The Weekly Close Out
Given how low FX volatility is at the moment, traders were hoping yesterday’s Super Thursday would inject some life back into markets. Unfortunately, Super Thursday was more like Soggy Thursday instead. Despite Headline and Core CPI coming in hotter than expected (core CPI highest since 1992), yields pushed higher initially but then were drubbed lower to around 1.44%. Observing this reaction, it looks like the market has become comfortable with the narrative of inflation being transitory. Base effects and used car prices are still distorting inflation prints higher and give more credence to the transitory narrative. Some are saying the strong moves we saw in the US 10-year were also amplified by a short squeeze. Real yields put in a pretty chunky move lower yesterday and applied pressure on the greenback. I still believe the risk is skewed to real yields moving higher from these levels which would be dollar positive. On the data front, Initial Jobless claims continued their slide lower to 376k, but were a touch above expectations of 370k. Next week, we have the Fed Meeting on Wednesday, where traders will be listening closely and looking for any mention of the T word (tapering) as well as the the dot plot to see if any more dots move for a rate hike in 2023.
Price is bobbling around in a range between 90 and 90.5. The greenback is seeing some decent strength today. It’s perched its head just above the 21-day EMA which could provide support on any pullbacks as well as the 90.2 horizontal support. The RSI is close to the 54 level which marked previous price rallies. For the bulls, I’d like to see the previous June 4 high of 90.627 high taken out and the 50-day SMA overcome. For the bears, the 90.2 level will be good to monitor and 90.
The ECB delivered as expected by keeping the pace of their PEPP purchases constant at around €80 bn/month. There were some nice upgrades to GDP and inflation forecasts, but this was expected by the market. Lagarde also managed to avoid any hawkish miscommunications. In terms of economic data, there was a nice upgrade to Q1 EZ GDP, but this overshadowed by a big miss on the German ZEW expectations index as well as industrial production. Next week’s Fed Meeting will be closely watched by EUR/USD traders and euro zone inflation prints.
EURUSD has been under pressure since the end of May. The candle low broke the range low/horizontal support as well as the uptrend line around 1.216. Price is also now below the 21-day EMA. The 1.224 price resistance seems to be the short to medium term cap on price as it proves too difficult for EURUSD to overcome. The divergence on the RSI as price made higher highs and the RSI made lower highs should still concern EURUSD bulls. The RSI has now moved below the key 52 support level. The target to the downside would be 1.21 and then 1.205 support further down. To the upside 1.22 and 1.224 would be my points of interest.
Sterling has been receiving a lot of attention lately. Firstly, traders got slightly jittery on the back of a reopening delay. Reports say Boris Johnson will make a decision Sunday evening/Monday. The delay could be anywhere from 2-4 weeks according to a variety of media sources. On top of this tensions escalated between the EU and UK over Northern Ireland, with the EU going as far to say they’d be prepared to take legal action and implement tariffs in other areas of trade if the UK took unilateral action over NI. We also had outgoing Bank of England Chief Economist Andy Haldane on the wires with his bullish remarks about the UK economy going “gangbusters” and how the monetary policy taps may need to be turned off. Although there is truth to his comments, given he’s leaving the weight of his comments should be considered. What’s important is if his thinking is affecting those that remain and if it’ll shape their policy views. On the data front GDP figures came smack bang in line with expectations, but disappointed on the industrial and manufacturing production figures. Next week, we get a trifecta of employment, inflation and retail sales data for the UK.
GBPUSD has been in a very tight range between 1.41-1.42. There is good support where price is now close to the range bottom and the 21-day EMA, which should keep Cable on an upward trajectory in the short term. The RSI has dipped just below the 53.92 level. 1.425 the range highs is the initial price target to the upside. On the downside 1.41 and 1.40 would be a good level to watch.
The yen continues to move in line with the ebbs and flows of the US 10-year yield. Given the slight move higher today in yields, USDJPY has bounced strongly off its lower trendline of the triangle pattern. The RSI has turned back upwards and has plenty of room before it can be considered overbought. I feel like USDJPY is coiling like a spring with a big move being primed. To the upside 110 will be a key level and on the downside 109 will be important.
The shiny yellow metal bounced yesterday after a strong CPI print and as real yields dived lower. Today with yields moving higher and the dollar stronger, gold is a tad softer. Gold is trading at a slight premium to where it should be in relation to real yields, but on a longer term view gold could come under pressure as we move further into the year and tapering talk continues to pick up steam. Real yields should also move higher given their current low base.
Gold is bobbing up and down around the $1900 level as it tries to make up its mind for the next direction of choice. The 21-day EMA seems to be providing some support for the bulls. A mini flat sided descending triangle is presenting at the moment (usually bearish). The RSI is heading towards the key 51 level, with a break of that potentially opening up some downside pressure. If the dollar and real yields continues to move higher we could see a re-test of the 200-day SMA and trend line around $1840/50. On the upside $1900 and $1915 looks to be good first initial targets.
The oil complex keeps us on our toes of late. With yesterday’s communication error causing some price swings in crude. Demand should ramp up as we enter the strong summer driving season through to August. Global air travel is the one question mark with the UK taking more countries off the green list. Ultimately travel needs to open up amongst the Europe and the US for demand to really strengthen. The next OPEC+ meeting on July 1 will be interesting to see if they bring a little bit more oil supply back online. This could be an option with the US Iran talks stumbling and a deal now even if sealed still seeing hundreds of sanctions remaining in place, according to US Secretary of State Anthony Blinken. Libya’s output is picking up again though so OPEC+ will have to be very astute in their decision making. Additionally, US crude production remains disciplined for the time being, but could higher prices entice the yanks back into the mix? There were also some demand headwinds out of China as the government tries to scale back on their refining sector which could see lower volumes of crude imports into China. All in all a bit of a mixed bag really.
The black liquid is trending nicely in an upward channel supported by the 21-day EMA acting as a dynamic support tool. Price has now comfortably taken out the March 8 high of 71.36. The RSI is sniffing around close to overbought territory. $75 would be the next upside target with $70 the target on the downside, roughly where the 21-day EMA, horizontal support and uptrend line is.
The Crypto space this week has been quite eventful. They got punished on FBI and hacking issues as well as regulatory noise from the IRS. However, that negative news was soon forgotten as Microstrategy a big believer in crypto held a well-received bond offering, providing them with dry powder to purchase more Bitcoin etc. El Salvador also has now made Bitcoin official legal tender adding to the positive news flow. Lastly, banking regulators looked favourably upon digital currencies which has boosted the price of Bitcoin.
Bitcoin is back pushing up against the $38k level of resistance. The triangle pattern continues to point to a potential large breakout move. The 21-day EMA is acting as dynamic resistance for the time being. The RSI is trying to have a go at the key 48 level to get the bullish price movement back on track. For the bulls, price will need to clear the 38k level first, but there is plenty forms of resistance at that level. On the downside there seems to be some support around 36k.