Equities rallied strongly on Friday turning the markets bullish for the short to medium term. Investors took their cues from the UoM Inflation Expectations number that Fed Chair Powell had earlier said is a factor in Fed’s future interest rate decisions. The UoM number for inflation expectations came in 0.1% lower than the expected 5.4% and spared a rally in stocks. Investors focused on the combination of lower inflation expectations and the lower than expected (and declining) US manufacturing PMI. On Thrusday the PMI number was reported well below expectations (52.4, 56 expected) and quite a bit lower than the previous reading (57.0). Lower inflation together with an economy that’s not likely to grow is good for stocks in this environment as the markets had priced in a much more aggressive Fed. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
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DJ – Risk-on sentiment helped the DJ to rally strongly on Friday. Now the index has moved beyond some significant resistance levels and the way higher is cleared. With Friday’s strong momentum it seems likely that the market could rally all the way up to the 32350 – 32590 range. The nearest key support levels are at 30798 and 31027. I am therefore looking for long trades in DJ today.
EURUSD has provided several trade opportunities on the long side recently. The pair has been moving nicely higher above the rising trendline I pointed out last week. On Thursday the weak PMI numbers from Europe pushed EURUSD to the rising trendline support at 1.0490 and since then we’ve seen a steady uptick in the pair. The market is now trading at the pre-PMI announcement levels and approaching a resistance area (1.0584 – 1.0605). With the USD Index trading near to a support at 103.60, this could bring in some profit-taking in EURUSD. The nearest key S&R levels to focus on in today’s trading are 1.0482, 1.0514, 1.0584 and 1.0605.
GBPNZD – As expected GBPNZD traded lower on Friday. Today there’s been a bounce higher but the nearest resistance level at 1.9467 is already making it hard for the bulls to take the market higher. We might therefore see another leg down before the bulls are ready to commit to this market. If the 1.9407 support fails the next key support level we should focus on is at 1.9321. This support is fairly close to the rising channel low and therefore highly significant.
USOIL – Strong rally in oil prices on Friday moved USOIL out of the bear channel we have focused recently focused on. Now the market needs to create a sustained break above the 106.20 – 107.00 range to maintain the bullish momentum. This would be likely to take the market to the 109.92 – 110.80 range while a failure to push above the level would mean the price retracing back to the 101.14 – 102.77 range.
USDCAD created a double top last week indicating weakness in the currency pair this week. The market had a significant down day on Friday and created a lower swing high at 1.3017. The nearest key support level is at 1.2860 and the nearest resistance at 1.2905. Below the 1.2860 level, there aren’t clear swing point supports before the June 8th low at 1.2517 but based on the recent price action (above the 1.2860 level) we can create a measured move target range at 1.2709 – 1.2733. The nearest key resistance levels in USDCAD are 1.2905 and 1.3017.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The Federal Reserve||Fed hiked by 0.75% in June and indicated that there will steady rate hikes until the end of the year.|
|Stimulus||The Fed is looking to scale down its bond-buying program (QE) but has signalled that it be careful with tightening due to the war in Europe.|
|Yields||The US 10-year treasury yield has been rising strongly over the last two weeks as investors sell their bond holdings.|
|Employment||The May non-farm payrolls increased by 390K (436K previous) while the participation rate was confirmed at 62.3% (62.2% previous). The unemployment rate remained unchanged at 3.6%.|
|Inflation||The US annual inflation growth for May accelerated to 8.6%. This was the highest reading since 1981. Analyst consensus had expected the yearly rate to be 8.3%. The prices for energy (+34.6%) and food (+10.1%) made record increases. For food, this was the first increase of 10% or more since March 1981.|
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The Next Main Risk Events
- USD – Core Durable Goods Orders m/m
- USD – Durable Goods Orders m/m
- USD – Pending Home Sales m/m
- EUR – ECB President Lagarde Speaks
- USD – CB Consumer Confidence
- USD – Richmond Manufacturing Index
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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