After the elevated levels of volatility across major forex pairs and commodities (precious metals primarily) in recent sessions, we see markets relatively settled this morning. This comes ahead of the July meeting of the Federal Reserve’s FOMC. Markets have taken a view on selling the dollar recently. Huge increases in COVID-19 infections and deaths have driven several US states to reverse their economy re-opening procedures and reintroduce containment measures. The impact this is expected to have on US economic underperformance in the coming months has driven yields lower and the dollar selling pressure. How the Fed reacts today could be a significant driver of either confirming this dollar sell-off, or potentially reversing it, at least near term. An allowance for higher inflation, and yield curve control are all potentials, but will this happen in a summer meeting? There has been such a swathe of dollar selling (to extreme near term oversold technical levels), so there may need to be a significant dovish lean from the Fed to drive further downside potential. Does this set up for a “sell on rumour, buy on fact” near term dollar rebound? This morning, we see little direction on yields, however, an edge of dollar selling is still present. Yesterday’s larger than expected miss on US Consumer Confidence has not helped, neither has news overnight that even the Republicans are against their own fiscal support package. It will be interesting to see if this dollar selling will continue in the wake of the Fed later today.
Wall Street closed lower last night with the S&P 500 -0.6% at 3218, whilst futures are settled this morning (E-mini S&Ps +0.1%). In Asian, there was a mixed look to trading, with Nikkei -1.2% but Shanghai Composite +1.8%. European markets look slightly cautious into the European open, with FTSE futures -0.1% and DAX futures -0.3%. In forex, the edge of USD underperformance has continued today, with EUR being the main outperformer. In commodities, after a hugely volatile session yesterday, there is a slight stalling of the bull runs on gold and silver, whilst oil continues to oscillate without any real direction.
We are once more looking towards the US session for the economic calendar today, with the Fed meeting of primary focus later in the day. The US Trade Balance for June at 1330BST is expected to show the deficit widening to -$75.5bn (from -$75.2bn in May). Pending Home Sales at 1500BST are expected to show a sizeable recovery of +15.0% in June. The EIA Crude Oil Inventories at 1530BST are expected to show stocks building by +1.0m barrels last week. However, the key announcement is with the FOMC monetary policy decision at 1900BST. There is no change expected on rates, whilst it will be interesting to see if the statement contains any dovish leans. The FOMC Press Conference with Fed chair Powell at 1930BST is likely to be interesting too, with focus on the prospects for yield curve control and forward guidance.
Chart of the Day – Silver
Silver volatility has gone through the roof in the past week and a half. Since the breakout above $19.64 (the old key 2019 resistance), the market has skyrocketed to levels not seen since 2013. At the high of $26.18 yesterday, silver had added +35% across seven sessions. However, it has been the manner of the moves in recent days which is so incredible. Yesterday’s intraday range of $3.85 was the widest of any session since 2011. Moves like these tend not to come in the middle of a trend, and will often be more the culmination of an exhaustion move. Additionally, the RSI is at 87, which aside from the all-time high of April 2011 is the most overbought it has ever been. It seems unlikely that silver will just consolidate for a while to calm the market down. As the market begins to slip back today, we see a retracement as increasingly likely now. There was an initial move intraday yesterday, but the bulls were not quite ready to give up yet. An intraday rebound of over +10% to leave an incredible “long legged doji” candlestick leaves significant uncertainty in the bull run. Initial support at $22.25 is now in place and although way back from current levels, we see it likely that this will be tested again by an incredibly overbought market. A breach would open a deeper corrective move. The $18.94/$19.64 breakout support would be a prime area for an unwinding retracement. On the hourly chart the fizzle looks to have going out of the move, with resistance forming $24.74/$24.87.
There has been a pause in the accelerating bull run, as EUR/USD yesterday posted a first negative candle in eight sessions. How the bulls react today could determine whether this is now set up to be a retracement move or just a consolidation. With the RSI reaching 81 on Monday, this was the highest level since 2008, and is clearly stretched. Second successive negative candlestick today would be the first instance in over a month and increase the retracement potential. Yesterday’s low around $1.1700 will also become a gauge, for if the market begins to form lower highs and lower lows, this will add weight to corrective pressure. On the hourly chart we have been seeing the 55 hour moving average as a basis of support throughout the bull run, and could give a first indication of bull control easing. There is a support band too, between $1.1680/$1.1715 which if breached would confirm a retracement. For now though, the market has ticked higher this morning and holding a move above $1.1745 would certainly encourage the bulls to have another go at $1.1780 and continue their run.
We hold a broadly negative dollar outlook, but th