USD rallies for a few minutes on good US retail sales

The dollar rallied yesterday in anticipation of a good US retail sales figure for May. In the event the figure did beat even the optimistic forecasts and the dollar moved up instantly when the number came out. However there was a “buy the rumor, sell the fact” response and the dollar spike was quickly met by selling. For example, within 10 minutes of the number EUR/USD was higher than before it came out. The rally didn’t even last that long in USD/JPY – only 2 minutes or so. Nonetheless the US currency managed to hold onto much of its overall gains and it is trading higher this morning against most G10 currencies compared to where it was this time yesterday.

The market is now looking ahead to next week’s US FOMC meeting. The market does not expect them to hike at the meeting; rather, the question is whether they will send any strong signals about a possible hike in September. The March “dot plot” showed the weighted average of the FOMC members’ estimates for Fed funds at the end of this year was 0.77%, which implies at least two rate hikes. There are only four more meetings this year after next week’s (July, September, October and December) and only two with press conferences (September and December). Is their earlier vision still possible? We await the revision of the “dot plot” next week to see if the FOMC members have changed their view or whether the market has to change its view ASAP

Greece problem just gets worse and worse The Greek situation is really going down to the wire. The IMF’s technical team left Brussels and went home yesterday because they said the negotiations were now taking place on a political level. IMF spokesman Gerry Rice said "There are major differences between us in most key areas, and there has been no progress in narrowing these differences, and we are well away from an agreement." He said that the main obstacles remain pension reform, tax policy and financing – a familiar list. Apparently there is a deal all ready for Greek PM Tsipras to sign, but that doesn’t seem likely. And even if he does, can he get it through the Greek parliament? Meanwhile the German mass daily Bild reports growing dissatisfaction with Greece among German politicians, raising the possibility that Germany might refuse to fund a third bailout program for Greece even if the Athens government accedes to all the reforms that the creditors want. At that point it would be “game over” for Greece. I believe that this possibility is not in the market and that the euro needs to have a significantly higher risk premium – i.e., needs to be significantly lower – to reflect the growing likelihood of this worst-case scenario. Greek stocks were up 8% yesterday (vs +0.6% for the DAX) on optimism that a deal was near – let’s see how they go today. EUR/USD is likely to follow Athens’ lead.

Oil eases back Oil lost some of Wednesday’s gains after the International Energy Agency (IEA) said OPEC production in May was the highest it’s been since 2012, with Saudi Arabia, Iraq and the UAE all pumping record amounts of crude. The US is also producing at a record level. While the drop in US inventories in the latest week sent prices higher on Wednesday, inventories are still some 90mn barrels above the five-year average for this time of year, according to the Energy Information Administration. I remain bearish on oil and therefore on CAD and NOK.

Today’s highlights: The calendar is very light today. The only indicator we get from Europe is the region’s industrial production for April. Even though this indicator is usually not major market mover, it should add to the recent positive data and show that Eurozone is gathering momentum again.

In the US, we get the PPI for May. The forecast of a rebound from the previous month, could prove USD-positive somewhat. The preliminary University of Michigan consumer sentiment index for June is expected to tick up a bit from the previous month. The surveys of 1-year and 5-to-10 year inflation expectation outlook are also coming out.

We have only one speaker on Friday’s agenda: ECB Governing Council member Carlos Costa. The Bank of England also publishes a speech made by Ian McCafferty on Thursday. The market could look at this speech by someone who previously voted for a rate hike for hints if he is likely to resume his hawkish stance anytime soon.

The Market

EUR/USD pulls back

EUR/USD traded lower on Thursday and hit support below the 1.1210 (S1) barrier. Subsequently, the rate rebounded somewhat. Having in mind that the rate failed to overcome the resistance barrier of 1.1380 (R1) on Wednesday, and that there is still negative divergence between both our short-term oscillators and the price action, I maintain my neutral stance. A break above 1.1380 (R1) is needed to confirm a forthcoming higher high on the 4-hour chart and perhaps turn the short-term picture to the upside. Such a move could prompt extensions towards our next resistance of 1.1465 (R2). On the downside, another attempt below 1.1210 (S1) could signal the completion of a minor-term double top formation and perhaps pave the way for our next support at 1.1135 (S2). In the bigger picture, I believe that the move that could carry larger bullish implications is a clear close above the psychological zone of 1.1500 (R3).

Support: 1.1210 (S1), 1.1135 (S2), 1.1045 (S3)
Resistance: 1.1380 (R1), 1.1465 (R2), 1.1500 (R3)

GBP/USD rebounds from near 1.5435

GBP/USD hit support near the 1.5435 (S1) barrier and then rebounded, but the advance was limited below the 1.5550 (R1) resistance line. The break above the upper line of the downside channel on the 9th of June shifted the short-term picture to the upside in my view. However, a break above 1.5550 (R1) is needed to confirm a forthcoming higher high and reinforce that near-term uptrend. Something like that is likely to pull the trigger for the next resistance at 1.5635 (R2). Taking a look at our oscillators though, I would be careful that a pullback could be looming. The RSI shows signs that it could top near its 70 line, while the MACD looks able to fall below its trigger line soon. Switching to the daily chart, I see that the rate rebounded from the 50% retracement level of the 14th of April - 15th of May up-leg, and is now back above the 80-day exponential moving average. This supports the idea that the picture has probably turned positive again.

Support: 1.5435 (S1), 1.5360 (S2), 1.5275 (S3)
Resistance: 1.5550 (R1), 1.5635 (R2), 1.5700 (R3)

EUR/JPY still in a trendless mode

EUR/JPY traded in a quiet mode yesterday, staying slightly above the support barrier of 138.50 (S1). In my opinion, the short-term picture remains neutral as the rate has been oscillating between that line and the resistance of 141.00 since the 3rd of June. I believe that a rebound near 138.50 (S1) is likely to challenge again the 141.00 (R1) barrier. However, a break above the latter line is needed to signal the continuation of the prevailing uptrend. On the daily chart, the break above 131.40 on the 29th of April signaled a possible trend reversal in my view. Therefore I would consider the medium-term trend of EUR/JPY to be somewhat positive.

Support: 138.50 (S1), 137.00 (S2), 135.15 (S3)
Resistance: 141.00 (R1), 141.70 (R2), 142.20 (R3)

Gold rebounds from slightly above 1175

Gold traded lower yesterday, but the decline was halted marginally above our support barrier of 1175 (S2). Then the precious metal rebounded and is now trading fractionally above the 1183 (S1) line. Bearing in mind that the rebound from near 1175 (S2) printed a higher low and that the price is trading within a near-term upside channel, I would see a cautiously positive near-term outlook and I would expect buyers to drive the battle towards the 1195 (R1) resistance territory. The RSI is back above its 50 line, while the MACD, already positive, looks able to rebound from near its trigger line. These signs increase the odds that the rebound could extend higher. On the daily chart, the move below 1169 (S1) on the 5th of June gives a first sign that the overall outlook has probably turned negative. As a result, I would treat any further short-term advances as a corrective phase.

Support: 1183 (S1), 1175 (S2), 1169 (S3)
Resistance: 1195 (R1), 1204 (R2), 1215 (R3)

DAX futures hit resistance at 11450

DAX futures surged on the 9th of June after hitting support at 10870 (S3), which happens to be the 38.2% retracement level of the 16th of October – 10th of April advance. However, yesterday the index hit resistance at 11450 (R1) and then retreated. I believe that a break below 11240 (S1) is needed to signal the continuation of the retreat, and perhaps target our next support at 11070 (S2). On the other hand, a break above 11450 (R1) is likely to extend the rebound from 10870 (S3) and perhaps challenge the 11600 (R2) zone. As for the longer-term trend, on the 2nd of June, the price violated the uptrend line taken from the low of the 16th of October and is now trading within a downside channel. This keeps the medium term picture negative. However, a move above the 11900 area will signal that the fall started on the 10th of April is just a 38.2% retracement and that the prevailing trend is back in force.

Support: 11240 (S1), 11070 (S2), 10870 (S3)
Resistance: 11450 (R1) 11600 (R2), 11800 (R3)