Positive risk appetite on China data weaker US inflation questions Fed tightening

Market Overview

Market sentiment is positive today as weaker US inflation and Retail Sales questions the speed of Fed tightening, whilst stronger growth data from China should also help support risk appetite. There have been some decisive trend changing moves seen in major markets recently and the driver seems to have initially been a dovish Fed, but backed up by once more weaker than expected inflation trends in the US. This has all pointed towards questions over whether the Fed will deliver a  3rd rate hike in 2017, whilst also could impact on the timing for the balance sheet reduction to kick off. The prospect of looser for longer monetary policy has hit Treasury yields and the dollar. Subsequently, we see gold breaking higher, the yen also stronger and a sharp upside break to multi-month highs on Sterling. However, risk appetite is also improved and this could weigh on the recovery of these safe haven plays (Treasury yields are back higher today) as traders opt for more traditionally higher risk plays, with commodity currencies benefiting, and equities also seemingly turning a corner away from their previously corrective outlooks. Will this move be sustained this week? There is limited US data with which to change the trend. The positive risk outlook is also being helped by Chinese GDP which was higher than forecast at +6.9% (6.8% exp), whilst Industrial Production of +7.6% and Retail Sales of +11.0% also topped forecasts.

Wall Street closed at all-time highs again with strength in the breakout, as the S&P 500 was +0.5% at 2459. Asian markets were also broadly higher in the wake of the positive China data, although the Nikkei was closed for a public holiday in Japan. The European markets are mildly positive in early moves. In forex, the dollar is looking to pare some of the recent losses and is outperforming across the majors today. In commodities, gold is trading mildly higher and oil is around the flat line.

Traders will be looking at the final reading of Eurozone CPI for June at 1000BST which is expected to be confirmed from the flash readings at +1.3% for the headline CPI and +1.1% for the core CPI. Empire State Manufacturing (New York Fed) at 1330BST is expected to drop to +15.0 (from +19.8) but this still would remain well above zero and a positive for the region. New Zealand CPI at 2345BST is expected to drop to +1.9% from +2.2%.

Chart of the Day – DAX Xetra

The upside break above 12,490 has changed the outlook, or now. The near to medium term outlook is now far more neutral. The bears still hang on to the two month top pattern that was formed on the breach of 12,490 which subsequently became a pivot. However there is still a sequence of lower highs intact and the top pattern will remain in play whilst this is still the case. The candles since the Wednesday’s initial breakout suggest consolidation but the momentum indicators are pointing to recovery. The hourly hart shows 12,577 with the neckline at 12,490. If the market can now build another higher low above the neckline of 12,490 then the bulls will begin to form a new recovery trend to challenge the corrective one.

EUR/USD

The euro may not have broken out on Friday, but the strength of the trend, in addition to positive momentum signals, suggests that it should only be a matter of time. Friday’s bull candle once move brought the market higher within touching distance of the recent resistance at $1.1489 and puts the bulls in a strong position for an upside break today. The market continues to leave a series of higher lows and although the past week has actually been a fairly tight 120 pip consolidation above $1.1370, the move is re-affirming support for the breakout around at $1.1300, having left another higher low at $1.1310. The support of the three month uptrend comes in at $1.1315. The momentum indicators are positively configured with the RSI holding above 60, with the Stochastics and MACD lines still positive. The hourly chart reflects a bullish bias to the recent consolidation and that intraday corrections are a chance to buy. There is minor support within the range $1.1414/$1.1425.

GBP/USD

A huge bullish breakout has completely changed the complexion of the chart. A move above the resistance band $1.3030/$1.3050 has opened the upside once more and seemingly breaks the shackles of the medium term consolidation. The bulls will need to have the move confirmed today with a second day closing breach. This is because often in the wake of such a strong move, there will be a retracement. However, momentum is strong, with the RSI in the mid-60s, the Stochastics ticking higher and a bull kiss on the MACD lines. The old breakout resistance band $1.3030/$1.3050 will now be  key gauge and be seen as a basis of support for a correction. If the market can hold on to the break then the bulls will be preparing to look higher once more. Resistance comes from September 2016 with initially $1.3120 and $1.3280, however the way would be open for $1.3450/$1.3500 as the next key resistance.

USD/JPY

The negative candles are beginning to rack up and intensify, whilst the recovery days are making little real impression on the new downtrend that is developing. Momentum indicators are increasingly deteriorating with the RSI and Stochastics tracking lower, whilst the MACD lines have now bear crossed lower. The reaction to today’s early rebound will be again important as if the market once more fails around resistance and rolls over, the bears could begin to really push lower. The hourly chart shows a breakdown of the support band 112.70/112.90 which completed a small top pattern and implies around 70 pips lower towards 112.00, whilst the top pattern neckline becomes a basis of resistance now. There is more considerable resistance at 113.57. Friday’s low at 112.25 is initially supportive whilst the next main low on the daily chart is 111.70.

Gold

The market has been trending lower for the past five weeks but a decisive bull candle has broken the downtrend and a sequence of lower highs to improve the outlook once more. Taking the market above $1229.10 resistance means that the new key low is at $1204.50, with a higher low at $1214.50. The momentum indicators are now improving well but need to continue. The RSI is rising but needs to move above 50 to decisively improve, whilst the Stochastics are rising at a four week high, and the MACD lines are ready to cross higher. The bulls are still confident to push further gains early today and the hourly chart shows decent support now above $1222.50 and another higher low above here would really put the recovery on track. The bulls will be eying the key pivot within the medium to longer term range, with $1240 a key pivot.

WTI Oil

The move above the mid-week high of $46.48 has re-opened the key resistance in place between $47.00/$47.30. A medium term pivot around $47.00 has been a consistent turning point (taking into account the early June intraday peak of $47.30) and means that this is a key resistance that needs to be overcome for the bulls. Momentum indicators have been confirming the improvement, with the RSI climbing above 50 again, whilst the MACD lines accelerate higher. This suggests the bulls are gaining confidence for a test of the pivot in the coming days. A bullish upside break of the pivot would improve the prospects for further gains, with resistance at $48.40 and then $50.30. The support of the higher low at $45.00 is increasingly important.

Dow Jones Industrial Average

The buyers continue to pull the market gradually into new high ground, posting another bull candle. The outlook for the Dow is once again strong having broken out  of a three week range and the market remains positively configured having broken clear of the previous four week consolidation range. Momentum indicators are positive and with the RSI into the low 60s there is still upside potential, whilst the Stochastics are rising strongly and MACD lines are just now turning up again.. Near term corrections remain a chance to buy, with a band of support 21,4445/21,530 as a buy zone now.