What we are looking for
- USD firming again: USD is the outperforming currency today. This is significantly impacting the outlook of major forex pairs.
- Indices looking more tentative: Indices were strong once more yesterday, and European markets are playing catch up on Wall Street gains. However, US futures are lower and with markets technically stretched the temptation to take profits is growing.
- Commodities falling: Especially on the higher risk end of the scale. The oil price fell sharply yesterday to close at multi-month lows and is lower again. Silver is underperforming gold.
- Data trading: Data traders have an active day. EUR traders initially will watch for an improvement in German ZEW to potentially lend EUR support. CAD positions will be volatile off Canadian inflation. Any lower than expected inflation would put downward pressure on CAD. For USD there is some initial housing data, but the main driver will be Industrial Production.
There is a resurgence in the USD. For the past month, the USD has been corrective. However, a strong move higher on Friday has been followed by further gains early this week. Breaking a four-week downtrend on the Dollar Index, the USD is starting to look stronger again. This is coming amid a flight to safety. With deterioration in the growth outlook for China and an energy crisis in Europe, the USD is a preferred destination to park money. However, there has been another lurch into the USD despite the New York Fed Manufacturing survey which jagged lower yesterday. This is a sign of the growing preference for the USD currently.
These data concerns are also weighing on commodities. Oil has broken to multi-month lows (on demand concerns following the Chinese and US data) and silver is also retreating (silver is also a pro-cyclical play that is suffering on demand concerns). For now, we see that equity markets are holding up relatively well. However, with Wall Street indices looking stretched after decisive recent gains, there will be a growing temptation for locking in some profits. If the dollar strength and decline in commodities continue, this could result in some near-term unwinding moves on indices developing in the days ahead.
There is plenty to keep traders interested on the economic calendar today. German ZEW is expected to show a mild recovery in August. Canadian inflation is expected to follow US inflation lower which would reduce pressure on the Bank of Canada to tighten rates. Building Permits and Housing Starts are expected to decline between -1% to -3%. After not growing for the past couple of months, Industrial Production is expected to grow slightly again in July.
Market sentiment is looking wary: A USD rebound, with commodities falling, tends to go with a negative feel to sentiment. However, indices are still holding up well, for now.
Treasury yields are mixed: Longer-dated yields fell yesterday (on US growth concerns), but shorter-dated yields continue to hold up (still hawkish Fed speak)
UK Unemployment steady, wages increase: The headline unemployment rate remained at 3.8%. Average Weekly Earnings (ex-bonus) increased to 4.7% (from 4.4%) which was ahead of the 4.5% expected.
Cryptocurrencies consolidate after yesterday’s pullback: Bitcoin closed around the day low yesterday and has posted a corrective candlestick on the daily chart. A “shooting star” candlestick (which is also a bearish one-day reversal) can be a strong corrective signal. The market is consolidating this morning around $24000.
- German ZEW Economic Sentiment (at 09:00 GMT) – Sentiment is expected to improve marginally in August with a tick higher to -52.7 (from -53.8 in July).
- Canada inflation (at 12:30 GMT) – Headline inflation is expected to drop to 7.6% in July (from 8.1% in June), with core inflation down to 6.1% (from 6.2%)
- US Housing Starts (at 12:30 GMT) – Starts are forecast to decline by -1.2% to 1.540m in July (from 1.559m in June)
- US Building Permit (at 12:30 GMT) – Permits are expected to decline by -3.3% to 1.640m (from 1.696m)
- US Industrial Production (at 13:15 GMT) – Production is expected to grow by +0.3% in July (after falling by -0.2% in June).
Major markets outlook
Broad outlook: There is a mixed outlook. A stronger USD with falling commodities is risk-negative, but European indices are holding up well for now.
Forex: USD is performing well again, with NZD underperforming.
- EUR/USD has fallen sharply to break the recovery uptrend and back below the 21-day moving average. The daily RSI has fallen back below 50. The important test suddenly now becomes the support at 1.0095. A closing break under 1.0095 opens parity again. There is near-term resistance at 1.0200/1.0220.
- GBP/USD has fallen to test the bottom of the near-term trading range at 1.2000 which is the key gauge of support. The RSI has below 45 and is around four-week lows which is a warning sign of a range breakdown. A close below 1.2000 opens 1.1890 and possibly 1.1760. Initial resistance is now 1.2100/1.2145.
- AUD/USD has pulled decisively lower in the early part of this week. Moving back below the support of the breakout at 0.7045/0.7070 is disappointing. However, whilst the uptrend channel and support at 0.6945 is intact, with the daily RSI above 50, the strategy remains to buy into weakness.
Commodities: Precious metals are rolling over, whilst oil is again posting lower highs and lower lows.
- Gold has fallen back from the resistance band between $1785/$1805. The intraday charts also show that moving below $1783 support is starting to turn the market lower again. A move below the higher low at $1765 would add to near-term corrective momentum again. Although daily momentum is holding up well, on the 4-hour chart we see the RSI into a more corrective configuration. Near-term resistance is building now at $1783.
- Silver has moved decisively back from the resistance band of $20.45/$20.90 and is starting to threaten a near-term correction. Although the daily RSI is holding above 50, the 4-hour chart RSI is looking more correctively configured. Resistance is built initially between $20.24/$20.50. Reaction to the key support (which is the higher low) at $19.54 will be an important gauge now.
- Brent Crude oil has seen the recovery falter at $102.95 to fall sharply below support at $95.90 to levels not seen since February. The run of lower highs and lower lows continues. And we look to sell into strength. There is initial resistance at $97.40/$99.25. The next support is not until $90.45.
Indices: Wall Street has closed higher once more, but is looking increasingly stretched. European markets are holding on to their uptrends.
- S&P 500 futures have closed higher in four successive sessions now and are testing the resistance of the April highs around 4302. A decisive close clear opens 4355 and potentially 4500 resistance. The concern we have is the increasingly stretched daily RSI which is now into the mid-70s. Whilst this reflects the trend strength, if a correction doe hit, it could be significant. The uptrend is down at 4185 currently, with good support between 4170/4200.
- German DAX continues to follow a trend higher over the past four weeks with weakness being bought into. Momentum is solidly strong now with the daily RSI into the 60s. There is good initial support between 13730/13795 with the uptrend at 13630 today. The next important resistance area is around 14250/14300.
- FTSE 100 continues to track higher within the four-week uptrend with near-term weakness seen as a chance to buy. There is solidly strong momentum with daily RSI in the 60s. The uptrend is at 7475. Support at 7457 is growing in importance near term. Initial resistance is Friday’s high at 7547 with the next important resistance area at around 7635/7650.
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