The unwind continues. The market is apparently still mulling over the implications of the FOMC statement and FOMC Chair Janet Yellen’s comments. At the short end, the Fed Funds expectations for 2017 are back almost to exactly where they were on the Monday before the meeting, in contrast to the Tuesday and Wednesday levels, which were around 4 bps higher. At the same time bond yields, which moved lower immediately after the meeting, have more or less regained their pre-FOMC levels. So there has been mean reversion in the fixed income markets, signifying that at the end of the day, the market doesn’t see any real change in view at the Fed. On the other hand, the VIX index remains notably lower than before the meeting, US stocks rallied for six consecutive days, and the dollar is weaker across the board, both in comparison to G10 and EM currencies. So the question is why mean reversion in fixed income isn’t accompanied by mean reversion in FX.
My guess is that it’s due to the Fed’s view on accelerating inflation in the US. Inflation is rising faster than nominal yields are, meaning that real interest rates are coming down in the US. Yellen dismissed the recent acceleration in inflation as “noisy” data, but the trend does seem to be upwards. Moreover, Canada’s CPI for May, released on Friday, was well above expectations at +2.3% yoy headline, +1.7% yoy core (forecast: 2.0%, 1.5% respectively). US and Canadian inflation tend to move together. With the FOMC still focused on the employment side of its dual mandate, US real yields are likely move lower, which may slow any USD rally from here. The huge demand for fixed income product is likely to keep USD yields from rising significantly. US investment-grade bond issuance is already the largest for any June on record and there’s one week left in the month.
We may get some clarification on the Fed’s view when Yellen gives the inaugural Michel Camdessus central banking lecture at the IMF on 2 July. That will be followed by the nonfarm payrolls on 3 July and FOMC minutes on 9 July.
The dollar is opening mixed this morning, higher against SEK, CHF and EUR and lower vs the commodity currencies – CAD, AUD and NZD. In the EM world, ZAR and MXN gains strongly while PLN and RUB were lower. It looks as if the market is favouring those countries that may tighten monetary policy while selling those where policy may be loosened. ZAR was probably boosted too by Saturday’s reports of a “breakthrough” in talks to end South Africa’s longest-ever mining strike. Details of the agreement will be released today. Expectations of an agreement bolstered ZAR on Friday and I would expect it to gain further today once the details are out. The commodity currencies are also likely beneficiaries of the much higher-than-expected rise in the HSBC/Markit China manufacturing PMI for June, which jumped to 50.8 from 49.4 (market consensus: 49.7). The surprising return of this gauge above the 50 level for the first time this year buoyed copper significantly. The recovery of growth in China plus rising oil prices on the back of Iraqi tensions should mean more gains for the commodity currencies.
RUB stands out as an outlier. The market is rewarding currencies with tight monetary policy, plus oil and other commodity prices are moving higher, but fresh clashes in Ukraine and NATO reports of more Russian forces near Ukraine are hurting the ruble. It’s likely to remain hostage to geopolitical forces.
The rest of the PMIs will take center stage during the European day as well. The Eurozone manufacturing PMI is expected to be unchanged while the service sector PMI is forecast to be slightly higher. Somehow the composite index is forecast to be marginally lower. German manufacturing PMI is also forecast to rise, while French manufacturing PMI on the other hand is expected to fall. The opposite holds for the service PMIs.
In the US, the preliminary Markit manufacturing PMI is expected to be lower, although attention usually focuses on the ISM index. Chicago Fed national activity index is estimated to have increased to 0.20 in May, a turnaround from -0.32 in the previous month. Existing Home sales are forecast to have increased in May.
We have three speakers on Monday’s agenda. ECB’s Vice President Vitor Constancio speaks in Frankfurt, ECB Executive Board Member Yves Mersch speaks in Poland and ECB Governing Council Member Ewald Nowotny also speaks.
As for the rest of the week, on Tuesday, the main event will be the German Ifo survey for June. In the UK we get the BBA mortgage approvals for May, while in the US, new home sales for May, while the FHFA and the S&P/Case-Shiller house price indices for April are also coming out. On Wednesday, in the Eurozone, we have the German GfK consumer confidence index for June and Italy’s retail sales for April. From the US, we have durable goods orders for May and the third estimate of the nation’s GDP for Q1. On Thursday, US personal income and personal spending for May are coming out, alongside the PCE deflator for the same month. The latter will be closely watched to see if the higher prices reflected in the CPI are indeed just “noise.” Finally, on Friday, we get the usual end-of-month data dump from Japan. In Europe, the preliminary German CPI for June is coming out, which may impact real rates in the Eurozone and hence be crucial for EUR/USD. Also the UK final GDP for Q1 is due. In the US, we get the University of Michigan final consumer sentiment for June.
THE MARKET
EUR/USD still in a correcting phase
EUR/USD found resistance at the 200-period moving average and moved lower to find support at the blue short-term uptrend line, slightly below the 1.3587 barrier. If the longs are willing to take advantage of that support zone, I would expect them to challenge the 1.3685 (R1) zone, which coincides with the 38.2% retracement level of the 8th May- 5th June decline. Relying on our short-term momentum studies does not seem a solid strategy at the moment, since the RSI found support near its 50 level and is now pointing up, but the MACD remains below its signal line and is pointing down. In my view, the long-term picture remains to the downside and I would consider any further advance as a retracement for now.
Support: 1.3587 (S1), 1.3500 (S2), 1.3475 (S3).
Resistance: 1.3685 (R1), 1.3745 (R2), 1.3745 (R3).
EUR/JPY within a falling wedge
EUR/JPY moved sideways, remaining slightly above the 138.65 (S1) hurdle. Seeing that our short-term momentum studies show signs of topping with the MACD ready to cross below its signal line, I would expect further consolidation near that zone and I cannot not rule out a move back below 138.65 (S1) again. In the bigger picture, the rate is trading within a possible falling wedge formation, thus I would maintain my neutral view. Only a decisive move out of the pattern could give clearer indications about the pair’s forthcoming direction.
Support: 138.65 (S1), 137.70 (S2), 100.80 (S3).
Resistance: 139.35 (R1), 140.00 (R2), 141.00 (R3).
GBP/USD tests the 1.7000 barrier as a support
GBP/USD edged higher after challenging the psychological barrier of 1.7000 (S1) as a support this time. As long as cable is forming higher highs and higher lows within the purple upside channel and above both the moving averages, I see a positive picture and I would expect the rate to go for the 1.7100 (R2) zone. My only concern is that we can identify negative divergence between the MACD and the price action, indicating that the upside momentum is decelerating. On the daily chart, the 80-day exponential moving average provides significant support to the lows of the price action, keeping the long-term upside path intact.
Support: 1.7000 (S1), 1.6915 (S2), 1.6880 (S3).
Resistance: 1.7060 (R1), 1.7100 (R2), 1.7200 (R3).
Gold in a consolidative mode
Gold moved in a consolidative mode on Friday, remaining between the support barrier of 1305 (S1) and the resistance of 1320 (R1). The RSI moved lower and seems ready to exit overbought conditions, while the MACD shows signs of topping. As a result, further consolidation or a downside wave are possible in the near future. However, as long as the structure of the precious metal is higher highs and higher lows, the technical picture remains positive and I would consider any downside waves as corrective waves, at least for now
Support: 1305 (S1), 1285 (S2), 1268 (S3).
Resistance: 1320 (R1), 1330 (R2), 1342 (R3).
WTI’s uptrend is back in force
WTI opened with a bullish gap above the 107.00 hurdle, confirming my view that the prior correcting phase is over and the uptrend is back in force. As long as we see a structure of higher highs and higher lows, the outlook remains positive and I would expect WTI to challenge the 108.00 (R1) zone. The MACD rebounded from its blue support line, while it crossed above its signal line, amplifying the case for the continuation of the short-term uptrend.
Support: 107.00 (S1), 105.80 (S2), 105.10 (S3).
Resistance: 108.00 (R1), 110.00 (R2), 110.70 (R3).
Recommended Content
Editors’ Picks
EUR/USD steady below 1.0800 after US PCE meets expectations
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair barely reacted to US PCE inflation data, with the Greenback shedding some pips. Fed Chair Jerome Powell set to speak ahead of the weekly close.
GBP/USD hovers around 1.2620 in dull trading
GBP/USD trades sideways above 1.2600 amid a widespread holiday restraining action across financial markets. Investors took a long weekend ahead of critical United States employment data next week. Fed Chair Powell coming up next.
Gold price sits at all-time highs above $2,230
Gold price holds near a fresh all-time high at $2,236 in thinned trading amid the Easter Holiday. Most major world markets remain closed, although the United States published core PCE inflation, the Federal Reserve’s favorite inflation gauge.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.