Next 24 hours: Soft US Data Headlines Monday Action
Today’s report: Not Ready to Take Fed Seriously
We’re coming out of a week where there wasn’t much to chew on, with the market spending most of the time contemplating this month’s Fed decision. The US Dollar has found some bids though gains have been less than impressive when considering the Fed’s commitment to keep with guidance.
Wake-up call
Chart talk: Major markets technical overview video
- Germany IFO
- Brexit headlines
- external drivers
- SNB’s job
- local data
- softer inflation
- Medium-term accounts
- Fed change
- outlook solid
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Push on with the ‘Great Unwinding’, M. Jones, Reuters (June 25, 2017)
- Bank of England’s Growing Policy Dilemma, M. El-Erian, Bloomberg (June 22, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market is showing signs of short-term exhaustion after extending its 2017 run. But with the medium-term structure still quite bullish, any setbacks that we do see in the sessions ahead should ideally be well supported in favour of the next higher low and bullish continuation towards key resistance around 1.1365, which represents the August 2016 peak. While above 1.1110 on a daily close basis, the outlook favours a more immediate continuation of gains. However, a daily close below 1.1110 would open the door for a deeper correction targeting a measured move extension to 1.0925.
EURUSD – fundamental overview
The past several days has been less about economic data and so much more about trying to figure out what to make of the most recent Fed decision. The Euro has pulled back from 2017 highs since the Fed decision, which certainly leaned more to the hawkish side as the Fed changed course and showed that it thought it was finally more important to err on the side of policy normalization. Still, setbacks have been rather mild considering, especially with messages out from the ECB seemingly moving back to the dovish side. The Euro has also managed to shrug off the Italian banking bailout and a shakeup in the Italian municipal elections. Looking ahead, Â Monday’s calendar features German IFO readings, US durable goods orders and Dallas Fed manufacturing. On Tuesday, the Fed Chair will be making an appearance in London and we could get more colour on the Fed’s outlook then.
GBPUSD – technical overview
The latest round of setbacks are viewed as corrective with the market expected to be very well supported on dips ahead of 1.2400 in favour of a higher low and bullish continuation towards a measured move extension objective at 1.3500 in the weeks ahead. A breakout above critical resistance at 1.2775 back in April triggered a structural shift in the major pair warning of a longer-term base. Only a break back below 1.2360 would compromise this outlook.
GBPUSD – fundamental overview
The Pound had taken a hit last week on dovish BOE Carney comments with setbacks extending as low as into the 1.2500s. But there was good demand to keep the UK currency well supported below 1.2600, with the normally dovish BOE Haldane helping things along after acknowledging he’d be inclined to support a rate hike later this year if economic data continued as forecast. Meanwhile, dovish comments from various Fed officials in the latter half of the week, helped to open additional upside. Of course, with the government still scrambling and the Brexit negotiations hanging in the balance, there is plenty of good reason to not be getting overly bullish the Pound just yet. Looking ahead,absence of first tier data out of the UK will leave the focus on UK politics post election, Brexit headlines and some US data that includes durable goods orders and Dallas Fed manufacturing.
USDJPY – technical overview
Despite the latest recovery rally, the overall pressure remains on the downside. In the interim, look for any additional upside to remain capped below 113.00, though only a break back above the recent high at 114.37 will negate the outlook and take the pressure off the downside.
USDJPY – fundamental overview
There hasn’t been much going on with this major pair of late, with most of the price action driven off the combination of a more hawkish Fed decision and an ongoing bid in US equities, two drivers that have been mostly supportive. Of course, scope exists for renewed Yen demand if risk markets become more sensitive to the reality of the dangers associated with stocks if the Fed actually does follow through with its timeline. Looking ahead, US durable goods orders and Dallas Fed manufacturing are the only notable standouts on Monday.
EURCHF – technical overview
A recent break above 1.0900 has taken the short-term pressure off the downside and could be warning of a more significant structural shift. Next key resistance comes in at 1.1000, with the psychological barrier coinciding with a high from August 2016. The establishment above 1.1000 would force a meaningful shift in the structure and open the door for longer-term upside. At the same time, while the market holds below 1.1000 the overall trend is still bearish and a break back below 1.0800 would renew downside pressure.
EURCHF – fundamental overview
The combination of artificially supported, record high US equities should be a worry for the SNB as any capitulation on the equity front is likely to invite massive safe haven Franc demand the central bank will be unable to offset, irrespective of the central bank’s commitment to negative rate policy. For now, the SNB is hoping global sentiment will remain artificially elevated and the ECB will take on a more hawkish policy approach in the months ahead. But the key focus for this market going forward will unquestionably be on the performance in US equities given the influence on broader sentiment. Any signs of intensification to the downside will likely invite a pickup in Franc demand and unwanted downside pressure on EURCHF. Certainly the message from the latest Fed decision in which it refused to back away from forward guidance will only make the SNB’s job that much tougher.
AUDUSD – technical overview
Despite the latest rally, the market continues to be very well capped into medium-term resistance around 0.7800. Ultimately, any moves to the topside are therefore classified as corrective with the market expected to stall out and roll over again. Look for a break back below 0.7500 to strengthen this outlook and accelerate declines.
AUDUSD – fundamental overview
Overall, the Australian Dollar has done a good job holding up, helped along by local developments that include balanced RBA policy, better than expected Australia GDP, solid China data and an impressive Aussie employment report. However, there are plenty of offers from medium-term players into this rally, with these accounts still feeling quite skeptical about the outlook for China, elevated equities and choppy commodities prices. Moreover, the Fed has changed its outlook, now erring on the side of normalization, something that could push yields significantly back in favour of the Buck, while also weighing on Aussie if risk comes off as a consequence. Looking ahead, the calendar is light, with only US durable goods orders and Dallas Fed manufacturing standing out.
USDCAD – technical overview
The latest round of setbacks have taken the pressure off the topside for now, with the market trading back into the middle of a longer-term range. The recent break below 1.3200 opens the door for the possibility of a more pronounced decline in the days ahead towards 1.3000. Ultimately however, the longer-term uptrend remains intact and setbacks should be well supported around the 1.3000 psychological barrier. Look for a break back above 1.3348 to strengthen the constructive outlook.
USDCAD – fundamental overview
The Canadian Dollar has put in an impressive recovery in 2017, helped along by hawkish Bank of Canada comments. The central bankers have been flagging a reconsideration of current policy stimulus and the prospect for a rate hike in the 2017 pipeline. Odds for a 2017 rate hike have jumped well above 50%, reflecting this shift in BoC sentiment, clearly benefiting the Loonie as a result. However, with the Fed taking a different approach and committed to its normalization timeline, additional upside in the Loonie could be tough, particularly with OIL struggling and Friday’s Canada CPI coming in much softer than forecast. Looking ahead, absence of first tier Canada data leaves the focus on US durable goods orders and Dallas Fed manufacturing.
NZDUSD – technical overview
Despite the intense surge over the past several days, the overall pressure remains on the downside with the market expected to be very well capped around 0.7300. The weekly chart is reflective of this fact as it looks like we’re seeing the formation of a major top off the 2016 high. Only a clear break back above 0.7300 would compromise the outlook, while back below 0.7186 strengthens the bearish case.
NZDUSD – fundamental overview
As expected, the RBNZ left rates on hold last week, with no new material insights on the policy outlook. Still, the market has been buying Kiwi in the aftermath, perhaps on the RBNZ’s optimistic growth outlook and the absence of what could have been stronger language about Kiwi strength in its policy statement. Another source of Kiwi gains are the dovish Fed comments in the latter half of last week, which throws cold water on the idea that all of the Fed members are in agreement about how to move forward. Still, when considering the hawkish Fed decision, and some softness in recent New Zealand data, there is risk for fresh sell interest to emerge into this rally. Looking ahead, the calendar is light, with only US durable goods orders and Dallas Fed manufacturing standing out.
US SPX 500 – technical overview
The record run continues with the intense bullish momentum intact and the door open for that next push towards a measured move extension at 2480. At a minimum, a break back below 2400 would be required to take the immediate pressure off the topside, while only a break below 2320 would signal a meaningful shift in the structure.
US SPX 500 – fundamental overview
There has been a lot of talk about a potential top in the US equity market, with the rally pushing to record highs at an unnerving pace in the face of some disturbing fundamentals including exhausted (and reversing) Fed policy and rising geopolitical risk. And certainly this ongoing turmoil surrounding the US administration has made things even more tense. But overall, the US equity market has done a good job proving it can easily buy back into any dip and keep pushing to record highs as it focuses on rates staying lower for longer and the Fed continuing to underdeliver on forward guidance. This bet will be put to the test in an even bigger way going forward, after the Fed surprisingly held to its forward guidance this month, still calling for another rate hike in 2017 despite a slowdown in data, something that could start to weigh more heavily on investor sentiment. The major takeaway is that the Fed is shifting from a strategy that errs on the side of accommodation to a strategy now erring on the side of policy normalization. Any more confirmation in the days ahead could increases downside pressure.
GOLD (SPOT) – technical overview
The market has been very well supported since basing out ahead of 1100 in 2016, putting in a series of higher lows and higher highs. This latest break to a fresh 2017 high confirms that next higher low in the 1215 area and opens an upside extension towards the 2016 peak at 1375 further up. At this point, only a break back below 1215 would compromise the constructive outlook with setbacks ideally seen well supported in the 1230s.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about the limitations of exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity in demand, with many market participants also fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Certainly the US Dollar under pressure in 2017 is adding to the metal’s bid tone as well, but there is a growing sense that even in a scenario where the US Dollar is bid, gold may continue to find bids on risk off macro implications.
Feature – technical overview
USDZAR has been under pressure in recent weeks, though setbacks have managed to stall ahead of the 2017 low thus far. Look for a break back above 13.21 to negate the bearish outlook and open the door for a bullish resumption.
Feature – fundamental overview
Overall, the South African Rand has done a good job holding up when considering ongoing domestic woes including a prosecutor report critical of the SARB, regulatory dispute between miners and the government, a Moody’s downgrade and drama surrounding the Zuma no confidence court ruling. But it seems these troubling fundamentals coupled with last week’s more hawkish Fed decision are starting to get the better of the Rand, with the greater risk from here for renewed weakness. Remember, US equities are also exceptionally elevated and at risk for capitulation, yet another risk that could expose the emerging market currency to additional pressure.