What are we looking at today:
- USD fluctuating ahead of US CPI: USD made strong gains yesterday but is giving some back this morning. Reaction to US CPI later will be key.
- EUR under selling pressure: EUR has dropped sharply in the wake of the ECB due to pressures on Eurozone bond yield spreads.
- Indices consolidating breakdowns: Sharp breaches of support were seen yesterday across major indices. European markets remain under selling pressure today and US futures suggest a struggle for any recovery.
- Data trading: Big focus will be on US CPI inflation today. The consensus is for the headline to stick at 8.3% but core inflation to drop slightly to 5.9%. USD will certainly be reactive. Canadian unemployment could impact CAD positions, whilst USD is again in focus later with the prelim Michigan Sentiment.
Yesterday was a day of breakdowns. Significant support levels have been breached on major forex pairs and indices in what looks to be a series of outlook-changing moves. Breakdowns were seen on AUD/USD and NZD/USD, with EUR/USD standing on the brink. There was also a wave of selling pressure that has flooded across Wall Street and European equity markets.
The key question is now how market participants respond to these moves. If they are confirmed today and there is no instant recovery, it would suggest that the outlook has changed once more, with risk aversion and USD strength back as the dominant forces. The EUR was initially buoyed by the hawkish stance of the ECB yesterday, but as the session progressed, concerns rose as the yield spreads of Eurozone core/periphery bonds widened. There has been a kickback against a stronger USD this morning, but the next risk event comes this afternoon with US CPI inflation. Unless there is a sustainable recovery of these breakdowns (where risk appetite improves and USD sells off) these trends could be set for the near to medium term.
Subsequently, US CPI inflation will be the highlight of the economic calendar today. Estimates appear to be fairly mixed, ranging from 8.0% to 8.5% for the headline, but the consensus is looking for inflation to stay at 8.3% having slipped back slightly last month. Core inflation is expected to continue to decline and fall for a second consecutive month. Canadian unemployment is expected to remain steady, but any surprise could see CAD positions impacted. The prelim Michigan Sentiment survey will bring USD positions back into focus later in the US morning, with consensus looking for a slight decline.
Market sentiment turns negative: Indices are under selling pressure. Although there has been a kickback against the USD strength this morning, this looks to be a mild pullback rather than anything sustainable.
Treasury yields mixed (curve flattens): The rebound in the US 10-year yield has tailed off this morning (-3bps) with the 2-year yield still edging higher (+1bps). US inflation will be a key driver of yields later.
Yellen does not expect US recession: US Treasury Secretary Yellen does not expect the US will fall into recession, noting the solid consumer spending. Being in a political role, this view is fairly predictable.
China inflation dips in May: The headline CPI remained at +2.1% but was a shade under the 2.2% expected. The PPI dropped back to 6.4% (from 8.0%) as expected.
Cryptocurrency hovers: Renewed selling pressure on risk assets has not hit crypto overly. Bitcoin is a shade lower this morning, hanging on to $30,000.
- US CPI (1330BST) – Headline CPI is expected to stay at 8.3% in May but core CPI is expected to drop to 5.9% (from 6.2% in April)
- Canadian Unemployment (1330BST) – The headline rate is expected to remain at 5.2% in May.
- Michigan Sentiment - prelim (1330BST) – Sentiment is expected to drop slightly to 58.0 in June (from 58.4 in May)
Major market outlook
Broad outlook: Risk aversion has taken hold, with indices lower again. A kickback against USD strength has initially been seen this morning, but will it last? Reaction to US CPI will be key today.
Forex: USD is giving back some of its gains from yesterday. Notably, GBP is not taking part in this recovery.
- EUR/USD tested both resistance at 1.0760/1.0780 and support at 1.0625 yesterday, but a breach of 1.0625 looks to be more pertinent. The reaction higher this morning needs to hold through the US CPI data and ideally close above 1.0640 again. If not, it would suggest that EUR/USD is breaking down again. A move under 1.0600 (a basis of old resistance) would suggest renewed selling pressure, with 1.0540 and 1.0460 next supports.
- GBP/USD continues its decline of yesterday and is drifting towards a test of the range support of the past 3 weeks at 1.2430. A close below 1.2430 would be negative and open 1.2330 as the next support and potentially the key low at 1.2155. Resistance is mounting overhead with 1.2600 and initially 1.2555.
- AUD/USD has closed decisively below key near-term support at 0.7140 to complete a small top pattern and imply a fall to 0.7000. The market is rebounding this morning, but could simply be a pullback into neckline resistance at 0.7140/0.7160. A failure in this range today would be another chance to sell.
Commodities: Precious metals remain rangebound, with oil engaging a minor pullback following the breakout to multi-month highs.
- Gold remains in a near-term range play. Resistance at $1874 caps the upside of a 3-week range above $1828 support. However, there is a very slight negative bias that is present on the RSI momentum which suggests the market is edging towards a test of the support at $1828. Initial resistance is at $1860. Expect volatility in the US CPI data today.
- Silver formed a decisive negative candle yesterday and is falling back towards a test of near-term trading range support around $21.28/$21.43. Momentum on the RSI is not yet leading the market lower but the risk of a downside break is growing. Initial resistance is $21.75/$21.95 on the intraday charts and a failure to recover back above this will add downside pressure. Below $21.25 implies a retest of the $20.45 May low.
- Brent Crude oil the break above resistance at $124.40 has opened moves towards $130, however, an initial pullback has developed. The bulls will be looking to continue a run of higher lows and use this as a chance to buy. Subsequently, the support at $120.50/$123.90 will be a key gauge. Initial resistance is at $126.35 now. A move below $118.25 would see positive momentum lost and the channel broken.
Indices: Wall Street has broken sharply lower and European markets also look to be under growing downside pressure.
- S&P 500 futures have decisively broken down following the trading range between 4071/4201. This now completes a small top pattern which implies c. -130 ticks of further downside towards 3940. The old support 4071/4100 now becomes an area of overhead supply and unless this can be reclaimed, will grow as key resistance. The next support is now 3960.
- German DAX has turned decisively corrective in recent sessions. Strong negative candles have seen a sharp breakdown of the support band 14,220/14,320 to pull the market back under what had been improving moving averages. This area of support now becomes resistance again. There is a growing downside momentum with support at 13,860 as the next test. A move below 13,675 would open 13,565.
- FTSE 100 has swung sharply lower again having broken the support band at 7495/7518. Given the deterioration in momentum and how the market has moved in recent months, a move back towards a test of the 7157/7227 support band of the May lows now looks likely. 7495/7518 is now initial resistance.
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