The drivers of the key breakouts on major markets in the past few days have been a surge of positive risk appetite from progress on COVID vaccination trials and the market taking a view on dollar weakness. However, the risk positive outlook is turning a little sour in the last 24 hours as diplomatic tensions between the US and China continue to escalate. Tit-for-tat consulate closures have been announced, whilst the rhetoric of US Secretary of State Mike Pompeo referring to China as being a threat to the world order, sees relations becoming ever less cordial. The strengthening of the Chinese yuan below 7 to the US dollar is beginning to reverse. Equity markets are seeing some profit-taking on their breakouts, whilst risk currencies (AUD and NZD) are slipping back. However, the dollar remains under pressure. Despite a surprise deterioration in Eurozone Consumer Confidence, EUR/USD continues to climb. The breakout on gold is also holding as US Treasury yields continue to fall and the US yield curve “bull flattens” (something which tends to be dollar negative and we see the strains of this through a sharp decline on Dollar/Yen today). These moves do though look increasingly stretched and the potential for a near term snap back is growing. Sterling could fine a basis of support with UK Retail Sales for June coming in way ahead of expectations.
Wall Street closed strongly lower last night with the S&P 500 -1.2% at 3235, whilst US futures are falling further today (E-mini S&Ps -0.4%). This has weighed on Asian markets, with the Nikkei -0.6% and Shanghai Composite -3.1%. European indices are also looking under pressure early today, with FTSE futures -1.2% and DAX futures -1.2%. In forex, there is risk negative bias with JPY performing strongly, but USD also continues to be pressured as EUR holds up well and GBP feels the benefit from the retail sales data. In commodities, the sharp run higher on silver is beginning to drop back, whilst gold is beginning to also stall slightly. Oil is stable after its fall back yesterday.
The Flash PMIs for July dominate the economic calendar today. Eurozone flash Manufacturing PMI is at 0900BST and is expected to improve to 50.0 (from a final 47.2 in June). Eurozone flash Services PMI is expected to improve to 51.0 (from a final 48.3 in June), meaning the Eurozone flash Composite PMI is expected to improve to 51.1 (from 48.5 final June). The UK flash Manufacturing PMI is at 0930BST and is expected to improve to 52.0 (from 50.1 final June), whilst UK flash Services PMI is expected to pick up to 51.5 (from a final 47.1 in June). This would leave the UK Flash Composite PMI improving to 51.1 (from 47.7 final June). Into the afternoon, the US flash Manufacturing PMI is at 1445BST and is expected to improve to 51.5 in July (from the final reading of 49.8 in June), whilst US flash Services PMI is expected to pick up to 51.0 (from a final reading of 47.9 in June). US New Home Sales for June are at 1500BST with consensus expecting an improvement of 4% to 700,000 (up from 676,000 in May).
Chart of the Day – NZD/USD
The period following a key breakout can often be an uncertain one for traders. Do you chase a breakout, or wait for a pullback? In the case of the Kiwi, after two days of breakout, the bulls are stuttering somewhat and the pullback is taking shape. A bearish outside day session formed yesterday and the market is ticking lower today. However, we see this will likely be the source of the next opportunity to buy. The upside break above 0.6585/0.6600 was a key breakout from a consolidation rectangle that implies 0.6830 in due course. However, with this stalling occurring as the RSI hit 70 and the MACD lines have been a little underwhelming, there is room for a near term pullback. The 0.6585/0.6600 old resistance is now a basis of initial support and a prime zone for a pullback. Given the mid-July congestion area between 0.6500/0.6600, this is a key area of support now and we would be looking for another higher low to find support above 0.6525. The bulls would still be in control whilst support of a higher low at 0.6500 is intact. If breached, it neutralises the outlook until 0.6370. Looking forward, given the breakout and strong medium term indicators, we expect the December high of 0.6755 to be tested at least in the coming weeks.
After such a strong run higher of the past two weeks, there are just a few signs that EUR/USD could be close to a near term pullback. We see the breakout above the long term resistance of 1.1490/1.1500 as being an outlook changing move. However, the near term overbought position is beginning to weigh slightly. Looking at the last three daily candlesticks. The breakout candle was huge, but since then, the magnitude of the candles (Wednesday and Thursday) have been reducing. This comes with the daily RSI into the mid-70s which is historically very stretched for a market as liquid as EUR/USD. There are no sell signals (or profit-taking signals) yet, but the hourly chart is beginning to show this slowing of the run higher. Small negative divergences are appearing on hourly RSI and hourly MACD. Divergences are warning signs and are not outright signals (as the divergence can continue to form). So we begin to look for little breached of support. The rising 55 hour moving average has been a basis of support for the past week (currently c. 1.1575) and would be another early warning of exhaustion if broken. The key reaction low at 1.1540 being broken would confirm a corrective move. For now, the bulls are still in control and will be eyeing further gains above yesterday’s 1.1625 high and there is little real resistance until 1.1800. However, this run higher is becoming ever more susceptible to a correction now.