The Weekly Close Out
Dollar bulls were looking for something to chew on and the Fed gave them just that on Wednesday evening. The FOMC surprised due to their hawkish bias as seen in their dot plot, which now shows the possibility of two rate hikes for 2023. Additionally, the discussion around tapering has certainly begun and now tees up the Jackson Hole Symposium at the end of August as the event for an explicit shift to tapering. September could be where we see a formal timeline announced. Most expect actual tapering to begin in Q1 of 2022, but there is now a risk with further economic progress of that being pulled forward to December 2021. We saw solid upgrades to both GDP and inflation for 2021 with inflation then falling back to 2.1% (indicating the transitory view from the Fed). Which may seem a bit strange given the two rate hikes in their dots. The reactions across interest rates markets were punchy with the short end of the curve (most sensitive to Fed policy) putting in some solid increases. Another important tailwind for the greenback is the 10-year real yield which flew higher. Lastly, on the rates front we saw the Eurodollar December 2022 contract move significantly lower, inches away from pricing in a hike. Jobless claims missed expectations yesterday with a slight uptick from its downward trend.
Looking at the charts the dollar has put in some seriously bullish candles since Wednesday. Definitely seems like some shorts got caught and had to cover. Price is now just below 92 (resistance level) and above all its key moving averages (200 and 50 day SMA and 21-day EMA). The 21-day EMA also close to making a bullish crossover with the 50-day SMA. Price is also sitting right on the 61.8% Fibonacci retracement level. The RSI went stratospheric and is now right on the overbought boundary, which could lead to some mean reversion. A close above 92 into the weekend would keep the bullish momentum in the dollar’s favour.
The single currency was plodding along until the FOMC meeting sent it sharply lower against the dollar. Slicing through its 50 and 200-day SMAs like butter. The narrative of a growing divergence between a dovish ECB and Fed are growing ever louder. Not only is there a growing divergence between the Central Bank’s policy biases, but also yields between the US and Germany are widening again – applying pressure to EURUSD. Core inflation came in a smidge higher than expected, but was clearly overshadowed by lingering effects from the FOMC meeting.
The technicals paint an ugly picture for EURUSD at the moment with a trend line break and 50-day and 200-day SMA breach. The 21-day EMA has also crossed below the 50-day SMA. Price seems to be finding some support around the round number of 1.19. The RSI is turning upwards from oversold territory too. A further decline would bring 1.183 support into play and 1.175 even lower. To the topside 1.20 around the trend line and 200-day SMA would be a decent target.
Besides the Fed causing weakness in Cable, sterling traders have had to deal with some domestic issues. Firstly, the initial reopening date of 21 June has been pushed back to 19 July, but could be earlier if data permits. I don’t see this as a major headwind for the pound as long as further extensions don’t get implemented. On Brexit related issues we have some interesting developments. The grace period for regulatory checks kicking in for the movement of certain goods between GB and NI takes place the day after the 30 June, however, the UK has requested an extension until 30 September which the EU commission are now considering. The DUP leader, Mr Poots has been removed as leader introducing another potential source of instability into the region. If relations sour further between the UK and EU with an escalation, we could see a Brexit risk premium begin to be priced back into the pound. Weaker employment data was offset by stronger than expected inflation numbers. Retail sales out this morning were a bit soft compared to expectations, could we be seeing some consumer fatigue? Next week Thursday sees the BoE Meeting which I will write a preview for.
Cable sliced through its range support around 1.41 and settled around the high 1.30s. Price is below the 50-day SMA and at a minimum needs to regain that for the bulls to feel somewhat more confident. That level comes in around 1.402. The RSI was traveling in the direction of oversold territory but pulled up before and has curled up now. There is some support lower down at 1.385 with further declines seeing 1.375 come into play. On the upside, monitor 1.40ish (50-day SMA) and above that 1.41 (former range support).
The yellow metal naturally struggled as both real yields and the dollar strengthened - two key inputs for gold’s price moves. The problem for gold further out is that monetary policy will only tighten from here, it won’t go more dovish which means real yields should move higher too, creating a major headwind for gold.
Pulling up the charts we can see price hovers around the 61.8% Fibonacci retracement level. There is also price support around that area at $1770. The RSI sunk into oversold territory and as we go into the weekend it will be important to see where we close. The 50-day SMA is close to the 200-day SMA, a cross above may provide some relief to gold bulls. On the upside, monitor $1800. The levels to watch for a deeper selloff would be $1750 and $1720.
Oil hasn’t had any negative fundamental news in its own right in fact looking at the inventory data out from the US we saw massive drawdowns – much higher than expected. The weakness we saw lately is due to getting caught up in the stronger dollar. Positioning data from the CFTC shows hedge funds have boosted their bullish positions to near 3 year highs. There are Iranian elections taking place today, which could maybe see a more hardline approach taken to the Nuclear talks currently. News on progress of this deal has been very quiet. Fuel sales in India are showing signs of recovery as demand ramps up. Another interesting factor to put on your radar for the supply side is US Crude output which is ticking up again probably as a result of higher oil prices.
Price is still moving nicely within its ascending channel. The candles topped out at channel resistance and just shy of $75. There is support around the $72 level and just below that is the 21-day EMA which will provide further support. These levels will need to be held for bullish momentum to continue with the lower trend line of the ascending channel being the line in the sand. My only concern is the large negative divergence appearing on the RSI as price made higher highs, the RSI made lower highs indicating weaker momentum on price’s push higher.
As the week began Bitcoin got a push higher as the god of Crypto Elon Musk stated Tesla would allow transactions with cryptocurrency once mining uses clean energy. However, he then caused price to suffer as another CEO tweeted Elon needs to study more on the greenness of crypto mining and Elon retorted back according to what data. For the crypto bulls according to a Forbes article the CEO of Hong Kong-based crypto lender and asset manager Babel Finance, pointed to market data showing recent inflows are from short-sellers and that leverage has greatly increased. This creates a potential fertile environment for a short squeeze to occur. The hawkish Fed meeting also put further pressure on the digital currency.
Price continues to cling to the lower line of the triangle pattern as well as the horizontal support around $38.2k and the 21-day EMA. Higher up there is resistance around the $39.5k and $41.5K. The RSI perched its head above the 48 level and has now travelled south just below this zone. An ominous sign would be if the 50-day SMA crossed below the 200-day SMA which it looks very close to doing if price suffers further pressure. A break below the trendline would eye up the $35.8k level as the first support level on the downside.