Today’s report: Market Still Trying to Figure Out the Fed
This week’s quiet economic calendar has resulted in subdued trade, with most of the focus continuing to be on market expectations for the US Dollar and US stocks in the aftermath of last week’s more hawkish Fed decision. Eurozone PMIs, German PMIs, Canada retail sales and Fed speak ahead.
Wake-up call
Chart talk: Major markets technical overview video
- German manufacturing
- EU negotiator
- healthcare bill
- SNB job
- Buy side
- Canada CPI
- Fed Bullard
- Normalization
- outlook solid
- USDZARÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- BOE Risks Forgetting Its History, M. Gilbert, Bloomberg (June 22, 2017)
- JPM's Guide to Machine Learning and Big Data, S. Butcher, EFC (May 30, 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 at 1.0925.
EURUSD – fundamental overview
The economic calendar has been exceptionally quiet this week and the focus continues to be on the outlook over at the Fed, with the central bank all of a sudden sounding less data dependent and more committed to moving forward with policy normalization despite a data slowdown and subdued inflation. Meanwhile, on the other side, a combination of dovish ECB speak and chatter the ECB may not be moving as quickly on tapering, hasn’t done anything to help the Euro’s cause. Still, with nothing confirmed as of yet, the trend of selling the US Dollar and buying the Euro remains well intact in 2017 and demand continues to emerge into dips. Fed Bullard’s dovish comments on Thursday have been helping to prop the Euro into Friday. Dealers do however report stops below 1.1100. As far as today’s calendar goes, Eurozone and German manufacturing PMIs stand out along with US new home sales. Fed Bullard is back on the wires, with Mester and Powell also scheduled to speak. Keep an eye out for any updates on the US healthcare bill as well.
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 earlier this week on dovish BOE Carney comments with setbacks extending into the 1.2500 on Wednesday. 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 Fed Bullard on Thursday, 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, the EU chief negotiator is slated to give a briefing on the Brexit negotiations, while on the data front, US new home sales stand out.
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
Last week’s Bank of Japan policy meeting went off without a hitch, with no change to policy and no meaningful changes to the policy statement. And so, the market has been left with the combination of a more hawkish Fed decision and an ongoing bid in US equities, two drivers that have been very supportive of the major pair. 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 new home sales, updates relating to the US healthcare bill and some more Fed speak standout.
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 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 the central bank’s commitment to negative rate policy as reflected in this latest policy decision. 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 Fed 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 (once again reflected in this week’s Minutes), better than expected Australia GDP, solid China data and this latest 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 just delivered a pivotal decision 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 new home sales, US manufacturing data and some Fed speak standing out.
USDCAD – technical overview
The latest round of setbacks has 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. Meanwhile, the Canadian Dollar has just got another boost from Thursday’s better than forecast retail sales print and signs of possible demand for OIL into this latest slide. However, with the Fed taking a different approach and committed to its normalization timeline, additional upside in the Loonie could be tough. Looking ahead, we get Canada CPI, US new home sales and some more Fed speak.
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 this 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 into Friday has been Thursday’s dovish Fed Bullard comments, which throw some cold water on the idea that all of the Fed members are in agreement about how to move forward. Still, when considering last week’s more hawkish Fed decision, and recent local data that includes softer Kiwi GDP and a negative print from the latest GDT auction, there is risk for fresh sell interest to emerge into this rally. Looking ahead, the calendar is light, with only US new home sales, US manufacturing data and some Fed speak 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 last week, still calling for another rate hike in 2017 despite a slowdown in data, something that could start to weigh more heavily on investor sentiment, especially with this week’s Fed speak remaining consistent with the decision. 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.
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.