Next 24 hours: ECB Downplays Draghi, Carney Takes His Turn
Today’s report: Euro Driving the Show into the Midweek
Plenty of volatility and even some more weakness in the US Dollar, though it really hasn’t been about the Buck, with the Dollar weakness isolated to a few currencies. The big story has been the Euro and its surge after ECB President Draghi finally decided to appease hawks.
Wake-up call
Chart talk: Major markets technical overview video
- Draghi’s tune
- BOE Carney
- Yen defies
- SNB strategy
- Iron ore
- Governor Poloz
- Sentiment deterioration
- Shifting Fed
- Uncertainty invites
- USDZAR
Peformance chart: Five day performance v. US dollar
Suggested reading
- Addressing Bilateral Trade Imbalances, M. Feldstein, Project Syndicate (June 27, 2017)
- Cracks Emerging in Calmest Market, J. Ciolli, Business Insider (June 27, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
This latest break to fresh 2017 highs beyond 1.1300 confirms a higher low at 1.1110 and sets the stage for this next upside extension, which takes us into a critical longer-term resistance zone in the 1.1500-1.1700 area. Technically, after consolidating between 1.1100 and 1.1300, the push projects a measured move in the sessions ahead to 1.1500. At this point, it would take a break back below 1.1110 to negate the constructive outlook.
EURUSD – fundamental overview
The Euro led the charge on Tuesday, taking out stops above 1.1300, breaking to a fresh 2017 high. The catalyst for the move came from ECB President Draghi, with the central banker finally shifting gears. On Tuesday, Draghi softened his dovish stance conceding the ECB would need to be gradual when adjusting policy parameters. Draghi went on to say deflationary forces had been replaced by reflationary ones, all while maintaining an upbeat outlook for the Eurozone economy and taking a play out of the Fed’s book, downplaying subdued inflation. Also seen supporting the Euro rally on Tuesday was the IMF downgrade of US growth forecasts and more hold up in Washington, with the healthcare vote delayed. Looking ahead, we get German import prices, the US advanced goods trade balance and US pending home sales.
GBPUSD – technical overview
The market has entered a period of choppy consolidation over the past several sessions but is now expected to be very well supported on dips 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 back below 1.2360 would compromise this outlook.
GBPUSD – fundamental overview
While most currencies were flat to lower against the US Dollar on Tuesday, the Pound managed to perform well, with the UK currency seemingly following the Euro higher, while perhaps continuing to feel a little better about itself with the PM securing a deal with DUP and a softer Brexit outlook becoming more viable. Still, we’re far from out of the woods here and the Brexit overhang will be something that continues to stifle the Pound into any meaningful rallies for the time being. Elsewhere, the news of the IMF downgrade on the US growth outlook and delay in the healthcare vote helped to keep the Pound supported. Looking ahead, there’s no first tier data due out of the UK, though there will be plenty of room for volatility, with Governor Carney on the wires. As far as the US docket goes, we get the advanced goods trade balance and pending home sales.
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
Tuesday was an interesting day for the Yen. The Euro and Pound were off to the races, risk markets came under pressure and yet, the Yen was lower by a healthy margin. It seems the focus here continues to be on the expectation the Fed could follow through with another hike this year, pushing yield differentials further in the Dollar’s favour. Meanwhile, US consumer confidence data came in above forecast, giving the Buck an additional prop. Of course, the downturn in risk sentiment was something that played out into the Tuesday close and could invite renewed Yen demand if there’s downside follow through in stocks on Wednesday. Looking ahead, key standouts on the calendar include the US advanced goods trade balance and US pending home sales.
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
Overinflated, 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 have an extremely difficult time offsetting, irrespective of the central bank’s commitment to negative rate policy. The SNB is hoping global sentiment will remain artificially elevated and the ECB will continue to paint a more hawkish picture. But the key focus for this market right now is unquestionably 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 as it potentially invites risk off flow.
AUDUSD – technical overview
Despite the latest rally, the market continues to be very well capped into medium-term resistance around 0.7600. 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. Tuesday’s rally in the price of iron ore has been yet another source of support for the commodity currency, while the news of the IMF downgrading the US growth outlook and the healthcare vote getting delayed are hurting Aussie’s bid. Still, there are plenty of offers from medium-term players, with these accounts more concerned with what could be a downturn in global equities and a fresh wave of uncertainty. Moreover, the Fed has changed its outlook, now erring on the side of policy normalization, something that could push yields significantly back in favour of the Buck. Looking ahead, key standouts on the calendar include the US advanced goods trade balance and US pending home sales.
USDCAD – technical overview
The latest round of setbacks have taken the pressure off the topside for now, with the market trading back into 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 a shift in sentiment over at the Bank of Canada. Governor Poloz and other BoC officials 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, reflecting this shift in BoC sentiment, clearly benefiting the Loonie as a result. Meanwhile, the price of OIL recovered nicely on Tuesday and although US data was solid, the IMF downgrade on US growth and a delay in the healthcare vote more than offset any US Dollar demand, opening the door for another wave of Loonie demand, taking the Canadian currency to its highest levels since February. Looking ahead, absence of Canada data will leave the focus on OIL, a BoC Poloz appearance and US data featuring the advanced goods trade balance and pending home sales.
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
The New Zealand Dollar has put in an impressive rally over the past several days, but is starting to crack a bit, with local data not as impressive and US equities pulling back. The one saving grace right now is the broad based US Dollar selling, most recently on the back of an IMF downgrade of the US growth outlook and news the US healthcare vote has been delayed. But overall, when considering this month’s hawkish Fed decision and a potential capitulation in global equities, the risks appear to be tilted to the downside from here. Looking ahead, key standouts on the calendar include the US advanced goods trade balance and US pending home sales.
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. Any setbacks have been exceptionally mild thus far and at a minimum, a break back below 2400 would be required to take the immediate pressure off the topside. But 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 increase 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 1214 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 recent 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 a weaker growth outlook, depressed commodities prices and a more hawkish Fed are starting to weigh on the Rand, with the greater risk from here for additional 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.