EUR/USD Fights Back Above 5/28 Lows
Last Thursday’s pullback on large volume was a warning sign, as we had feared. The EUR/USD has continued its slide on heavy action, dropping back below the psychological 1.40 level. Volume remained at elevated levels during Friday’s downturn, confirming the conviction of the pullback. Fortunately for bulls, the EUR/USD has popped back above 5/28 lows on declining volume and is balancing on our 3rd tier uptrend line, avoiding another collapse at least for the immediate-term. Despite the present stabilization, the pullback on such large volume is disconcerting, and gives us reason to believe there may be more room to go to the downside. Therefore, although the medium-term uptrend is still intact, it appears as if we’ve entered a new near-term downtrend. If 5/28 lows don’t hold we could see a retracement towards the 1.35-1.355 zone. As for the upside, bulls should look out for a recovery above the psychological 1.40 level and our 2nd tier uptrend line on large volume. If this doesn’t occur, then the currency pair may be inclined to continue its downward path.
We’ve seen a quick, sizable appreciation of the Dollar across the board over the last few sessions, so the Euro is not alone. Even though many analysts highlight Friday’s job report as the engine behind the appreciation, we believe the rise of the Dollar has more to do with the strong language from Bernanke concerning the need to tighten liquidity as soon as possible without squeezing the economic recovery. The probability of the Fed raising rates by year end has risen substantially over the past week, giving investors a reason to favor the Dollar. However, we also view the recent public addresses from both Bernanke and Geithner as a means to change the negative psychology surrounding the sustainability of the Dollar. Though psychology is obviously a strong market force, the fundamentals are still in favor of a medium-term uptrend in the EUR/USD unless the currency pair should continue to collapse through strong supports on heavy volume.
Today’s German Factor Order report came in line with analyst expectations and received a muted reaction. News will be relatively quiet on the economic data front in the EU this week. The U.S. will announce retail sales on Thursday which should be a market mover. However, although there isn’t much data to sift through this week, investors should keep in mind that we have seen volatile sessions and light economic data over the past 8 months.
Fundamentally, we find resistances of 1.3891, 1.3945, 1.4003, 1.4035, and 1.4090. To the downside, we see supports of 1.3815, 1.3766, 1.3734, 1.3663, and 1.3581. The 1.40 area serves as a psychological resistance with 1.35 acting as a psychological cushion. The EUR/USD is currently exchanging at 1.3871.
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GBP/USD Sets a Temporary Bottom on Declining Volume
The Cable is finally forming a temporary bottom after its swift selloff. Friday’s downturn gained traction as Gordon Brown faced the resignation of another top official who asked for Brown’s resignation. The incredible shake up taking place in the Labor Party is unsettling since investors dislike such uncertainty. The Cable managed to drop beneath the psychological 1.60 level in the process, though it is trying to fight back above right now. On an encouraging note, volume continues to tail off with the GBP/USD’s decline, meaning a near-term bottom is certainly feasible. However, Thursday’s large volume to the downside could prove to be significant, indicating we are witnessing the beginning a new near-term downtrend in both the Cable and the EUR/USD. In the meantime, if our 1.5777 support doesn’t hold, we could witness another pullback towards the psychological 1.55 level. On the flipside, a near-term pop back above 1.60 and our 3rd tier uptrend line would be a comforting fundamental movement for the bulls.
Regardless of the near-term downward pressure coupled with political instability, we can’t forget economic data from Britain has been very encouraging over the past six weeks. Britain has outperformed both the U.S. and the EU as far as an economic recovery is concerned, which has given the Pound relative strength. Therefore, the medium-term uptrend in the Cable is alive and well unless the currency pair should make some drastic downward movements. Much progress has been made in the GBP/USD since January, and it will take several more convincing pullbacks to destroy the medium-term uptrend. Meanwhile, the present pullback in both the Cable and the EUR/USD is indicating a retracement in the S&P futures due to their positive correlation. Therefore, investors should keep an eye on U.S. equities this week to see if key supports in the S&P can hold.
Though economic data will be relatively light from Britain this week, we will see Manufacturing Production on Wednesday along with the U.S. Trade Balance. We maintain our negative near-term outlook on the GBP/USD trend wise due to the meaningful volume accompanying the pullback.
Fundamentally, we find resistances of 1.5940, 1.6023, 1.6089, 1.6171, and 1.6233. To the downside, we see supports of 1.5863, 1.5777, 1.5703, 1.5629, and 1.5552. The 1.60 level acts as a psychological resistance with 1.55 serving as a psychological cushion. The GBP/USD is currently exchanging at 1.5907.
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USD/JPY Pops Up to our 3rd Tier Downtrend Line
We got nice movement to the upside from the USD/JPY on Friday after the currency pair got above our 2nd tier downtrend line. However, the bull-run has hit a wall at our 3rd tier downtrend line as investors hesitate below May highs. We’re finally seeing some volatility from the USD/JPY after a dry spell with the currency pair participating in the broad appreciation of the Dollar. The USD/JPY finds itself in an advantageous position in the process. Our 4th and 5th tier downtrend lines are drawing in closer by the day with yearly highs just out of reach. If the USD/JPY can fight through our 4th and 5th tier downtrend lines along with 2009 highs and the critical 100 level, we may witness a near-term explosion to the upside. However, these barriers are certainly worthy foes, and breaking out to the upside will take convincing volume.
Meanwhile, investors should keep an eye on the EUR/USD and GBP/USD since the USD/JPY should continue to exhibit a negative correlation with these currencies for the time being. Currency movements are honed in on the fate of the Dollar, and the appreciation of the greenback over the past few sessions is a result of the realization that the Fed may need to raise rates by year end to defend the currency. While the uptrend is gaining a little momentum, there are some strong medium-term downtrend forces at work.
Fundamentally, we find resistances of 98.66, 99.49, 100.06, 100.74, and 101.55. To the downside, we see supports of 97.98, 97.45, 96.90, 96.33, and 95.82. The 100 level serves as a key psychological barrier with 95 acting as a psychological cushion. The USD/JPY is currently exchanging at 98.63.
Crude has been noticeably resilient considering the steep pullback in the EUR/USD, GBP/USD, and gold coupled with disappointing weekly inventories. Crude normally exhibits a strong correlation with these investment vehicles, meaning there is something else driving the commodity’s engine. Bulls our sticking to their guns, indicating they expect global demand to continue its recovery, bolstering price as OPEC keeps production at a reduced rate. However, it seems that crude’s ultimate path relies upon the performance of U.S. equities. The relative stability of the S&P futures is allowing crude to climb back to our 2nd tier uptrend line and the futures are presently trading back in the $70/bbl range.
Investors should keep in mind that last week’s sharp pullback was accompanied by heavy volume, whereas the pops to the upside are coming with declining volume. Therefore, it remains to be seen whether the bulls have the dedication to follow through and take down the psychological $70/bbl level. Crude has already had an impressive run, and a sizeable pullback wouldn’t be uncalled for. Regardless of any near-term uncertainty, we have no reason to alter our medium-term bullish outlook. The 2nd tier uptrend is far below and it would take a sizeable retraction to counter the upward force in place. Meanwhile, investors should keep a close eye on the volume accompanying upcoming movements. If crude futures manage to drive past $70/bbl on rising volume, this could be indicate more near-term gains. On the other hand, another contraction on large volume would likely denote the opposite.
Fundamentally, we maintain our supports of $67.91/bbl, $67.29/bbl, $66.78/bbl, and $66.13/bbl. To the topside, we find resistances of $68.63/bbl, $69.39/bbl, and naturally $70.35/bbl. $65/bbl becomes a psychological cushion with $70/bbl serving as a psychological barrier. The crude futures are currently trading at $68.52/bbl.
Gold Stabilizes Around $950/oz
Gold ended with heavy losses on Friday backed by considerable volume. The precious metal is suddenly trading beneath the $950/oz psychological level while trying to climb back above our 2nd tier uptrend line. Gold seems to be following the path of the Cable and EUR/USD, Friday’s large volume is certainly disconcerting. With the Dollar re-appreciating, investors are exiting gold as it turns into a less-attractive hedge. However, as with the aforementioned currencies, gold’s medium-term uptrend is damaged but alive. Volume is dying off, meaning a near-term bottom could be put in place. Hence, bulls shouldn’t get too discouraged yet. An immediate-term key will be holding $950/oz and 5/28 lows. These lows are also a key area for the EUR/USD, so investors should keep a close eye on this currency pair as well.
On the negative side, it does seem the present pullback could have legs. The Dollar saw some large interest across the board with Geithner and Bernanke voicing their defense of the greenback. Therefore, if the near-term appreciation of the Dollar should continue gold may be inclined to make a more significant retracement. Meanwhile, a retest of $1000/oz has quickly become a memory, a negative development psychologically. As a result, we maintain our negative outlook on gold trend-wise even though we maintain our medium-term bullish stance. Keep an eye on volume, for if it continues to decline we could see a pop in the precious metal.
Fundamentally we find resistances of $951.79/oz, $954.32/oz, $957.11/oz, $960.47/oz, and $963.45/oz. To the downside, we see supports of $946.21/oz, $943.68/oz, $940.13/oz, $937.85/oz, and $935.31/oz. Gold is currently trading at $949.75/oz.
S&P Struggle to Build a New Base Above May 7 Highs
The S&P futures are struggling to stay above May 7 highs once again despite the rapid appreciation of the greenback across the board. The fact that the S&P futures have exhibited resilience in the face of their ordinarily positive correlation with the EUR/USD, GBP/USD, and gold is an encouraging development for the bulls. On the other hand, the recent movement in the S&P’s correlations could be signaling a coming retracement in U.S. equities. Furthermore, we saw a considerable increase in volume to the downside on Friday. Therefore, we wouldn’t be surprised to see the S&P futures dip towards our 2nd tier uptrend line. If our 2nd tier uptrend doesn’t hold, then we would likely see a retracement towards the critical 900 level. As for outlook, we are taking the near-term guidance of the S&P’s correlations for a negative performance in the near-term. However, the medium-term uptrend is safe for now considering the base the futures have built up around the 900 level over the past month.
The U.S. will be relatively quiet on the economic data front this week. We won’t see any heavily weighted data until Wednesday’s Trade Balance, followed by Retail Sales on Thursday. Hence, the S&P futures may rely on the behavior of its correlations in terms of finding a near-term direction.
Fundamentally, we find resistances of 939.5, 945.75 and 958.25. To the downside we hold our supports of 931, 924.75, 915.5, and 905.5 with fresh bottom-end of 897.25. The S&P futures are currently trading at 929.75.
30 Year T-Bond Futures Form New Temporary Bottom
The 30 Year T-Bond futures are stabilizing again, attempting to climb back above May 28 lows in reaction to declining U.S. equities. Though the 30 Year futures continue to follow the path of our 2nd tier downtrend line, the volatility seems to be calming as the Dollar appreciates and the S&P futures hesitate. Regardless, we still haven’t seen a convincing move to the topside, and the momentum clearly remains in the bear’s favor. Quantitative easing doesn’t seem to abate the rise of Treasury yields with investors testing the higher yielding equity markets. As long as U.S. equities stabilize, the 30 Year T-Bond futures may have no choice but to head south until yield becomes an attractive investment choice again. On the other hand, bulls should be a little encouraging by the rapid appreciation of the Dollar, as it may be indicating a pullback in U.S equities. If this happens, the 30 Year futures could experience a nice near-term pop.
Meanwhile, rising Treasury yields have investors worried that the current economic recovery may be compromised. Investors are uncertain whether fragile U.S. consumers can handle rising interest rates. This should remain a topic of discussion since, technically speaking, the 30 Year futures remain lodged in their medium-term downtrend line.
Fundamentally, we find resistances of 116.36, 117.04, 117.58, and 117.92. To the downside, we see supports of 115.53, 115.08, and 114.59. The 30 Year T-Bond futures are presently trading at 115 20.0.
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