There seems to be no let up for the dollar as the trends of recent sessions continue to hold. This has become a story of renewed dollar weakness, with yields trending lower, gold strength and Wall Street breaking higher. The US COVID-19 infection rates may be showing signs of plateauing at least, but Congress is still unable to agree on a fiscal support package. Recent economic data announcements point to a deterioration once more in the labor market (employment components of both ISM Manufacturing and Non-Manufacturing, along with a miss on the ADP) suggest that we could see a negative surprise in the payrolls report tomorrow. Congress needs to deliver on fiscal support. Whilst the arguments continue, yields will remain under pressure and the dollar will slide. Gold is breaking ever higher into blue sky territory, but if Congress can deliver, then this would likely be a trigger for yields higher, a dollar rebound (albeit near term) and profit taking on gold. Early this morning, we have had the Bank of England announce monetary policy. No changes to its rates (at +0.10%) or asse purchases (at £745bn) which will run until around the “turn of the year”. The decisions were unanimous. What has moved sterling though is that whilst the study into negative interest rates continues, the indication is that the BoE has “other tools available” still. Sterling bulls seem to have taken this well.
Wall Street closed again decisively higher, with the S&P 500 +0.6% at 3327, whilst futures are again looking higher (E-mini S&Ps +0.1%). Asian markets were somewhat muted overnight (Nikkei -0.4%, Shanghai Composite +0.1%). European markets are also slightly cautious, with DAX futures -0.1% and FTSE futures -0.6%. In forex, there is still an edge of dollar selling pressure still on, with GBP outperforming after the BoE. In commodities, gold is another +0.5% higher and silver continues to smash higher by another +2%. Oil is also continuing to hold is break higher, by around half a percent today.
With the Bank of England reporting early today, there is not too much on the calendar today. Sterling traders will still be digesting the BoE when the UK’s Construction PMI is released at 0930BST. It is expected to improve to 57.0 in July (from 55.3) although
It only accounts for around 8% of the economy so no significant impact is anticipated. Into the afternoon, Thursdays mean US Weekly Jobless Claims at 1330BST with claims expected to at least begin to stabilise around 1.41m (after last week’s 1.43m).
There are a couple of central bank speakers on the agenda. The Bank of England’s Governor Andrew Bailey has the monetary policy press conference at 1230BST. Furthermore, the FOMC’s Robert Kaplan (voter, centrist) speaks at 1500BST.
Chart of the Day – USD/CAD
Charts reflecting the weakness of the dollar are everywhere right now and USD/CAD is no different. The pair has been trending lower with Canadian dollar outperformance pretty much since the March high. However, having spent the past seven weeks consolidating between 1.3310 and 1.3715, with renewed dollar selling pressure, a downside break of 1.3310 has taken the pair to its lowest since February. The implication of a close below 1.3310 is a target of -400 pips in the coming weeks. This should mean a full retracement to the December low at 1.2950 in due course. Momentum is bearishly configured across the indicators, but with downside potential too as the MACD lines bear kiss lower, whilst RSI and Stochastics falling decisively. The historical significance of breaking so decisively below 1.33 is also notable, as this has so often been a ley pivot area in moves dating back to late 2018. Subsequently it is now key resistance to sell into any near term strength, with a “sell zone” between 1.3310/1.3460. The downtrend of the past few months comes in at 1.3470 to add weight to the downside move. Initial support is at 1.3200 from the February lows, but then the way is open towards 1.2950.
The bull move on EUR/USD is certainly impressive. Successive uptrends are becoming ever steeper and the market is looking to push through resistance. The question is whether the bulls will continue to run higher, or whether the move will begin to lose its way. For now, momentum indicators are not showing any real signs of reversal. There has been a strong reaction to a couple of negative candles, with RSI, Stochastics and MACD lines all picking up again in strong configuration. Support has formed at 1.1695 this week, and the market is testing the 1.1908 key high from last week. A closing breakout above 1.1908 would imply another +210 pips into the $1.20s. Given the size of the bull move and the stretched position on momentum, there needs to be a degree of caution still over chasing this market ever higher. We are still on the lookout for potential exhaustion signals which may time the profit-taking. For now though, the hourly chart remains positively configured. Initial support at 1.1800/1.1830.
The initial market assessment is that sterling likes the Bank of England update. Seeing that “other tools are available” aside from negative interest rates is a boost. The chart of Cable shows that the market has begun to drive higher again. Around the turn of the weekend, there were three distinctly uncertain candlesticks, but yesterday’s gain of over +50 pips and further moves higher on the Bank of England early this morning, is now breaking the market above 1.3170 and eyeing the old key 1.3200 resistance. Momentum indicators are swinging higher once more in still strongly positive configuration. A decisive closing breakout above 1.3200 would be the next big step forward for Cable. Slightly re-aligning the recent uptrend lends support around 1.3070 today, whilst the hourly chart shows good initial support at 1.3110.