EUR/USD has begun to really take on a positive bias once more. Strengthening over the past two weeks, a decisive bull candle with a close above $1.1350 has cleared a key band of near term resistance and means that the bulls are now primed to test the June rally high of $1.1420. A run of higher lows and higher highs have formed a mini uptrend channel which today crosses the $1.1420 resistance. It is interesting to see that the market has already had a look early this morning at the resistance before just backing off slightly. Daily momentum indicators are increasingly positively configured now, but also retain further upside potential. Stochastics have only just crossed into bullish territory, whilst RSI is strong in the mid-60s and MACD lines have only just bull crossed higher. Given the momentum set up, we would view near term weakness as a chance to buy. The old key breakout resistance of $1.1350 is now a prime area of underlying demand, and any supported dip back into $1.1300/$1.1350 is a good buying opportunity now. A close above $1.1420 opens $1.1490 which is the key March spike high and the long term resistance around $1.1500 which we expect to be tested in due course. The higher low at $1.1255 is now key support.