Next 24 hours: Draghi Shifts Gears, Euro to Fresh High
Today’s report: Will the Fed Chair Shake it Up?
We come into Tuesday with the market having tried to extend USD declines after another discouraging round of US data, but ultimately failing to do so. It seems the US Dollar just isn’t in the mood to roll over with the Fed on course to keep with its policy normalisation timeline.
Wake-up call
Chart talk: Major markets technical overview video
- record IFO
- DUP deal
- BOJ Minutes
- SNB strategy
- Fed speak
- OIL outlook
- local data
- Fed shift
- Uncertainty invites
- USDZAR
Peformance chart: Five day performance v. US dollar
Suggested reading
- Another Lesson from Japan, S. Roach, Project Syndicate (June 26, 2017)
- Hedge Funds Back the Wrong Bull, N. Kaissar, Bloomberg (June 26, 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 to 1.0925.
EURUSD – fundamental overview
On Monday, German IFO readings were much stronger than forecast, producing a record print. At the same time, US economic data disappointing again, with durable goods orders coming in soft. And yet, despite all that, the Euro closed lower on Monday, unable to sustain any gains from these developments. It seems the Fed’s message that it’s now less data dependent and committed to following through with forward guidance calling for another rate hike in 2017 is what’s keeping the Euro capped. Looking ahead, we get an important appearance from the Fed Chair later in the day that could shed more light on what the Fed is thinking. US consumer confidence and additional Fed speak from Williams, Harker and Kashkari also stand out.
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
It seems the market was fairly confident the PM would be able to strike a deal with the DUP, because confirmation of this deal on Monday did little to rally the Pound, with the currency actually trading lower on the day, even in the face of a discouraging US durable goods orders print. The combination of worry associated with Brexit negotiations and a Federal Reserve committed to moving forward with rate hikes despite softer data is the combination weighing on the Pound at the moment, offsetting any of the positives. Looking ahead, the market will be focused on central bank speak, with BOE Carney speaking earlier in the day and then followed by a Fed Yellen appearance in London later in the day. As far as data goes, UK CBI trades and US consumer confidence stand out. It’s also worth noting we get more Fed speak throughout the day from Williams, Harker and Kashkari.
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
There hasn’t been much going on with this major pair of late, with most of the price action driven off the combination of a more hawkish Fed decision and an ongoing bid in US equities, two drivers that have been mostly supportive. But Monday’s BOJ Minutes may have factored some more to Yen weakness after the central bank confirmed there was no urgency to shift policy. 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 consumer confidence and a wave of Fed speak will be the key focus. The Fed Chair highlights the docket later in the day, but other Fed speakers include Williams, Harker and Kashkari.
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
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 be unable to offset, 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 take on a more hawkish policy approach in the months ahead. But the key focus for this market right now 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 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 0.7800. 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, better than expected Australia GDP, solid China data and an 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 changed its outlook, now erring on the side of normalization, something 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, US consumer confidence and a wave of Fed speak will be the key focus. The Fed Chair highlights the docket later in the day, but other Fed speakers include Williams, Harker and Kashkari.
USDCAD – technical overview
The latest round of setbacks have 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, reflecting this shift in BoC sentiment, clearly benefiting the Loonie as a result. However, with the Fed taking a different approach and committed to its normalization timeline, additional upside in the Loonie could be tough, particularly with OIL struggling and Canada inflation remaining subdued as reflected this past Friday. Looking ahead, absence of first tier Canada data leaves the focus on US consumer confidence and a wave of Fed speak. The Fed Chair highlights the docket later in the day, but other Fed speakers include Williams, Harker and Kashkari.
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 last 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 come from dovish Fed comments in the latter half of last week and Monday’s softer US data, throwing cold water on the idea the Fed will stick with guidance calling for another hike this year. Still, when considering this month’s hawkish Fed decision, and some softness in recent New Zealand data, medium-term players have been stepping in with sell orders. Looking ahead, US consumer confidence and a wave of Fed speak will be the key focus. The Fed Chair highlights the docket later in the day, but other Fed speakers include Williams, Harker and Kashkari.
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 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 increases 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 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, drama surrounding the Zuma no confidence court ruling and this latest turmoil surrounding PetroSA’s massive loss. But it seems these troubling fundamentals coupled with last week’s more hawkish Fed decision are starting to weigh on 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.