Hints of a dollar rebound, but is it time for a sustained recovery? [Video]
|Market Overview
The is plenty for markets to contemplate as trading begins for August. The dollar has been under huge pressure in recent weeks as traders have factored for an underperforming US economy due to the alarming second wave COVID infections. However, as other countries increasingly find their own problems with second waves (the Australian state of Victoria going back into lockdown), perhaps the US dollar may begin to find some respite? Could a rebound on the dollar become an August story? Hints of a dollar rally this morning, but as yet nothing confirmed. It may depend upon leaders in Congress coming to an agreement on how to react as emergency US employment support expires. As yet, there is no consensus of how to push forward, but another fiscal package to support the labor market would help to allay fears of faltering consumer confidence. Risk appetite has certainly been wavering in recent sessions, but the better than expected China Caixin Manufacturing PMI has helped to prop up sentiment this morning. The manufacturing PMIs for July could be a driving factor through today’s session, with eyes on the ISM data later today.
Wall Street closed a tumultuous session on Friday with S&P 500 gains of +0.8% at 3271, whilst futures are a touch weaker today with the E-mini S&Ps -0.1%. Asian markets took the lead from the Chinese PMIs with the Nikkei +2.2% and Shanghai Composite +1.4%. In Europe there is a mixed look to early moves, with FTSE futures -0.2% and DAX futures +0.2%. In forex, USD is climbing through the majors, with CHF and AUD primarily weaker. In commodities, hints of a dollar rebound are weighing slightly on gold and silver, whilst oil is just under -1% lower.
The first trading day of the month is PMI day for the economic calendar. The Eurozone final Manufacturing PMI for July is at 0900BST and is expected to be unrevised from 51.1 (flash July 51.1 up from 47.4 final June). UK Final Manufacturing PMI is at 0930BST and is expected to also be unrevised at 53.6 (53.6 flash July, up from 50.1 final reading of June). The US ISM Manufacturing at 1500BST is expected to improve to 53.6 (up from 52.6 in June).
Chart of the Day – German DAX
After coming under increasing selling pressure in recent sessions, there needs to be a significant response by the DAX bulls early this week. Having seen the risk rally fall over at a July high of 13,314, almost every session in the past eight have seen the bears prevailing to leave a negative candlestick formation. This has really ramped up as the market has now broken the first really important support if the mid-July low at 12,416. With a decisive breach of the old pivot at 12,470 the bears now look to be in near term control. Accompanied by increasingly deteriorating momentum, with the MACD lines accelerating lower, RSI and Stochastics are falling at their lowest level for several months. With Friday’s failure of an attempted rally, there is now a band of resistance 12,416/12,525 that needs to be overcome to suggest the bulls are fighting back. Given the recent run of bear candles and intraday failed rallies, there is a downside bias towards testing the old June supports now. Initial support is 11,957 but the crucial support on a medium term perspective is now at 11,598. To break what is now a corrective phase, the bulls need to move back above resistance in the band 12,745/12,915.
Brent Crude Oil
There is an increasing sense that the bears are feeling their way back into this market now. A few jabs are being thrown in the fight for control, but nothing notable has yet been landed. However, the intraday moves lower are now breaching supports which had previously held firm, something that is a developing warning. Initial support at $42.35 was breached on Thursday with a candle that had a negative configuration but could not sustain the selling pressure in the close. We have spoken previously about the importance of the support at $41.30 being the first real support of note, and for now, this remains intact. However, the bears will be growing in confidence as the candles begin to take an increasingly negative lean. For the first time in weeks, there is an argument for lower highs (at $43,95, under the $44.90 July high) along with lower lows. For now, this is still initial warnings of deterioration, as with RSI still above 50 there is a sense of consolidation rather than correction. However, the longer the bulls fail to push the market forward, the increasingly likely the selling pressure will grow. A close below $42.35 would be a negative signal, whilst a close under $41.30 would open the correction in a decisive way. Initial resistance at $43.95 needs to be cleared to re-open $44.90 and the $45.20 key gap resistance.
Dow Jones Industrial Average
Wall Street markets have become increasingly uncertain in recent sessions. The Dow has now decisively broken its four month recovery trend ana dis now starting to breach supports. However, the move lower lacks conviction. Twice testing sharp moves lower in the past two sessions, the bulls have fought back into the close. Long lower shadows on the candles are key warning signals. We continue to see the market closing in the pivot band 26,300/26,610 but now this pivot is developing into more of a basis of resistance in recent sessions. There needs to be a close back above 26,610 for the bulls to regain some of their lost control and would retest 27,070. Despite this, momentum indicators remain positively configured on a medium term basis, even if they have slid back recently. It would still suggest that weakness still represents a chance to buy. A close under 26,000 would begin to question this outlook though.
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