What we are looking for
- USD continues to decline: A near-term dollar correction is threatening to turn into something far more considerable. Major forex pairs show key technical indicators and levels being broken.
- Indices continue to rally: Wall Street is leading the recovery, with the tech stocks at the forefront.
- Commodities into recovery phases: Precious metals are driving recovery phases, but oil needs to break resistance still.
- Data trading: Eurozone growth and inflation will drive EUR during the European morning. In the wake of the Fed’s decision, a more traditional move on economic data has emerged. The bad news is now trading as negative for the USD. It will be interesting to see if this continues to be the case, with core PCE and Michigan Sentiment today.
There has been a decisive shift in outlook since the Fed meeting. The general assessment is that the Fed has blinked in its fight against inflation. Furthermore, the US is now into a technical recession after Advance Q2 GDP showed a second consecutive quarter of negative growth. With fear of dealing with recession looming overhead, ending forward guidance is a dovish move. The prospect of a less aggressive interest rate policy has also pulled inflation expectations higher. The market impact of this has been to be USD negative in forex, pulling commodities (especially precious metals) higher and allowing equities to recover.
These moves have developed in the days since the Fed meeting and are holding firm once more this morning. Yesterday also showed that negative economic data surprises for the US no longer induce support for the USD. With the Fed now data-dependent, negative data could induce an even more dovish response and that means a USD correction is gathering momentum.
Once more we are looking at tier-one Eurozone and US data dominating the economic calendar. After the German HICP inflation surprised to the upside yesterday, there is an upside risk to the headline Eurozone inflation forecasts which are expected to remain at 8.6%. Core inflation is expected to increase to 3.8%. A first look at Q2 Eurozone GDP is expected to show slight growth of +0.2%, weaker than Q1 but still in expansion. For the US, core PCE is expected to remain flat at 4.7%. The final reading of the July Michigan Sentiment is expected to be unrevised.
Market sentiment is positive: Risk positive and USD negative moves are a feature across major markets.
Treasury yields breaking down: Yesterday’s downside move in yields was significant. The US 10-year yield has now fallen below 2.70%. This is the lowest since mid-April and has completed a “head and shoulders” top pattern.
US tech stocks rise on earnings: The NASDAQ rally has been boosted further since the earnings of tech giants after-hours. Apple beat on revenue and earnings (shares up +3%) whilst Amazon missed on earnings but beat on revenue (shares up +13%).
Early Eurozone GDP and inflation data: Mixed news. Eurozone countries announce GDP before the Euro area data. France has beaten estimates on GDP with +0.5% QoQ, with Spain also beating at +1.1%. However, inflation for France and Spain was also higher than expected.
Cryptocurrencies pause in their recovery: Crypto has jumped since the Fed meeting. In two days Bitcoin rallied by over 14% into last night’s close. However, the move has been on pause this morning. Bitcoin is down around -0.5% at just under $24,000.
- Eurozone GDP (flash Q2) (09:00 GMT) – Consensus is expecting +0.2% growth QoQ (after +0.6% in Q1)
- Eurozone Inflation (prelim) (09:00 GMT) – Headline inflation is expected to remain at 8.
- US Core Personal Consumption Expenditure (12:30 GMT) – Consensus is looking for inflation to be steady at 4.7% in July
- Michigan Sentiment (final) (12:30 GMT) – Consensus is not expecting any revision to the flash reading of 51.1 (up from 50.0 final June)
Major markets outlook
Broad outlook: Sentiment continues to recover well. USD weakness is a part of this too.
Forex: USD is underperforming again across major forex pairs. JPY continues to be the best performer whilst AUD and NZD are also notable outperformers.
- EUR/USD rebounded from a low of 1.0096 in the wake of the Fed and is once more solidly back into the consolidation area of the past week. There is an upside bias forming on near-term momentum, however for now resistance at 1.0275 remains intact. With other pairs breaking higher, this leaves a bias towards breaking above 1.0275 but the longer this is resisted, the more it will be of concern.
- GBP/USD continues to recover well. Closing decisively above 1.2055 completed a near-term base pattern which implies recovery towards 1.2330. The resistance band between 1.2160/1.2210 is already creaking as the next step in the recovery. More importantly, the five-month downtrend has now been broken. Recovery momentum is also building with the RSI into the high 50s and the highest since February. We are happy to back the continuation of this rally and there is good initial support between 1.2055/1.2100.
- AUD/USD has broken out above the resistance of the near four-month downtrend and the 55-day moving average. This continues the recovery uptrend with the resistance between 0.7030/0.7070 set to be tested. Initial support is at 0.6955 with 0.6910 as the first higher low.
Commodities: Precious metals are rallying strongly now, but oil still needs to break through resistance.
- Gold continues its strong recovery in the wake of the Fed's decision. Breaking through $1752 a test of the next resistance band between $1785/$1805 is on. 1711 and is now testing $1739/$1752 resistance. With the RSI into the mid-50s, the momentum of this move continues to develop. The four-month downtrend is at $1781. Initial support to buy into weakness to play the recovery is at $1745/$1752.
- Silver has accelerated higher through resistance at $19.48 and has quickly now set to test $20.20/$20.45. This is the next important test for recovery. RSI momentum is confirming the improvement. Initial support is now around $19.10/$19.50.
- Brent Crude oil has improved in the wake of the Fed decision. It has broken the six-week downtrend channel and is trading above the falling 21-day moving average. However, the resistance band between $107.65/$109.65 remains key. A close above $110 would be a strong signal of sustainable medium-term recovery. Furthermore, the RSI needs to move decisively back above 50 (where recent rallies have faltered) to add confirmation. Initial support is at $105.70.
Indices: Wall Street is in a strong recovery, whilst European indices look unsure.
- S&P 500 futures with another strong bull candle and the market has surged towards a test of the next important resistance band between 4070/4200. With momentum now strongly positive, weakness is being used as a chance to buy. Initial support is now between 3994/4015, with 3938 as a key higher low.
- German DAX rallied strongly yesterday to break above 13440 resistance but the move has just eased back slightly this morning. A more improved configuration on RSI momentum suggests that there is a recovery in the process, however, a second close above 13440 would be needed to confirm. Initial support is at 13260/13330. A move below 13035 would question the recovery.
- FTSE 100 has now seen a second close above 7370 which is breaking the shackles of the month-long trading range. With RSI momentum into the high-50s, the recovery is building well and weakness is being seen as a chance to buy. There is initial support between 7340/7370 whilst recent dips into 7282/7310 have been used as a chance to buy. The move above 7370 has opened 7520/7650 as the next resistance area.
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