The Big Picture

Has the dollar turned the corner? The notable point about Friday’s market was that the dollar managed to gain against most of its G10 counterparts and a good number of EM currencies despite mixed numbers for the durable goods data and a decline in both Fed Funds rate expectations (-2 bps) and bond yields (-4 bps in the 10yrs). The euro meanwhile weakened throughout the day and is trading this morning about where it finished US trading – the lows of the day. The Commitment of Traders report showed that speculators increased their long dollar positions to the highest since Nov. 2012. We may be seeing the start of the long-awaited USD rally. Then again, it could just be the aggregate effect of so many risky events around the world causing a “flight to safety” into USD. But gold, although doing well this morning, is still down on the week, suggesting that there’s more to it than that.

Today: On Monday, we have a relatively light calendar compared to the rest of the week. We have no major data or events scheduled during the European day.

In the US, the preliminary Markit composite and service-sector PMIs for July are released but no forecast is available. The Dallas Fed manufacturing activity index for July is estimated to have slightly increased, while pending home sales for June are expected to have slowed in pace on a mom basis.

Rest of the week: Wednesday is a huge day! The big event of the week will be the FOMC meeting on Tuesday and Wednesday. However, there is no press conference nor updated forecast materials scheduled after the meeting, so the only pointers the market will get from the meeting will come from the statement following it, and I expect little change there – just some editing to bring the first paragraph up-to-date with developments in the economy since the last meeting. The key points would be if they either a) changed the balance of risks to the outlook from “nearly balanced,” the view that they’ve held since March, or b) if they made any change to the phrase that they anticipate the Fed Funds rate will remain unchanged for a “considerable time after the asset purchase program ends.” But the likelihood of a change to either of those phrases is small. We’ll know more about what happened at the meeting when the minutes are released on Aug. 20th. Also coming out Wednesday from the US are the ADP employment report and first estimate of Q2 GDP. The ADP report, two days ahead of the NFP release, is expected to show that the private sector gained fewer jobs in June than it did last month. Q2 GDP is forecast to show a turnaround from the final Q1 figure of -2.9% qoq SAAR, adding support to the nation’s economic recovery.

Elsewhere on Wednesday, Japan’s preliminary industrial production for June is coming out and New Zealand’s building permits for the same month. During the European day, we get the preliminary German CPI for July, an important indicator of Eurozone inflation a week before the ECB meeting.

On Tuesday, we get Japan’s jobless rate and retail sales figures, both for June. In the UK, mortgage approvals for June may show that buyers are starting to balk at paying the current record prices, which could hurt GBP. From the US, consumer confidence index for July is expected to print to the upside. On Thursday, the Eurozone CPI estimate for July is forecast to stay at the record low of 0.5% yoy. Any decline from that could increase speculation about further ECB action. However, unless the EU is on the brink of deflation, I think the ECB is likely to wait at least until they’ve implemented both their targeted long-term refinancing operations in December before trying anything else. German unemployment for July and Eurozone unemployment for June are also coming out. From Canada, the GDP for May is expected to rise, giving a boost to the yoy rate.

Finally on Friday, the major event will be the US non-farm payrolls for July. The market consensus is for a rise of 230k, down from 288k in June. That would be a slowdown in hiring from the previous month, but not a cause for concern as it would be exactly in line with the average for the last six months. At the same time the US unemployment rate is forecast to have remained unchanged at 6.1%. Further in the US, the ISM manufacturing index and the final Markit manufacturing PMI, both for July, are coming out. Also to be released are the final manufacturing PMIs for July, from Japan, China, France, Germany, the UK and the Eurozone.

Sometime during the week, the EU is expected to announce tougher sanctions against Russia. That could heighten the geopolitical risks and hurt RUB, other Eastern European currencies and perhaps EUR as well.

The Market

EUR/USD below 1.3435

EUR/USD declined on Friday, breaking below the support (turned into resistance) of 1.3435. I still expect the rate to reach the 1.3400 (S1) hurdle, where a decisive dip could target the bar of 1.3350 (S2). The price structure remains lower highs and lower lows below both the moving averages and this keeps the short-term path to the downside. Nevertheless, zooming on the 1-hour chart, the hourly MACD, although in its negative field, crossed above its signal line, while the RSI found support at its 30 level and moved somewhat higher. As a result, there could be some consolidation of a minor bounce before sellers take the reins again. On the daily chart, the 50-day moving average lies below the 200-day one, adding to the negative picture of the currency pair.

Support: 1.3400 (S1), 1.3350 (S2), 1.3300 (S3).
Resistance: 1.3435 (R1), 1.3485 (R2), 1.3500 (R3).

USD/JPY rallies and hits 101.95

USD/JPY climbed to find resistance at 101.95 (R1), a bit above the upper boundary of the purple downside channel. I would change my view to neutral for today, since a move above 101.95 (R1) is needed to confirm the exit of the channel and perhaps target the next obstacle at 102.25 (R2). On the other hand, a move below 101.60 (S1) will confirm that the recent advance was just a corrective wave and would reinforce the downside path. Our technical studies provide mixed signals, corroborating my flat view. The RSI found resistance at 70 and moved lower, while the MACD shows signs of topping and seems ready to dip below its signal line. However, the 50-period moving average is pointing up and is getting closer to the 200-period one.

Support: 101.60 (S1), 101.35 (S2), 101.10 (S3).
Resistance: 101.95 (R1), 102.25 (R2), 102.65 (R3).

EUR/GBP finds resistance near 0.7935

EUR/GBP moved higher and reached the 0.7935 (R1) zone as expected before declining to trade virtually unchanged. Although the overall trend remains to the downside (marked by the downtrend line drawn from back the 11th of April), the positive divergence between the MACD and the price action remains in effect, indicating the lack of the necessary bearish momentum, at least for now. I can also see positive divergence on the daily chart, between the price action and both the daily MACD and the 14-day RSI, corroborating my view that the downtrend is not the best to rely on. I would regain my confidence on the downtrend upon a dip below 0.7875 (S1). Such a dip would confirm a forthcoming lower low and could trigger extensions towards 0.7815 (S2).

Support: 0.7875 (S1), 0.7815 (S2), 0.7755 (S3).
Resistance: 0.7935 (R1), 0.7980 (R2), 0.8030 (R3).

Gold reaches and breaks 1293

Gold advanced significantly, violating the short-term purple downtrend line, but finding resistance at 1308 (R1). A clear move above that hurdle would likely confirm the exit from the trend line break and could probably pave the way towards the next resistance at 1325 (R2). Moreover, I can see positive divergence between the metal and both our momentum studies, magnifying the case for further advance in the near-term horizon. Nonetheless, I would maintain my neutral stance as far as the longer-term path is concerned, since on the daily chart, both the 50-day and the 200-day moving averages are pointing sideways.

Support: 1290 (S1), 1285 (S2), 1265 (S3).
Resistance: 1308 (R1), 1325 (R2), 1345 (R3).

WTI declines but rebounds from 101.00

WTI moved lower on Friday, but found support and rebounded from 101.00 (S1), which coincides with the 50% retracement level of the prior near-term advance and the 200-day moving average. However, the price hit 102.50 (R1) and at the time of writing is trading at 101.56. Having in mind that the RSI remains below 50, while the MACD obtained a negative sign, I would see a mildly negative picture. Nevertheless, I would wait for a dip below 100.45 (S2), the 61.8% retracement level of the aforementioned advance, which would signal a bearish extension that could target the zone of 98.65 (S3), the low of the 15th of July.

Support: 101.00 (S1), 100.45 (S2), 98.65 (S3).
Resistance: 102.50 (R1), 103.35 (R2), 104.50 (R3).