Market Overview

Fed chair Powell has seemingly called an end to the prospects of ongoing outperformance of the US dollar this year. The Fed is pretty much nailed on to cut rates in the July meeting. However, it seems as though we are now entering a choppy period of range trading for the dollar. Swings will come with the data. Yesterday’s core CPI rose at its strongest monthly gain since January 2018, seeing a year on year improvement to +2.1% (notably above the Fed’s 2% mandated target). This is dollar positive and yet the market knows that the Fed will still cut rates in the next meeting. Subsequently an intraday jump for the dollar but then back lower again. On a near term basis, EUR/USD is still tracking higher, and Dollar/Yen edging lower. However, looking further out, there is also an increasingly ranging look to major markets (EUR/USD and Gold especially). For now there seems to be some fuel left in the tank for US equities on the dovish Fed, with the Dow joining the S&P 500 in breaking to all-time highs. However, the question is how far can this continue to have legs in a breakout to new highs, with this environment  of slowing global growth dynamics and ongoing trade tensions/protectionism. For now though, there is still a positive hangover from Powell that is pulling equities higher. However, if ranging conditions develop on the dollar and yields, equities are unlikely to soar from here.

Market Overview

 

Wall Street closed at all-time highs on Dow above 27,000 for the first time, whilst the S&P 500 was +0.2% at 3000. US futures are adding further ground to this move today, currently around +0.2%. The Asian markets had a decent session with the Nikkei +0.2% and Shanghai Composite +0.2%. In Europe there is an early bounce in play, with FTSE futures +0.3% and DAX futures +0.4%. In forex, the near term USD slide continues amid ongoing underperformance across the major currencies. Commodities currencies seem to be performing well, with AUD, NZD and CAD all gaining well.. In commodities, the uncertain trend on gold continues, with a mini rebound, whilst oil continues to consolidate the recent breakout.

On a quiet morning for European data the Eurozone Industrial Production for May is in focus, at 1000BST. The expectation is that growth will be +0.2% on the month (after falling -0.5% in April), however, the year on year there is a continued deterioration down to -1.6% (from -0.4% in April). The US data gives another look at the inflation picture with the US PPI for June at 1330BST. Consensus expects to show a to slip on a headline basis to +1.6% (from +1.8% in May) with core PPI drop back to +2.2% (from +2.3%).

Chart of the Day – German DAX  

A corrective move on the DAX has set in over recent sessions. This reaction of the market to the supposedly bullish equities implications of a dovish Fed chair Powell (and all-time highs on Wall Street) is intriguing. The DAX has turned corrective for the past week, with near term negative momentum signals being posted. A move back below the old breakout support at 12,440, means this has become a basis of resistance. The decline is now eyeing the next support at 12,190 (also an old pivot). Momentum indicators are deteriorating as the move lower has developed. The RSI has drop back towards 50, but interestingly to a five week low, which implies the 12,190 level will be threatened now. The MACD lines have also bear crossed for the first time since late April (when the market then corrected for the next five weeks). Stochastics are also accelerating lower from a bear cross. Near term and intraday rallies are now being viewed as a chance to sell, with the reaction around 12,440 now being key now. Furthermore, if the decline continues, how the market reacts to 12,190 will also be seen as key as this is the latest higher low and a breach would confirm a new bear trend formation.

GermanDAX

 

EUR/USD

It has been a choppy few days for EUR/USD, but it is interesting to see the recovery continuing to make ground. The clear turning point came with the Powell testimony on Wednesday and the decisive bull candle. This has swung a recovery back into prominence, posting some important momentum signals which point to a continuation of a neutral outlook on the pair. The support at $1.1192 coming above the key higher low at $1.1180 has prevented the dollar bulls from gaining control. The market is back into the tightening band of relatively flat moving averages between $1.1235/$1.1300 which are effectively in the middle of a 300 pip five month range $1.1110/$1.1410. Momentum has ticked higher within the range, with a buy signal bull cross on Stochastics, MACD lines flattening at neutral and importantly the RSI maintaining a level above 40. The near term outlook is higher, and holding above the pivot at $1.1265 improves the outlook further, but there is plenty of overhead supply between $1.1300/$1.1350 to restrict momentum for a rally. The hourly chart shows initial support at $1.1435/$1.1245.

EUR/USD

 

GBP/USD

Whilst EUR/USD may be bolstering its medium term trading range credentials, Cable remains a sell into strength. The near term bounce higher from growing support at $1.2435 is now into its third session and short term buy signals are being seen. This suggests a rally could have further legs in it. The RSI again bouncing off 30, with history telling us that recoveries tend to reach 45/50 area in these moves (note the rallies of late May and June). So we are looking for this rally to hit into resistance and start to stall before likely rolling back over again. There is resistance between $1.2600/$1.2650 under the far more considerable $1.2760 barrier. The hourly chart shows a near term by into weakness, with positive configuration on hourly RSI and MACD. Initial support is at $1.2505 (yesterday’s intraday low but also an old key low of $1.2475/$1.2505). How the market reacts around the initial pivot resistance at $1.2560/70 could determine how far the rally goes.

GBP/USD

 

USD/JPY

With Powell’s dovish testimony and better than expected US inflation data, it has been a choppy couple of sessions  on Dollar/Yen. However, it seems that with the market resuming lower today, the prospects for the continuation of the dollar rally are diminishing. An intraday breach of the mini two week trend higher certainly questions the recovery, whilst momentum indicators turning over add to this concern. A bear cross on Stochastics may not be confirmed, but does not reflect on going positive momentum. The resistance posted at 109.00 is at an old key low and strengthens the barrier overhead now. For now this is turning into a ranging market but the support at 107.85 will be key to this. Hourly momentum indicators rolling over today add a negative bias to the session.

USD/JPY

 

Gold

The volatility continues to come on gold, with yesterday’s range of $23, greater than the Average True Range of $22 which is itself at multi-year highs. However, there is just no sustainable traction for the bulls at the moment. Another strong rally has begun to retrace in the next session. This reflects what is increasingly a very choppy trading range between $1381.50/$1439. This has taken hold as momentum indicators have drifted off in the past couple of weeks. Whilst the RSI is still positive around 60, there is a clear drift back on the MACD and Stochastics. The market has left another lower high within the range at $1426. Calling direction on gold will become increasingly tough as newsflow/data swings add in to the near term uncertainty. Hourly signals are neutral and it is interesting that a pivot band $1400/$1410 is becoming the near term gauge. Below the band (below $1400) takes on a negative bias, whilst above the band (above $1410) the near term outlook looks more positive again. Into today’s session the outlook is almost entirely neutral and we wait the next catalyst.

Gold

 

WTI Oil

After the market broke decisively higher, a consolidation is helping to build on the breakout. The strength of the bulls is being tested today. Having broken out above the 50% Fibonacci retracement (at $59.60) and the previous resistance at $60.30 (which is also an old pivot), this is now a key area of support which the bulls will be keen to defend. There is an uptrend which is supportive at $58.30 today, but the bulls will be looking to hold and build upon to these recent gains. Momentum indicators are still taking improvement, with MACD lines rising above neutral and Stochastics strong as RSI sits above 60. This is encouraging for the outlook now. There is initial resistance from yesterday’s high at $60.95 whilst if a near term unwind can build higher from the breakout support, then the 61.8% Fibonacci retracement at $63.70 is the next target area.

WTI Oil

 

Dow Jones Industrial Average

After an initially rather tentative reaction higher on Wednesday, the Dow has closed decisively into all-time highs with a move above 27,000 for the first time. A solid bull candle along with strong momentum shows that the bulls are in a good place right now. The RSI is oscillating between 60/70 which is helping to define a new rally higher of the past month. A little bit of caution is needed as 70 on the RSI has proved to be restrictive on the Dow since September 2018. This may induce an element of consolidation or even another unwind. Taking the higher lows of the past few weeks there is an uptrend supportive at 26,810 currently. Initial support is at the old breakouts between 26,900/26,965. The hourly chart reflects the near term strength that has re-engaged the bulls and weakness is a chance to buy now. The higher low at 26,665 is now a key near to medium term support.

Dow Jones Industrial Average

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