Despite President Trump’s ongoing belligerence over trade, major markets are looking a bit more settled this morning. Trump has once more reiterated threats of US tariffs on Mexico if Mexico fails to legislate on its immigration agreements. Furthermore, he continues his strong rhetoric with threats of tariffs on China, for which he says there will be a deal “because they are going to have to make a deal”. This attitude is hardly going to endear the Chinese towards him or a deal, with the G20 at the end of June setting up as a key crossroads. For now though, markets seem to be taking this with a pinch of salt. However, there continues to be a more stable look to Treasury yields, with the 10 year yield even picking up slightly. This is helping to stabilise the dollar, whilst other safe haven plays have pulled back from their recent highs. One trade to note is the positive correction between 10 year yield differentials on Treasuries/JGBs coupled with Dollar/Yen. However, it will be interesting to see how Wall Street reacts to this settling of sentiment. With bad data now seen as good for Wall Street, anything that points towards Fed easing policy is taken positively right now. Today the focus is with US PPI which is next on the conveyor belt of economic updates. This will be taken as a pointer towards the Fed’s outlook in next week’s monetary policy meeting.
Wall Street closed positively last night but well off the highs of the session, with the S&P 500 +0.5% at 2887. US futures are again showing steady gains (of around +0.3%) this morning and this is helping a decent session in Asia, with the Nikkei +0.3% and Shanghai Composite +2.2%. European markets are following US futures this morning, with FTSE futures +0.2% and DAX futures +0.1%. In forex trading, there is a mixed look to the major pairs, however, the notable mild underperformer seems to be JPY. The drag of underperformance on GBP from the dour UK political environment continues. In commodities, the mixed outlook means gold is hovering around $1 higher, whilst oil is trying to put yesterday’s slip back behind it as it gains around a half to one percent in early moves.
UK employment and US inflation are in focus on the economic calendar today. UK Unemployment is at 0930BST and is expected to remain at 3.8% (3.8% in March) with May’s claimant count expected to be 22,900. The key focus though will come with the Average Weekly Earnings which are expected to slip back to +3.0% (from +3.2% in March) which would pull real wages growth below 1%. Into the afternoon, the US factory gate inflation numbers, the US PPI for May are at 1330BST. Headline PPI is expected to slip back to +2.0% (from +2.2% in April, with US core PPI also expected to drop to 2.3% (from 2.4% in April).
Chart of the Day – EUR/GBP
A huge rally in the past five weeks as the euro has strengthened around 5% against sterling. With the strong bull candles of the past few sessions the market has finally broken the shackles of the pivot at £0.8840 and is now eyeing a test of the next key pivot. Around the turn of 2019 a pivot at £0.8940 was a key gauge and is set to be once again. This is now sitting just overhead as the momentum of sterling weakness continues. It comes with the RSI strong over 70 but also at risk of plateauing (also note the MACD and Stochastics tailing off in the past couple of weeks). The pivot resistance could now become another area of consolidation. The question is whether this pivot begins to act as a barrier for the rally and potential turning point. Given the strength of momentum and no signs of any reversal signals, the trend is your friend on this one, and any consolidation is still likely to result in an upside break. A decisive close above £0.8940 would open £0.9000 as a key psychological level but also the £0.9050/£0.9100 key 2018 highs. The hourly chart shows how £0.8900 is an initial basis of support now, with the key near term pivot support around £0.8850.
The bulls have tended to use intraday weakness as a chance to buy in the recovery of the past couple of weeks. So after the rally stalled yesterday, the reaction of the bulls in today’s session could be very telling. A slightly mixed candlestick from Monday (closing 20 pips lower but over 20 pips up from the low of the day) has effectively held support of the break above $1.1300. Having previously broken above $1.1265 and $1.1300, this 35 pip band becomes an area of key near term support. This support held the initial test yesterday and the bulls will be happy. With momentum still positively configured, holding above $1.1300 will maintain the improving outlook. However, if the market again closes lower, this positive momentum will begin to wane away. Resistance at $1.1347 from Friday’s high, but the hourly chart is holding its improving configuration (hourly RSI above 40 and MACD above neutral). Initial support at $1.1290.
The recovery on Cable has been a struggle and is already showing signs of fatigue. The rebound has failed to breakout above $1.2755 and has now rolled over to breach initial support at $1.2665. The concern is that this has never been a rally with any solid foundations. Now we see the RSI falling back under 40, and the Stochastics seemingly set to cross lower. A second consecutive negative candle today would likely end the recovery prospects. A close back under $1.2665 would seriously question whether a near term base pattern (above $1.2755) is possible and then would re-open the $1.2557 May low. Looking on the hourly chart, the bulls are struggling, with hourly MACD lines rolling over under neutral and RSI dropping back from 50. An intraday move back under $1.2650 would be a bear signal now.
An attempt by the dollar bulls to engage a recovery is treading water. The traction really does not seem to be there right now. Although the market picked up yesterday (closing 25 pips higher on the day), a negative candle reflects the struggle that is still paying out around the old 108.50 key low (which is a basis of resistance). Momentum indicators have ticked a shade higher, but still within negative medium term configuration and nothing of any conviction. All the while, the 21 day moving average (which has capped the upside since May) is falling, today around 109.20, whilst the six week downtrend is at 109.35. The hourly chart shows ranging momentum (RSI oscillating between 30/70 and MACD around neutral). Initial resistance at 108.70.
The failure to sustain multi-year highs on Friday resulted in a turnaround to leave a high at $1348. As much as $23 of slip back from the high has been seen, as the market has retreated to the breakout support of the $1324 March high. This is a level that now needs to be watched, especially as the market found intraday support there during Monday’s session. A close back below $1324 would now be a disappointment and open for a much deeper correction that could unwind the market back to the long term pivot at $1300/$1310. Watch the hourly chart for clues of profit-taking building. The negative divergence on both hourly RSI and hourly MACD lines come as a warning sign for the bulls. A failure of the hourly RSI under 60 and hourly MACD under neutral would increase the prospect of correction. A move under $1320 would confirm the corrective momentum. The initial resistance is at $1338 under the $1348 new 2019 high.
A couple of positive candles that ended last week hinted at growing momentum for a recovery. However, the bulls have stumbled at the start of the new week, losing over a percent into the close and a negative candle. However, the hourly chart shows that despite an unwind back from $54.85, this move could still be part of a recovery, with the higher low at $52.60 now key to watch. A formation of support and another higher low above $52.60 will build on the recovery potential. A move back above $53.80 (a near term pivot) would again help to re-engage the bulls. As would maintaining the hourly RSI above 40 and hourly MACD lines above neutral. A close back under $52.60 would be a disappointment and bring the supports between $50.00/$50.60 back into play.
Dow Jones Industrial Average
Another positive close on the Dow, but this time with a very mildly negative candle. Intraday gains could not be held into the end of the session, with the close coming around the day low. This has formed a (small) shooting star candlestick which is a warning shot for the bulls. The small size of the daily range (155 ticks is around half the Average True Range of 294 ticks) suggests not to read too much into this session. However, it is the first sign of stalling in the rally. Most likely just a pause for breath in the recovery, but the near term breakout support around 25,958 is the level to watch as continued trading above this will maintain the improving outlook. Momentum is still improving (albeit at a slightly slower rate). Initial resistance at 26,210 from yesterday’s high, before 26,535 and the key medium term high at 26,695.