Next 24 hours: Euro and Yen Higher, Pound Lower
Today’s report: US Dollar Reasserts in May
We are coming off a solid month for the US Dollar, with the USD Index closing near two-month highs. Most of the gains in the index have come against the Euro, Yen and Pound, with the Buck actually giving some back to the commodity currencies. But overall, the price action is reflective of this latest hawkish shift in the Fed's outlook.
Wake-up call
Chart talk: Major markets technical overview video
- Thursday ECB
- leave camp
- Nikkei downside
- Swiss growth
- Aussie GDP
- lower OIL
- GDT auction
- Brexit risk
- CB policy
- USDTRY
Suggested reading
- Untold Story Behind Saudi Arabia's 41-Year U.S. Debt Secret, A. Wong, Bloomberg (May 31, 2016)
- Lessons, Predictions, Recommendations from an Icon, M. Andreessen, Tim Ferris (May 29, 2016)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The latest breakdown below 1.1200 suggests the pullback off the recent 2016 peak is developing into something more significant, after the major pair had stalled out into medium-term resistance ahead of 1.1710. From here, there is scope for additional setbacks into the 1.0823-1.1000 area. Any corrective rallies should be well capped ahead of 1.1400.
EURUSD – fundamental overview
Not a whole lot going on with the Euro at the moment, as the single currency consolidates recent declines. Tuesday’s economic data came in mixed both out of the Eurozone and US, and this had very little impact on the single currency. We don’t get all that much in the Eurozone today on the data front and the focus will be on US releases featuring ISM manufacturing and the Fed Beige Book. We should also expect to see the market start to position ahead of tomorrow’s  key event risk in the form of the European Central Bank decision. While no change on policy is expected, as always, it will be important to hear what Mr. Draghi has to say.
GBPUSD – technical overview
Although the recent surge may suggest this market is getting ready to carve a more meaningful base, inability to establish a daily close above 1.4770 is keeping broader pressure on the downside. Ultimately, the establishment back above 1.4770 will now be required to force a meaningful shift in the structure and strengthen the case for the formation of a material base. Until then, the structure remains bearish, with scope another topside failure ahead of renewed declines towards initial key support at 1.4333.
GBPUSD – fundamental overview
The Pound was a major underperformer in Tuesday trade after new polls showed favourable results for the leave camp in the EU referendum. This came as somewhat of a shock to the market after polls over the past few weeks had been showing an increasingly decisive lead for the remain camp. More volatility is expected in the lead up to the June 23rd event as the momentum continues to sway in both directions. In the interim, today’s focus on the economic calendar will be on UK manufacturing PMIs and US data featuring ISM manufacturing and the Fed Beige Book.
USDJPY – technical overview
The market has entered a healthy period of correction since stalling out a fresh multi-month lows ahead of the major psychological barrier at 105.00. There are now signs emerging of a more significant bullish structural shift. However, the market will need to establish back above the previous lower top at 111.89 to confirm this shift, while inability to do so will keep the pressure on the downside.
USDJPY – fundamental overview
The latest rally has run into offers into Wednesday, with HFTs and leveraged names selling on the back of the beat in Japan’s Q1 capital spending and some weakness in the Nikkei. Otherwise, not much of a reaction to the mixed China PMI showings, after manufacturing PMIs slightly beat, while services PMIs disappointed. Looking ahead, we get US ISM manufacturing and the Fed Beige Book.
EURCHF – technical overview
Setbacks continue to be very well supported, with the market putting in a series of higher lows and higher highs. Look for this most recent push back above 1.1100 to strengthen the constructive outlook and open the door for the next set of gains towards a retest of the 1.1200 yearly and multi-month high from February. Any setbacks should be well supported ahead of 1.0900, while ultimately, only below 1.0800 would compromise the structure.
EURCHF – fundamental overview
Certainly, the Franc has done a good job weakening over the past several weeks, though the price action continues to be suspect, with much of the weakness coming at a time when risk markets are more fragile and there is demand for safe haven currencies. This begs the question just how much this latest round of Swiss Franc weakness has come by natural forces and how much has come from SNB efforts to weaken the currency. The SNB remains committed to a policy of weakening the Franc, but it will be interesting to see how the central bank’s efforts fair in the event of another round of risk liquidation and this more hawkish leaning Federal Reserve. Looking ahead, the market digests this latest round of Swiss GDP data.
AUDUSD – technical overview
Setbacks have extended well off the recent 2016 peak, with the market breaking back below the 200-Day SMA. At this point, the focus has shifted back on the downside, though there is risk for a decent corrective bounce or period of consolidation now that the longer-term moving average has been tested and broken. Still, any rallies should be well capped ahead of 0.7500 in favour of additional declines, potentially back towards the 2016 base at 0.6827.
AUDUSD – fundamental overview
The OIS market has scaled back odds for RBA rate cuts in the months ahead, with the most likely scenario of an August cut priced down from 51% to 45.6%. This repricing comes on the back of Wednesday’s impressive Aussie GDP data, which managed to come in well above expectation, following up Tuesday’s healthy building approvals. While subdued inflation is certainly still the primary concern over at the RBA, the positive economic momentum from this week’s releases is definitely removing pressure for the central bank to need to think about rate cuts going forward. Looking ahead, we get US ISM manufacturing and the Fed Beige Book.
USDCAD – technical overview
The market could finally be in the process of establishing a meaningful base following this latest impressive reversal out from multi-month lows below 1.2500. The recent break back above 1.3000 strengthens this outlook and opens the door for gains towards next key resistance in the 1.3219-1.3296 area further up. Any setbacks from here should ideally be supported ahead of 1.2772.
USDCAD – fundamental overview
Tuesday wasn’t a good day for the Canadian Dollar, which managed to deviate from its commodity currency cousins and trade lower on the day. The Loonie took a hit on the back of the softer Canada GDP data and reversal in the price of OIL. Looking ahead, we Canada manufacturing data out of both Canada and the US along with the Fed Beige Book later in the day.
NZDUSD – technical overview
Despite recent gains to fresh 2016 highs, the market remains confined to a broader downtrend with rallies expected to continue to be well capped. The latest topside failure and impressive bearish reversal strengthens this outlook, opening a deeper drop towards next key support at 0.6546, which guards against the 2016 low at 0.6347 further down. Any rallies should now be well capped ahead of 0.6900.
NZDUSD – fundamental overview
Tuesday’s solid New Zealand business survey has been followed up on Wednesday with a well received terms of trade report. This in conjunction with an acceleration in house price inflation suggests the RBNZ will be less inclined to feel it will need to cut rates again when it meets next week. But overall, inflation remains subdued and the dairy market continues to struggle, which will keep the central bank from completely abandoning the idea of a near term cut. Looking ahead, we get the all important GDT auction results, which is sure to influence price action. We also get US ISM manufacturing and the Fed Beige Book later in the day.
US SPX 500 – technical overview
The prospect for the formation of an imminent top has faded, with the price rallying back above critical psychological resistance at 2100. If the market can now break back above the 2016 peak at 2112, this will open the door for a direct retest of the record high from 2015 at 2037. However, inability to establish a daily close above 2112, could warn of another topside failure and bearish reversal.
US SPX 500 – fundamental overview
The stock market is once again looking vulnerable at lofty heights, with 2016 rallies continuing to feel like they have very little behind them. The fact that monetary policy is exhausted on a global scale is not something that should be a comfort to investors. Moreover, investors should certainly not be comforted by this latest shift in Fed sentiment, with the central bank signaling a clear willingness to move on rates in the months ahead if data permits. This should remove incentive to be long stocks, leaving the door open for a more intensified liquidation as the Fed moves further towards policy normalization. There is risk the Fed holds off in June to make sure the EU referendum produces a remain vote in the UK. But if this plays out and that risk is removed, July is looking like a serious possibility at the moment.
GOLD (SPOT) – technical overview
The market has undergone an intense round of setbacks since stalling out just shy of the 2015 peak above 1300. Still, while the price holds above 1191 on a daily close basis, the overall structure remains constructive, with scope for the formation of the next medium term base ahead of a resumption of gains back through 1300 and towards 1400 further up.
GOLD (SPOT) – fundamental overview
GOLD has taken quite a hit over the past several days but ultimately is expected to be very well supported into the current dip, with the yellow metal finding solid demand form medium-term players in 2016, on the back of fears over the limitations of exhausted monetary policy and extended global equities. Whether the US Dollar is bid is becoming less relevant, with risk sentiment likely to be the primary driver going forward. Renewed weakness on this front will almost certainly keep the commodity supported ahead of $1180 and invite fresh upside in the sessions ahead. Dealers report buy-stops above $1230.
Feature – technical overview
USDTRYÂ remains exceptionally well supported on dips, with the latest round of setbacks propped ahead of 2.9200. From here, look for a higher low at 2.9250 in favour of the next major upside extension through 3.0120 and back towards a retest of the 2016 high from January at 3.0610. Ultimately, only a break back below 2.9250 would delay the constructive outlook.
Feature – fundamental overview
Turkey is coming off a bad month, with the local equity market getting slammed about 8% and putting in its worst performance since January 2014. This was the biggest slide for an equity market amongst all of the benchmarks tracked at Bloomberg. Meanwhile, the Lira also took a nice hit in May, down about 5% and coming in as one of the softest currencies on the month. The political uncertainty in Turkey has been driving the relative weakness, following the resignation of Prime Minister Davutoglu and attempts by President Erdogan to tighten up his power grip. Meanwhile, the hawkish shift in Fed expectations and possibility for a sooner hike has also factored into the EM weakness.