Market Overview
The tide market sentiment has once more seen positive risk appetite begin to ebb away once more today. It seems that in recent days, market direction is being driven by newsflow not so much on COVID-19, but on rhetoric from both sides of the US/China trade story. The latest comes on suggestions that China wants to renegotiate Phase One of the trade agreement (apparently in reaction to the White House’s suggestions of retribution for China’s role in the pandemic). However, renegotiation to tip the balance towards China is not something that Trump would ever likely bow to, and as such markets are leaning risk negative today. Treasury yields are ticking lower, along with equities. There is also a slight dollar positive lean on forex majors, although notably, the support for the heavily weighted euro and yen means that Dollar Index is flat. With Chinese inflation also coming in lower than expected for PPI (producers) and CPI (consumers) this alludes to weaker economic activity than forecast in China and again plays into a mild risk negative skew today. FOMC members Raphael Bostic and Charles Evans both speaking against the potential for negative interest rates yesterday is helping to bolster the near term dollar moves. Today’s focus on US inflation could though shift this narrative again, if levels come in lower than expected.
Wall Street closed mixed last night, with S&P 500 all but flat at 2930. With the E-mini S&P futures in decline this morning (by -0.7%) this is putting equities on the back foot. Asian markets dropped back slightly (Nikkei -0.1% whilst Shanghai Composite was -0.2%). European markets are also lower, with DAX futures -0.5% and FTSE futures -0.2%. In forex, the broad slip in commodity currencies is leaving AUD as the main underperformer, whilst JPY is the main outperformer. USD is mixed to slightly positive. In commodities, there are mixed moves for gold whilst silver is slightly lower, but oil continues its recent consolidation.
US inflation is big focus for the economic calendar today. US headline CPI is at 1330BST and is expected to show a -0.7% decline on the monthly data for April which would pull the year on year back to just +0.4% (down from +1.5% in March). The US core CPI is expected to decline by -0.2% on the month which would bring the yearly inflation back to +1.7% (from +2.1%).
There is a clutch of Fed speakers today, with Patrick Harker and Randall Quarles at 1500BST, whilst Loretta Mester at 2200BST.
Chart of the Day – AUD/JPY
After the six week uptrend was broken in early May, the bulls were under pressure. However, they have responded really well in recent sessions, to bolster the support band that has been forming at 67.25/67.62. The initial March rally formed resistance between 67.25/67.62, and since the April breakout, this old resistance has become a key basis of support. The slide of early May threatened this support once more, but the bulls have responded well. Now they need to take the next step forward and breakout to a new multi-week high above 70.15. Such is the accuracy of support and resistance levels on Aussie/Yen, once more, this level was hit to the pip before an intraday retreat in the past 24 hours. The bulls will be looking to use renewed positive momentum to pull higher above 70.15 and open 71.50/72.40 as the next upside targets. The hourly chart shows how 69.00 has become a pivot in the past month and is broadly mid-range now and will be an important gauge for the near term outlook. A good bull reaction to early weakness today is bolstering 69.00 as a basis of support and the bulls are looking to re-assert again. A new positive bias is taking hold with positive hourly momentum and this implies pressure on 70.15.
The pair has been trading in a band between $1.0725/$1.1015 for more than a month now. Having tested the range lows mid-last week, it had looked as though the bulls were beginning to regain some confidence once more, but yesterday’s renewed negative candlestick has questioned the prospect of recovery again. Friday’s rebound failure under $1.0890 leans a bias towards further pressure on the key support band $1.0725/$1.0765 again. Despite this, there is a fairly mixed outlook to EUR/USD right now. With the support still intact and momentum indicators retaining their ranging configuration (even if they are deteriorating latterly) this would suggest that we continue to play EUR/USD as a range. It does though mean that this could be another important session, as a decisive move lower could result in a key breach of support. There has been a decent response from the bulls early today, with a rebound off$1.0785 but the resistance is mounting overhead at $1.0890 (a mid-range pivot) and $1.0875 (last Friday’s rebound high). Hourly momentum suggests playing the range still, but with a near term negative bias in the lower half of the range.
With a rally into the mid-range pivot around $1.2400 failing, Cable has slid back again to put pressure on the range lows between $1.2160/$1.2265 once more. As yet there has been no breakdown and it is interesting to see that during several tests over the past four weeks, the 50% Fibonacci retracement support (of $1.3200/$1.1405) around $1.2300 has been defended into the close. However, the pressure is growing again following yesterday’s negative candlestick. Furthermore, momentum indicators just beginning to deteriorate now as MACD lines tail off and Stochastics also pull lower. The RSI has held 45 throughout the past six weeks and will also be considered a warning if this is decisively breached. The hourly chart shows resistance building $1.2360/$1.2400, but for now still only a mild negative bias on momentum. Support at $1.2265 will be an initial gauge for how the bulls are responding in this consolidation now. A close under $1.2265 would all but open $1.2160 which is the key April low. Above $1.2480 is needed to really see an improvement now.
There seemed to be a decisive shift in sentiment on Dollar/Yen yesterday. After weeks of negative drift within the confines of a shallow but well defined downtrend, the market just exploded higher. A huge bull candle added over +100 pips, but also burst through a series of key technical resistance. Breaching the five week downtrend, the 50% Fib but most importantly, the resistance of the first lower high at 107.50, brings a serious recovery into play. The next resistance is the 108.00 resistance which had been a barrier to gains throughout much of the latter half of April. The bulls have signalled their recovery intent, but now need to lay some strong foundations as the market has begun to retrace this morning. Given the importance of 106.90 for an improvement, the bulls will be looking to hold this as support on an unwinding move. The hourly chart shows positive momentum unwinding and another higher low between 106.90/107.50 will be seen as a development for a new near to medium term recovery trend on Dollar/Yen. We are looking to use intraday supported weakness now as a chance to buy. A close above 108.00 would be the next step after that.
Gold
Gold continues to trade within the range $1660/$1746. Signals are increasingly mixed within this range as a lack of conviction remains. Including today, it is now 11 sessions in a row where the market has traded at the $1702 pivot. With a couple of (very minor) closes below the pivot in the past two sessions, there is the mildest of negative biases within the range, but essentially the market remains very much devoid of real direction. This is reflected in the momentum indicators, where the RSI and Stochastics are ticking around their mid-points. MACD lines continue to tail off as the strong momentum of the early April rally has dissipated into consolidation. You can tighten support and resistance within the band. In the past week, there is support around $1681, with resistance firming at $1722. We continue to see the medium to longer term case is strong for further upside and an eventual break to multi-year highs. As such we favour buying into weakness within the range, with strong support $1640/$1660. For now though, this remains a market in need of decisive direction.
The sharp recovery from late April has flattened right off as the bulls have just taken a foot off the gas. This is now developing into an important phase. In early April the market had rallied sharply only to consolidate for a week before significant selling pressure took off. This selling coincided with the run up to the May contract expiry on WTI, and the June contract expiry is now just a week away. There is more of a positive momentum set up this time, but how the bulls respond in the coming days will be crucial, knowing the calamitous impact of last month. Technical support above $29.00 is holding, and momentum is holding its improving outlook. A closing drift below $29.00 would be a warning now, and below $27.15 would see the selling pressure ramping up. A variety of positive and negative candles in recent sessions reflects a battle for control, but one which at the moment is still resisting the renewed selling pressure. Resistance at $32.35 is preventing a test of $36.40 again.
A muted session to begin the week has settled the Dow into something of a consolidation. A -100 tick loss is a mild loss on the session within a small daily range (just under 300 ticks versus the Average True Range of 468 ticks). The Dow has held above the rising 21 day moving average again (currently 23,415) whilst momentum indicators are in something of a holding pattern. RSI and MACD are flattening just above their neutral points, whilst Stochastics are still edging higher from last week’s bull cross. The legacy of Friday’s pull higher is still there for now, although futures are suggesting mild early losses again today. Initial support is at 24,070 from yesterday’s low, with a mini higher reaction low at 23,835. The important near term support remains the 23,360 May low. Resistance at 23,365/23,410 is protecting the April rebound high of 24,765. We have a mild preference for still buying into weakness, but it is a slow grind.
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