Next 24 hours: FX Distracted by OIL and Stocks
Today’s report: Dear Prudence
The Fed Minutes have come and gone and though there weren't any meaningful changes, one subtlety has caught the attention of the market, after the Fed said ‘it would be prudent’ to wait for evidence that a recent run of soft data was transitory. UK GDP and some more Fed speak stand out on Thursday.
Wake-up call
Chart talk: Major markets technical overview video
- Dovish Minutes
- UK GDP
- diverging flows
- SNB strategy
- iron ore
- BoC decision
- Kiwi budget
- Fed guidance
- Hard asset
- USDSGDÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- EM Bonds Are Rallying Again, T. Hale, Financial Times (May 24, 2017)
- Hedge Fund Sells Pounds on Hard Brexit Bet, A. Debnath, Bloomberg (May 24, 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 on Tuesday. But with the medium-term structure still quite bullish, any setbacks that we do see in the sessions ahead should ideally be well supported above 1.1000 on a close basis in favour of the next higher low and bullish continuation towards the next key resistance point at 1.1367, which represents the August 2016 peak. Ultimately, only back below a confirmed higher low at 1.0840 would negate the outlook.
EURUSD – fundamental overview
The Fed Minutes revealed the central bank perhaps taking some more caution after adding the line that it would be prudent to wait some more to confirm the recent economic slowdown was transitory. This resulted in an overall dovish read of the release, which has continued to support the Euro into Thursday. Meanwhile, on the other side, European data has been impressive and pressure is building on the ECB to get the policy reversal process underway. Looking ahead, key standouts on today’s calendar come in the form of US initial jobless claims and some Fed speak.
GBPUSD – technical overview
This latest push through 1.2775, the December 2016 peak, is a significant development as it potentially ends a period of bearish consolidation, warning of the formation of a more meaningful longer-term base. The break ends a multi week consolidation mostly ranging between 1.2000-1.2700 with the bullish move paving the way for a measured moved upside extension equal in size back into the 1.3500 area in the days ahead. Still, there is rise for a short-term pullback, though any declines are now classified as corrective and should be well supported ahead of 1.2500 in favour of a higher low and bullish resumption.
GBPUSD – fundamental overview
The Pound continues to hold up well on dips despite this week’s terror attack and despite risk associated with the upcoming UK election and Brexit negotiations. There have been signs the May government may not get as much of a victory as it thought it would, which could make things a lot more challenging. Still, with most of the focus on the fallout from the dovish reading of the Fed Minutes right now, the major pair has been able to push back up. The Fed’s inclusion of language that it would be prudent to see if a recent data slowdown has been transitory has been used as a fresh catalyst to sell the US Dollar as it suggests the Fed could once again let down when it comes to forward guidance. Looking ahead, UK GDP will be the main focus, with the outcome to influence the Pound’s direction today. Later on, we get US initial jobless claims and more Fed speak.
USDJPY – technical overview
A recent recovery run off the 2017 low has stalled out, with the market sharply reversing course to the downside. This latest daily close back below 112.00 now exposes a possible retest of the yearly low at 108.13. In the interim, look for any rallies to be well capped ahead of 113.00, with only a break back above the recent high at 114.37 to negate and take the pressure off the downside.
USDJPY – fundamental overview
The major pair hasn’t been able to move all that much of late and the price action makes sense, with macro themes pulling in both directions. On the one hand, a broad based wave of US Dollar declines on the back of scaled back Fed hike odds has been weighing into rallies, but on the other had, the concurrent surge in risk, with US equities racing to fresh record highs is supporting the market on dips. Looking ahead, the key focus will be on US initial jobless claims and some more Fed speak. Wednesday’s dovish read of the Fed Minutes has inspired this latest round of volatility after the Fed expressed more doubt about a recent slowdown in US data.
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 1.0865 would renew downside pressure.
EURCHF – fundamental overview
The combination of artificially supported, record high US equities and rising geopolitical tension 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 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 as per reports the central bank is preparing for a taper. 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 renewed intensification to the downside will likely invite a pickup in Franc demand and unwanted downside pressure on EURCHF.
AUDUSD – technical overview
An impressive rally in 2017 has stalled out into significant medium-term resistance ahead of 0.7800. A recent break back below 0.7500 strengthens the prospect for some form of a top and could open the door for a deeper drop back towards the 0.7000 area in the days ahead. Ultimately, any moves to the topside are classified as corrective with a fresh lower top sought out, with only a break back above 0.7611 to negate the outlook.
AUDUSD – fundamental overview
The Australian Dollar has managed to trade up to multi-session highs but isn’t getting as much support as other currencies from the dovish reading of Wednesday’s Fed Minutes. Even the run up in US equities hasn’t done much to help the risk correlated currency and it seems the concurrent drop in the price of iron ore to seven month lows has been a major factor offsetting any of the demand from broad based US Dollar weakness and risk on flow. Looking ahead, we get US initial jobless claims and some more Fed speak.
USDCAD – technical overview
The uptrend in this market remains firmly intact, getting added confirmation following this latest break to a fresh 2017 high, beyond a previous peak from December 2016 at 1.3600. A period of healthy correction has now ensued and the market will be trying to carve the next higher low, with any additional weakness likely to be limited in favour of a push towards the next measured move upside extension objective in the 1.4000 area. Ultimately, only back below 1.3224 would give reason for pause and delay the constructive outlook.
USDCAD – fundamental overview
Wednesday’s cautiously optimistic Bank of Canada policy decision and a dovish reading of the Fed Minutes have helped to fuel additional upside in the Canadian Dollar that had already been enjoying a healthy correction from 2017 lows against the Buck. The recovery in the price of OIL and a softer run of US data had initially inspired a Loonie run in recent days, with the Wednesday developments only adding to the Loonie’s bid tone. Looking ahead, the key focus will be on US initial jobless claims, price action in the OIL market and some more Fed speak.
NZDUSD – technical overview
The overall pressure remains on the downside with the market expected to be very well capped on rallies. 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, with outlook strengthened on this week’s breakdown to a fresh 2017 low. As such, expect the market to continue to roll over in the days ahead, with setbacks projected towards medium-term support in the 0.6600s. Only back above 0.7100 compromises the outlook.
NZDUSD – fundamental overview
New Zealand Dollar demand off recent 2017 lows has picked up, helped along by a wave of negative US Dollar sentiment, rallying commodities prices and an upbeat batch of recent Kiwi data including consumer confidence, the GDT auction, firmer producer prices and this latest trade data. Meanwhile, local dairy giant Fonterra has come out this week raising its milk price forecasts to give the currency another prop. But at the same time, with global equities continuing to look like they have run too far and with many out there keeping with bets the Fed will follow through with its policy guidance of two more hikes in 2017 despite this latest dovish setback in the Fed Minutes, these players are happy to sell Kiwi into rallies. Looking ahead, the key focus will be on US initial jobless claims and some more Fed speak. Earlier today, the New Zealand budget was released but failed to offer any real surprises.
US SPX 500 – technical overview
The market has been unable to break down below major support at 2320 thus far, leaving the pressure on the topside and the door open for that next big record push towards a measured move extension at 2480. However, if setbacks intensify and the market breaks down and closes below 2320, this will signal a shift in the structure and suggest a meaningful top is finally in place ahead of a more significant corrective decline.
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 monetary policy accommodation and rising geopolitical risk. And certainly this latest turmoil surrounding the US President 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 its forward guidance promises. The market was feeling good about this bet on Wednesday after the Fed suggested it was concerned that it may have been too quick to assign a recent slowdown as transitory. Still, with asset prices where they are right now and with the Fed still very capable of following through with guidance in 2017, there is risk it could all come crashing down, with any additional upside limited before a major capitulation.
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 round of setbacks have been well supported above the previous higher low at 1195, with the 1215 area now sought out as the next higher low ahead of a fresh upside extension beyond the 2017 high at 1295 and towards the 2016 peak at 1375 further up. At this point, only a break back below 1215 would compromise the constructive outlook.
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 back under pressure in 2017 is adding to the metal’s bid tone as well.
Feature – technical overview
USDSGD has been trending lower in 2017, making a series of lower highs and lower lows. The most recent lower top has just been confirmed at 1.4130 following last week’s break to a fresh 2017 low, with the drop now opening the door for the next measured move downside extension into the 1.3600-1.3700 area. At this point, rallies should be well capped ahead of 1.4000, with only a break back above 1.4130 to compromise the bearish outlook.
Feature – fundamental overview
The Singapore Dollar has done a great job overlooking a soft run of data including last week’s non-oil domestic exports and today’s disappointing GDP result, with the emerging market currency rallying to a fresh 2017 high on an intense wave of US Dollar selling, from the combination of US protectionism and scaled back Fed rate hike odds, which have only intensified on the back of Wednesday’s dovish Fed Minutes read. Meanwhile, an appreciation in the Yuan at today’s fixing has been another source of Singapore Dollar demand.  Looking ahead, on Friday Tomorrow we get Singapore industrial production.