There is a cautiously positive tone to markets this morning as traders look toward the Federal Reserve meeting later today. A decline on Wall Street last night came amidst a session of risk reduction. After last week’s sharp move higher on Treasury yields amidst a heightened sense of risk appetite, peaked by Friday’s remarkable US jobs report, we now see yields pulling lower again. The US 10 year yield has reversed -14 bps since Friday’s high of 0.96% as traders try to figure out the reaction of the FOMC today. The dollar has been flung around like a doll in a washing machine in recent sessions, and is weakening again this morning. If the Fed opts to remain cautious and maintain its extremely dovish position (perhaps even nodding to yield curve control) despite the positive read-through of the payrolls report, we could see the dollar continuing to weaken. The Fed releases its latest set of economic projections today and forward guidance will be key. The risk rally has been built on the prospect that economies are re-opening but the massive support of easy monetary (and fiscal) policy continues. If the Fed guides for this to continue open-ended, then the structural weakening of the dollar will continue and the risk rally will remain unemcumbered to run ever higher. With equity futures ticking higher, yields lower and the dollar also lower today, it seems that this is how markets are positioning.
Wall Street closed lower with the S&P 500 -0.8% at 3214, whilst futures are ticking slightly higher early today, with the E-mini S&Ps +0.3%. Asian markets have been mixed with Nikkei +0.2% but Shanghai Composite -0.5% after slightly softer inflation data. European markets look mixed to slightly positive early today with FTSE futures +0.1% and DAX futures +0.4%. In forex, there is a broad USD negative read through, with USD underperforming around the range of major currencies by a quarter to a half a percent. In commodities, a similar picture is forming with gold and silver mildly higher, although oil is almost -2% weaker after the EIA reduced its global demand outlook.
There is a key focus on the US today for the economic calendar. The US CPI is released at 1330BST and is expected to show headline inflation for May is expected to be flat on the month and therefore fall back slightly to +0.2% year on year (from +0.3% in April). With core CPI, it is expected to again be flat on the month which would also shave a tenth of a percent to +1.3% (from +1.4% in April). EIA Crude Oil Inventories are expected to show a second consecutive week of inventory drawdown, by -1.5m barrels (-2.1m barrels last week). The big focus though for the day will be the FOMC monetary policy decision at 1900BST. There is no expectation for any change to rates (staying at a Fed Funds range of 0.00%/0.25%). There will also be a serving of staff economic projections which will be poured over, especially in the wake of the huge positive surprise in the latest jobs data.
Chart of the Day – AUD/JPY
We see Aussie/Yen as a key gauge of risk appetite. The risk rally seems to be at a near term inflection point and AUD/JPY could be a key market to watch. After such a strong run higher there have now been two negative candles in the opening days this week. The bull run higher has been well into overbought territory in recent weeks and the slip back is now starting to pull through some near term corrective signals (or at least profit-taking signals). The latest breakout of the old February high of 74.50 is the first line of support and is increasingly important. It was tested yesterday and held initial pressure, but how the market reacts around this support could be key. Having survived the initial test, a close below today could usher in a much deeper correction. The hourly chart shows a marked deterioration in momentum but also a potential top pattern would form below 74.40. The daily momentum indicators are now beginning to fall over, with 14 day RSI under 70 (from above 80) being a corrective signal, along with the Stochastics having bear crossed lower (although not yet a confirmed sell signal. Are intraday rallies now a chance to sell? The hourly chart shows resistance 75.25/75.60 and a bull failure under the 89 hour moving average (a good gauge for the outlook on this chart) would suggest corrective pressure is building. A decisive breach of 74.40 would imply a correction towards 72.25. Above 76.25 and the bulls regain control.
Euro bulls will be looking at the EUR/USD pair today and question what all the fuss was about. After a two and a half session correction from $1.1385 to $1.1240, another surge of buying pressure has driven a bull swing back higher again. A strong reaction in the US session yesterday completed a bullish outside day. This positive candle followed by early gains today means that once more the market is within reach of the $1.1385 high from Payrolls Friday. Technically, this is a very strong reaction and the bulls appear to have re-established their control of the market. It now means that a closing breakout above $1.1385 today would open the prospect of a full rally back to the key March high of $1.1490. Subsequently, daily momentum is ticking higher once more and seemingly all is good again with the bull run. However, the Federal Reserve meeting later today could be a factor that has an influence on the dollar once more and will certainly need to be watched. The near term importance of the support at $1.1240/$1.1255 is also growing. There is an initial support of $1.1320/$1.1330 on the hourly chart that will be a gauge of sentiment this morning.
An impressive intraday rally saved Cable from forming a key reversal signal yesterday and means that the bulls are still in control of the outlook. A third consecutive close above $1.2645 validates the breakout, especially with intraday pullbacks seen in the past two sessions. Cable has now formed nine positive closes in a row and another early breakout this morning opens the prospect that today could be the tenth. However, the bulls have had a warning. With momentum still stretched, the initial emergence of selling pressure yesterday is a caveat to the bull run (even if it amounted to little by the close yesterday). The daily RSI is ticking over 70 now and this comes with the candlestick bodies being relatively small. We have been cautiously positive of this rally and have been on the lookout for corrective signals which have threatened but never confirmed. We stay with this rally, but remain cautious, especially with the Fed meeting today. The prospect of some profit taking will still be tempting. The hourly chart reflects a less positively configured momentum set up now (given the mild negative divergence on hourly MACD in recent days). The support at $1.2615/$1.2625 is increasingly important now. A decisive breakout holding above $1.2755 this morning suggests a move towards $1.2875 could be the next upside target.
With two decisive negative candles in the past two days, and the potential for a third today, there has been a complete dismantling of the bullish breakout. A decisive close underneath the 108.10 old breakout support now means that the market is in reverse once more. Pressure is mounting on 107.05 initial support, but if this breaches it would open 106.00 once more. This is a remarkable turnaround in sentiment, with momentum indicators increasingly corrective now. A confirmed sell signal on Stochastics, whilst RSI moving so quickly back below 50 (from above 70) and a threat of a MACD bear cross is also a near term bearish signal. The old 108.10 level will be seen as a basis of resistance once more, whilst the hourly chart shows consistent lower highs and lower lows of recent days where old support is new resistance (initially then 107.85 is a barrier today).
The price action of recent weeks has firmed up our assessment that gold is trading in a growing medium term trading range between $1660/$1764. With the range, there is a band of important support around $1660/$1670 up towards a band of important resistance $1746/$1764. With the last two sessions seeing gold ticking higher once more, the outlook within the range has been rather neutralised once more around the middle of the range. The fact that this comes with the RSI around 50 again and MACD lines flattening around neutral, adds to this neutral outlook. The hourly chart shows that a near term corrective outlook has been neutralised too (with hourly RSI moving above 60 once more). A resistance band at $1720/$1725 will now gauge the next near term move. A failure of the rebound under this band of resistance will maintain the market in what we see as a neutral zone between $1700/$1725. A close above this band turns the bias more positive and opens the potential test of $1746 resistance. A failure and move below $1700 would see a more negative bias within the range again. This neutral position coming ahead of the Federal reserve decision should not come as a surprise either.
Brent Crude Oil
Through the course of this recovery, Brent Crude has seen two consolidation phases, each just over a week in duration, before the next upside breakout. As Brent has pulled back from Monday’s rebound high of $43.40, the strength of the recovery is again being tested. Having traded lower for much of the session yesterday, the bulls rallied into the close, leaving a positive session and to suggest that they are not willing to give up the run higher quite yet. However, the slide back has not played out in its entirety quite yet. The now seven week uptrend, since the April low, has provided a strong backdrop to the recovery and comes in as support at $39.35 today. An early slip again today suggests the market is still at least in its consolidation phase but could turn corrective. Daily momentum indicators are still positively configured (especially RSI and MACD), but Stochastics crossing lower are of note. The hourly chart shows yesterday’s low at $39.85 needs to be watched as initial support, but a break below $38.75 would complete a near term topping pattern. The bulls will be looking to overcome initial resistance at $41.45 to get back on track. Once more this is a pause for consolidation within the bull run and like any pause for contemplation, there are risks to the downside which are growing.
Dow Jones Industrial Average
It has been an incredible run in the past three and a half weeks. Since the May low, the Dow has rallied over +20% to Monday’s high before an initial pullback yesterday. Through the time of that bull move, there have been just a handful of negative sessions and each have been followed by an instant bull reaction. US futures are around half a percent higher in early moves today, so we can expect that this trend of buying into the weakness can continue. On a technical basis, the outlook remains very strong. The support of a three and a half week uptrend comes in at 26,780. Daily momentum indicators are very strong still, even if they have just ticked slightly lower with yesterday’s dip. However, perhaps a little caution may be wise today in front of the Federal Reserve meeting announcement. Hourly momentum is not as strong as it was previously, with MACD lines tracking lower and Stochastics falling at seven session lows. There has been a threat of a corrective slip to unwind some of the exuberance of the recent rally. If the bulls are uncertain of the Fed decision, this could begin to usher in some arguably overdue profit-taking. Initial support 26,835 and then filling a gap down at 26,385. Back above Monday’s high of 27,580 simply continues the bull move.