Next 24 hours: Markets Slow Down Ahead of Friday US Data
Today’s report: Yellen Has No Love for US Dollar
And just like that, so many of those hawkish Fed expectations that have been built up since the Fed's June meeting have been wiped out in a flash on a couple of comments from the Fed Chair in her Wednesday testimony. The US Dollar could come under more pressure as a result.
Wake-up call
Chart talk: Major markets technical overview video
- cross related
- UK employment
- yield differential
- SNB activity
- cross demand
- BoC hike
- USD weakness
- Yellen testimony
- Currency demand
- USDZAR
Peformance chart: Performance v. US dollar since weekly open
Suggested reading
- Pipe Down and Enjoy the Calm, N. Kaissar, Bloomberg (July 12, 2017)
- The Illusion of Trading the UK-US Yield Gap, M. Johnson, FT (July 12, 2017)
Chart talk: Technical & fundamental highlights
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EURUSD – technical overview
This recent break to fresh 2017 highs beyond 1.1300 has confirmed a higher low at 1.1110 opening the current extension into critical longer-term resistance in the 1.1500-1.1700 area. But daily studies are looking stretched, suggesting any additional upside could be difficult, with the greater risk building for some form of a meaningful bearish reversal in the sessions ahead. Still, the uptrend in 2017 is well intact and a break back below 1.1313 would be required at a minimum to take the immediate pressure off the topside.
EURUSD – fundamental overview
The Euro managed to rally to another 2017 high in early Wednesday trade, but couldn’t hold onto gains after stalling just shy of that much talked about 1.1500 barrier. The economic calendar was focused elsewhere and though the single currency underperformed, the setbacks were less a function of any fundamental weakness in the Euro and more a product of the rest of the currency market catching a bid against the US Dollar in the aftermath of a more cautious Fed Chair testimony than caught the many off guard. There is still plenty of demand reported on dips and Yellen’s comment that rates wouldn't have to rise much further to get to neutral could be something that keeps those yields moving in the Euro’s favor. There are sell-stops reported below 1.1300 and only a clear break there would get the market thinking more seriously about a potential top. Looking ahead, German CPI, US producer prices, US initial jobless claims and another day of Yellen testimony are the key standouts.
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. Still, in the shorter-term, choppy consolidation in the 1.2500-1.3000 area should not be ruled out before the market ultimately breaks higher.
GBPUSD – fundamental overview
Wednesday was a good day for the Pound, with the UK currency benefiting from welcome economic data on the better side of expectation. Data of late has been less than impressive and Wednesday’s solid UK employment report, accompanied by a rise in wage growth, did a good job resurrecting bids into dips. Of course, the Pound also got another boost in the North American session after the Fed Chair sounded quite a bit less hawkish than many had been expecting. Yellen’s upgraded concerns about inflation and comment that rates only needed to move up a little more to get to neutral, propelled a round of broad based US Dollar weakness that helped to keep the Cable rate supported. Still, with the commodity bloc and emerging market currencies playing catch up, this did take away from some of the Pound’s bid tone. Looking ahead, US producer prices, US initial jobless claims and another day of Yellen testimony are the key standouts.
USDJPY – technical overview
Despite the recent recovery rally, the market remains confined to a multi-day range. The latest topside failure above 114.00 strengthens this outlook, leaving the door open for a drop back towards range support in the 108.00s, also coinciding with the 2017 low from April. Ultimately, it would take a clear break through 115.50 to negate this outlook and shift the focus back on the topside.
USDJPY – fundamental overview
The Yen was a healthy gainer in Wednesday trade, though interestingly, the price action had nothing to do with risk off flow. In fact, equity markets were bid through the roof after Janet Yellen offered a less hawkish, more market friendly outlook on monetary policy. Yellen’s outlook was US Dollar bearish to the point that it was impossible for the Yen to ignore the yield differential factor, with yields moving back in favor of the Japanese currency in the aftermath of the testimony. Looking ahead, US producer prices, US initial jobless claims and another day of Yellen testimony are the key standouts.
EURCHF – technical overview
The market has pushed up to a fresh 2017 high through a critical psychological barrier at 1.1000 which could now open the door for an extension to retest the major peak from 2016 at 1.1200. However, inability to hold above 1.1000 in the sessions ahead would suggest a false break and put the pressure back on the downside for an acceleration of declines towards 1.0600.
EURCHF – fundamental overview
It feels like the SNB is committed to keeping active whenever there’s negative sentiment in the market, in an effort to keep the Franc from appreciating. But this is a hard job, and so, whenever there’s a surge in risk appetite, it gives the central bank an opportunity to step aside and let natural flows take their course. This means the Franc remains offered into rallies but is also subject to some strength with the SNB taking its hand off the offer in the Franc. Overall, inflated, record high US equities should be a worry for the SNB as any capitulation on this 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 negative rate policy and intervention efforts. For now, the SNB is hoping global sentiment will remain artificially elevated and the ECB will continue to paint a more hawkish picture as has been seen over the past two weeks through Draghi and the ECB Minutes.
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 0.7570 to strengthen this outlook and accelerate declines.
AUDUSD – fundamental overview
Another injection of bids into the Australian Dollar on Wednesday, this time from Yellen testimony that was decidedly less hawkish and taken as risk supportive in correlated equities markets. Overall, the Australian Dollar has already done a good job holding up on dips, despite last week’s RBA decision, which was a big let down for hawks. A recovery in commodities and solid local data have been a big help to Aussie. Remember, last week Aussie retail sales were impressive, while this week, Aussie confidence, business conditions readings and consumer inflation expectations have also come in above forecast. We’ve also seen the Australian Dollar benefit from this latest run of Kiwi declines on heavy cross related AUDNZD demand. Looking ahead, the primary focus will be the Fed Chair Yellen testimony. Looking ahead, US producer prices, US initial jobless claims and another day of Yellen testimony are the key standouts.
USDCAD – technical overview
There has been a clear shift in the outlook for this market over the past several days, with declines holding below 1.3000 and the market extending to fresh 2017 lows in the 1.2600s thus far. Technical studies are tracking in oversold territory, though a bounce may not come until the market retests the 2016 low at 1.2461. A break back above 1.3015 would be required to take the pressure off the downside.
USDCAD – fundamental overview
The Canadian Dollar was a big surprise on Wednesday, with the Loonie extending it’s 2017 run, rocketing to fresh highs, despite the market having already priced in this first hike in 7 years. Taking a page out of the Fed’s book, the Bank of Canada downplayed subdued inflation, while communicating the economy had also adjusted to lower OIL prices. The central bank stopped short of offering more detailed insight on the path forward, leaving it up to data and macro developments, but despite all of this being telegraphed, there was an intense demand with USDCAD trading well over three times its average daily range, collapsing through 1.2700. Of course, the contrasting tone from the Fed Chair testimony also played a major part, after Yellen sounded more concerned about inflation, while commenting that it wouldn’t take many more hikes to get policy to neutral. Looking ahead, all’s quiet on the Canada calendar and the focus will be on US producer prices, US initial jobless claims and another day of Yellen testimony.
NZDUSD – technical overview
Despite an impressive rally in recent weeks, the market remains confined to a longer-term range, with strong resistance into the 0.7400-0.7500 area. As such, look for this most recent topside failure to produce a more pronounced bearish reversal taking the market back down towards the 2017 low in the 0.6800s. Only a clear break back above 0.7500 would compromise the outlook, while back below 0.7200 strengthens the bearish case.
NZDUSD – fundamental overview
The New Zealand Dollar is showing signs of exhaustion after a nice multi-day run. Last week’s wave of US Dollar demand and another negative GDT auction triggered an initial round of Kiwi selling, with setbacks extending earlier this week on more disappointing local data and technical selling. Wednesday’s US Dollar bearish, risk supportive Yellen testimony has helped to keep the market supported for the time being, though plenty of medium-term offers are sitting up into rallies. Looking ahead, US producer prices, US initial jobless claims and another day of Yellen testimony are the key standouts.
US SPX 500 – technical overview
Any setbacks have been exceptionally mild thus far and at a minimum, a daily close back below 2400 would be required to take the immediate pressure off the topside, though only a break below 2320 would signal a meaningful shift in the structure. Until then, the market is capable of extending its record run towards the next measured move extension target at 2480 further up.
US SPX 500 – fundamental overview
The US equity market has done a good job proving it can hold up into any dip and can keep pushing to record highs as it focuses on rates staying lower for longer and the Fed continuing to underdeliver on forward guidance. Janet Yellen played right into the market’s hand on Wednesday, when the Fed Chair’s overall tone was quite the departure from recent messages since the June Fed meeting. Yellen’s sounded more concerned about lower inflation, while also commenting that rates would only need to go a little higher before policy was at a neutral level. At this point, it might not be enough to significantly remove hawkish prospects, though it’s clearly inviting additional demand with hawks taking a big hit.
GOLD (SPOT) – technical overview
The recent breakdown below a previous confirmed higher low at 1214 compromises the constructive outlook, with the move potentially flagging deeper setbacks below 1200. The market will now need to establish back above 1230 to reverse the bearish momentum, while inability to do so opens the door for a significant bearish structural shift. Â
GOLD (SPOT) – fundamental overview
Despite the latest sharp round of setbacks, solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity supported around 1200, 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 will hold up on risk off macro implications.
Feature – technical overview
USDZARÂ is showing signs of the formation of a meaningful base since bottoming out around 12.30 earlier this year. The latest push back above 13.21 strengthens this outlook and sets the stage for a continuation of gains towards next key resistance at 13.71 further up. Any setbacks should ideally be well supported ahead of 12.55, with only a break back below this level to negate the constructive outlook.
Feature – fundamental overview
The Rand got a break from distressing local fundamentals, instead benefiting greatly from a fresh wave of broad based US Dollar selling and demand for risk assets in the aftermath of Wednesday’s Yellen testimony. Yellen’s concerns about inflation and comments relating to rates only needing to go a little higher to get to neutral gave the market the green light to sell Dollars and buy back into emerging markets on the lower for longer Fed policy outlook implications. Still, we can’t ignore an investor base already nervous about political uncertainty in South Africa, including a never ending string of Zuma corruption charges. Throw in persisting South African recessionary forces, yield differentials shifting in favor of the major central banks and the still looming prospect for a material reversal in elevated global equities and it all points to the greater risk for additional Rand weakness going forward.