Market Overview
The risk recovery is once more approaching an intriguing crossroads. The bullish forces of ever greater stimulus from central banks (this week the Fed and BoJ have expanded their range of support) are being met by the bearish threat of second wave COVID-19 infections in Beijing. Wall Street has certainly felt the benefit of the Fed announcement on corporate debt purchases, but this positive mood is being tempered somewhat as China has announced it is raising its emergency response in Beijing back to level 2, closing schools and cancelling flights. There is a very real concern that if these infection rates cannot be kept under control, it would be the source of fear back into markets. How the newsflow develops in the coming days could be crucial. However, slightly tipping the balance to the risk positive side of the equation, rumours of a $1 trillion package of support measures being formulated by the US Government, including infrastructure spend and employee support. The announcement of this could once more boost confidence in the US economic recovery. So this morning, we see a state of calm and consideration across major markets. US futures tick mildly higher, but there is and edge back lower on yields. Forex majors show an edge of risk positive, but recent sessions have seesawed for the dollar (both on a closing basis and intraday). UK inflation coming in a shade softer than expected on CPI (and weaker on PPI) has been a drag on sterling early today (not helping the prospects of a recovery in our Chart of the Day).
Wall Street closed strongly back higher last night, with the S&P 500 +1.9% (at 3124). US futures are shading mildly higher this morning (E-mini S&Ps +0.1%) but this has not helped Asian markets with the Nikkei -0.6% and Shanghai Composite flat). European markets are taking it as glass half full initially, with the FTSE futures +0.5% and DAX futures +0.1%, but it tends to raise an eyebrow when FTSE futures outpace the DAX futures on the upside. In forex, there is a shade to USD underperformance, with the dollar struggling across the forex majors, with the one notable exception of GBP weakness. In commodities, the consolidation continues on gold and silver, whilst oil is a touch lower in early moves.
On the economic calendar, there are a few minor data releases but nothing to get overly worked up by. The final Eurozone inflation for May is at 1000BST and not expected to show any surprises, with the data unrevised from the flash readings. Headline Eurozone HICP is expected to be at +0.1% (down from +0.3% final in April) with core Eurozone HICP at +1.1% (final April at 1.1%). Then into the US session, look out for US Building Permits at 1330BST which are expected to bounce back strongly in May to 1.228m (from 1.066m in April), with US Housing Starts at 1.095m (up from 0.891m in April). The EIA Crude Oil Inventories are expected to show a build of just +0.5m barrels (after last week’s surprise build of 5.7m barrels).
Also it is important to be aware that Fed chair Powell has day 2 of his Congressional testimonies, this time to the House Financial Services Committee, at 1700BST. He gives the same written testimony but then will be responding to questions. He is unlikely to be anything other than cautious again.
Chart of the Day – GBP/AUD
For over 10 weeks, the Aussie has lorded it over sterling on the performance charts. However, could there about to be a shift in this relationship? As support has formed at 1.8055 in the past couple of weeks, the cross of GBP/AUD recently broke a well-defined downtrend. The recent re-emergence of positive candlesticks in the past week or so have helped to bolster this support. The question is whether this is a consolidation before the next lurch lower, or the start of a recovery. For that, sterling bulls must look to a breakout above 1.8450 which, if seen on a closing basis, would be a pivot resistance breakout, but also complete a small base pattern which would imply around +400 pips of further recovery. Already we see leanings towards improving momentum indicators. The RSI and Stochastics have both picked up but it is a bull cross buy signal on the MACD lines which is really notable. However, for the recovery to really get going, the RSI needs a position above 50 to suggest the bulls are backing the move. They can start, with a close above the falling 21 day moving average (today around 1.8360) which has been a strong gauge for the outlook of GBP/AUD pretty much throughout 2020. The hourly chart suggests that current outlook is one of consolidation. However, building higher lows from support at 1.8145 will help to improve confidence now. It is still very early for the prospects of recovery on Sterling/Aussie, but the interesting developments suggest it is a market that could well be on the turn and is definitely one to watch.
As the near term outlook increasingly becomes rangebound, the mix of signals on EUR/USD continue to come. Sharp moves higher and lower in recent sessions reflect a lack of traction either way and a market which is being pulled around by uncertainty. There is support at $1.1210 and resistance at $1.1420. The daily technical signals are moving into reverse as RSI and Stochastics slide and MACD lines threaten to bear cross. However, the lack of conviction in these moves would suggest this is still more a function of unwinding the sharp late May rally than anything more malign. A consolidation back towards the five week uptrend (which rises at $1.1125 today) is more the likely bias, and even if this choppy consolidation were to breach $1.1210 support, it would still likely to be playing out this consolidation. We would subsequently see near term unwinding moves towards the breakout support at $1.1145 as a chance to buy for what we see as the next bull leg. The hourly chart shows hourly RSI oscillating between 30/70 for most of the past eight sessions as this choppy consolidation has taken hold. With hourly signals swinging back higher once more today, it sets up a mild positive bias within this range this morning. Support has built at $1.1210/1.1225, with moves towards $1.1350 resistance likely to struggle near term.
The important near term levels to keep note of on Cable are support at $1.2450 and resistance of $1.2645. As Cable picked up on Monday, the strong positive candle left the formation of a four week uptrend in its wake. This trendline sits at $1.2475 today. Although this has lent a positive bias to the outlook, the bulls will have been disappointed by the failure to close back above $1.2645 yesterday. The ensuing negative candlestick and early slip lower today leaves a far more uncertain near term outlook for Cable. The trendline needs to hold initially, but if the support at $1.2450 breaks then any positive bias, within what is still a medium term range $1.2075/$1.2810, will be lost. For the bulls to get back on track a move above $1.2645 need to close above the resistance. Momentum indicators appear to be at an infection point. The RSI is hovering a shade above 50, and similar with the Stochastics. A decisive negative session could tip these negative once more. The MACD lines have converged and threaten a bear cross too. The hourly chart shows yesterday’s sharp move lower has been contained around a near term pivot of $1.2550 this morning, with momentum signals moderating too. However, if this pivot support begins to fail, then $1.2450 comes back into play. Resistance is initially at $1.2610.
Despite the prospects of a broad dollar technical rally showing signs of improvement across major pairs yesterday, another session of consolidation has done little to shift the outlook for Dollar/Yen. A second consecutive small bodied candle (this time a shade higher) was seen yesterday, whilst the market is showing little appetite for direction today. The latest moves on Dollar/Yen re-affirm the ranging outlook and have helped to bolster support between 106.00/106.55. Momentum indicators have stabilised previous selling pressure but retain a mild negative bias within the range. Daily RSI flattening off in the mid-40s, whilst Stochastics show little appetite for real recovery and MACD lines tip back around neutral. The hourly chart continues to show that resistance at 107.60 is holding a recovery at bay, but given the neutral positioning on hourly momentum, even if it were to be breached, the prospect of upside traction seems limited for now. Whilst support at 107.00 holds, the outlook will remain neutral.
As the latest attempted bull move once more petered out after around three sessions last week, gold has entered a phase of consolidation. Within the medium term range of $1660/$1764 of the past two months, it is very rare that gold consolidates. In three of the past four sessions, gold has seen daily traded ranges of less than the Average True Range (which is now around $25). The move early today suggests that this consolidation will continue today. There is the slightest positive bias that is still in the outlook. It comes as gold continues to trade above the $1720/$1725 pivot band on the hourly chart. This lends a slight preference towards a test of $1733 initial resistance, however, we have little conviction of any sustainable traction in gold right now. The daily momentum indicators which have effectively unwound to a broad negative configuration, reflect the likely continuation of the range. Resistance of $1744 is strengthening and whilst this resistance may come under pressure from this mild positive bias, we expect rallies will continue to fade and lack traction. We are neutral between $1704/$1720 and turn corrective within the range below $1700. This is now very much a trading range on gold and technical signals do not suggest it will be broken any time soon.
Brent Crude Oil
A renewed sense of improving outlook continued to build yesterday with a third consecutive positive close on Brent Crude. The move has now broken a mini corrective downtrend and has bolstered the support of the neckline from the medium term base pattern completed above $36.40. There has been a slight faltering of the move overnight, as the price has just drifted off slightly early today. The bulls now need to hold the foundations of this medium term recovery, but for now this is still likely to be seen more as an opportunity than a threat to the recovery. Holding the support above $36.40 will sustain this view. Momentum indicators are in more of a containment phase, as their previously strong configuration has been hampered by the recent correction. How the market responds to another slip lower will be an interesting gauge. The hourly chart shows near term support $38.95/$39.45 but holding above $40 (which is a pivot as well as psychological) once more will improve confidence. Initial resistance now at $41.65 is preventing a move back to $43.40 which is key resistance now.
A strong rebound continued yesterday, with the Dow closing +2.0% higher into the close. However, there is still cause to be mindful of this move which has added almost 1500 ticks since Monday’s session low. The daily candlestick shows that the Dow closed below its open. Could this be considered a disappointing session? Add to that, the market is also at a key moment with regards to the big “island reversal” that completed last week. The big gap that was left, between 26,295/26,940 will be a key gauge now for the bulls. Yesterday’s high around 26,610 shows a failed attempt to fill the gap. If the market now begins to turn back lower today, it simply reinforces the topping element of the island reversal. It would suggest that the market is in a very important phase now. The gap needs to be “closed” for the bulls to have conviction once more. The hourly chart shows the rebound just tailing off slightly into the close yesterday. Initial support at 25,810 needs to hold to prevent the rebound again rolling over.
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