Lockhart changes the way of looking at Fed rate decision

• Will they raise rates this year? Will the data be good enough to support a rate hike? These have been the major questions for financial markets his year. Overnight the debate turned around and raising rates became the default position after Atlanta Fed President Lockhart said “the economy is ready and it is an appropriate time to make a change.” Rather than looking for an improvement in the economy to convince him to tighten in September, he said there would have to be “a significant deterioration in the economic picture” to convince him not to move. In other words, the calculus is reversed. This is important because Lockhart tends to be a centrist among the FOMC members, neither a noted dove nor hawk. For example, back in May he said, “I am more prepared to take the risks of waiting than the risks of being too early, particularly in light of what we saw in Q1.” Following St. Louis Fed President Bullard’s comments Friday that the economy is “in good shape,” his comments indicate a growing view among the Committee, albeit not yet a majority.

• Following his comments, Fed funds futures were predicting 0.185% for September and were back above 1% for December 2016, although just barely (1.03%). This strengthened the dollar against almost all currencies. I would expect the dollar to remain strong, at least this week, as the labor market data is likely to show continued gains towards the Fed’s policy goals. Unfortunately there are few Fed officials speaking in the near future to give further clarification – Lockhart gives a speech on Aug. 10th and noted dove Minneapolis Fed President Kocherlakota on Aug. 20th. We may have to wait until the annual Jackson Hole symposium on Aug. 27th to get detailed views from more Fed officials.

• Commodities rebound a little Commodities rebounded slightly on Tuesday, perhaps because of some stabilization in the Chinese stock market (which has resumed falling today). Oil gained after the API inventory report showing a bigger drawdown than expected. That helped the commodity currencies somewhat, although they were still generally lower vs USD – CAD for example was down only slightly despite the disappointing decline in the Canadian manufacturing PMI in July, reversing several months of recovery.

• AUD has been gradually moving lower but is still well above its level of before the RBA meeting as the market digests the change in its view on the currency. NZD however fell as the average winning price at the biweekly dairy auction declined once again, the ninth consecutive decline. The price is now down 38% from its peak in March, which is a dramatic fall in just a few months. Moreover the unemployment rate rose to 5.9% from 5.8%, as expected, making further loosening all the more likely.

• I believe that just as investors were talking about a “commodity supercycle” a few years ago, we are now in a chronic situation of oversupply and prices are likely to continue to decline. Against that background, we can expect the commodity currencies to weaken further.

• China’s service sector doing OK: China’s Caixin service-sector PMI for July rose to 53.8 from 51.8, as the service sector in China – as in much of the world – is doing better than manufacturing. This is particularly important for China, where the government is trying to rebalance the economy away from investment and towards domestic demand. The overall PMI however declined to 50.2 from 50.6, meaning the economy as a whole is perilously close to contraction.

• Today’s highlights: During the European day, we get the final service-sector PMIs for July from the countries we got the manufacturing data for on Monday. As usual, the final forecasts for France, Germany and Eurozone are the same as the initial estimates, therefore the market reaction is usually limited at these releases. Eurozone’s retail sales for June are coming out as well.

• The UK service-sector PMI is forecast to have slid to 58.0 in July from 58.5 in June. After the mixed manufacturing and construction PMIs for July, a slide in the service-sector PMI could prove GBP-negative.

• The main indicator for the day is the US ADP employment change for July coming out two days ahead of the nonfarm payroll release. The ADP report is expected to show that the private sector gained fewer jobs in July than it did in the previous month. Although there is a lot of variation between the ADP and the NFP reports, if the ADP report comes strong and prints another solid above 200k reading, the market is likely to assume that the nonfarm payroll figure may come in strong as well and boost the dollar. Further improvement in the labor market is likely to keep confidence up that the Fed is on track to raise rates.

The Market

EUR/USD collapses after hitting resistance at 1.0990

• EUR/USD plunged on Tuesday after it hit resistance at 1.0990 and crushed three support barriers in a row. Now the rate is trading slightly below the 1.0870 (R1) line and therefore I would expect the bears to extend the negative move and perhaps target the 1.0810 (S1) barrier. Our short-term oscillators detect negative momentum and amplify the case for a further downward move. The RSI slid after it hit resistance near its 50 line, while the MACD, already negative, has fallen below its trigger line. As for the broader trend, as long as EUR/USD is trading between 1.0800 and 1.1500, I would consider the longer-term picture to stay flat. I believe that a move above the psychological zone of 1.1500 is the move that could carry larger bullish implications, while a break below 1.0800 (S2) is needed to confirm a forthcoming lower low on the daily chart and perhaps turn the overall bias back to the downside.

• Support: 1.0810 (S1), 1.0800 (S2), 1.0660 (S3)

• Resistance: 1.0870 (R1), 1.0900 (R2), 1.0930 (R3)

EUR/GBP breaks below 0.7000

• EUR/GBP traded lower on Tuesday, breaking below the psychological figure of 0.7000 (R1). The rate is trading below the prior uptrend line taken from the low of the 17th of July and within the downside channel that has been containing the price action since the 24th of July. As a result, I would consider the short-term outlook to remain negative. I would expect the move below 0.7000 (R1) to target the 0.6970 (S1) barrier. A dip through that level could extend the negative move, perhaps towards 0.6935 (S2). Both our momentum studies reveal downside speed, but the RSI has turned somewhat up, raising some concerns that a corrective bounce could be on the cards before the next bearish leg. On the daily chart, the price structure remains lower peaks and lower troughs. Therefore, I believe that the overall picture is negative as well.

• Support: 0.6970 (S1), 0.6935 (S2), 0.6900 (S3)

• Resistance: 0.7000 (R1), 0.7045 (R2), 0.7100 (R3)

USD/JPY is testing once again the 124.50 hurdle

• USD/JPY traded higher on Tuesday after it hit support at 123.80 (S1). During the early European morning Wednesday, the rate appears ready to challenge again the 124.50 (R1) barrier, where an upside break could trigger extensions towards the psychological zone of 125.00 (R2). Our short-term oscillators show positive momentum: the RSI rebounded from its 50 line and now looks to be headed towards its 70 line, while the MACD, already positive, has bottomed and crossed above its trigger line. These indicators increase the likelihood that this time we may experience the break above 124.50 (R1).

• As for the broader trend, I still believe that the break above the downtrend line taken from the peak of the 5th of June signaled the continuation of the longer-term uptrend.

• Support: 123.80 (S1), 123.40 (S2), 123.00 (S3)

• Resistance: 124.50 (R1), 125.00 (R2), 125.80 (R3)

Gold continues within the range

• Gold rebounded somewhat on Tuesday, hit resistance at 1095 (R1) and then slid to trade virtually unchanged. The metal has been oscillating between the support area of 1080 (S1) and the resistance of 1105 (R2) since the 21st of July, therefore I view the short-term picture as remaining neutral. A break below 1080 (S1) is likely to shift the bias to negative and perhaps bring into play the 1072 (S2) barrier marked by the low of the 20th of July. A break below that hurdle could set the stage for more bearish extensions and perhaps target the 1060 (S3) zone. Our short-term oscillators reveal negative momentum and increase the likelihood that the metal would exit the sideways range to the downside. In the bigger picture, the plunge on the 20th of July triggered the continuation of the longer-term downtrend and kept the overall bias of the yellow metal to the downside, in my view.

• Support: 1080 (S1), 1072 (S2), 1060 (S3)

• Resistance: 1095 (R1), 1105 (R2), 1120 (R3)

WTI corrects higher after hitting 45.00

• WTI traded higher after it found support at the psychological zone of 45.00 (S2). It moved above 45.60 (S1), but fell short of reaching the 46.50 (R1) resistance hurdle. In my opinion, the price structure on the 1-hour chart still suggests a short-term downtrend. As a result, I would treat the recovery from 45.00 (S2) as a corrective move and I would expect the bears to eventually take control again. A break back below 45.60 (S1) is likely to confirm my view and perhaps target once again the 45.00 (S2) zone. The 14-hour RSI looks ready to move back below 50, while the MACD, although positive, it points sideways. These signs show that the upside corrective move is running out of momentum and that it is possible to experience the next negative move any time soon.

• Similarly, in the absence of any major bullish reversal signals in the daily chart, I would consider the longer-term trend to still be to the downside. A break below 45.00 though is needed to confirm a forthcoming lower low. Something like that could open the way for the 44.00 zone, defined by the low of the 18th of March.

• Support: 45.60 (S1), 45.00 (S2), 44.00 (S3)

• Resistance: 46.50 (R1) 46.90 (R2), 47.35 (R3)

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