Rumours suggest that the recent high inflation numbers could lead to the Fed considering a rate hike as big as 0.75%. This has spooked investors and softened the bids in stocks yesterday but the damage done was relatively small. However, all in all, the risky assets were out of favour yesterday with stocks, gold and T-Bonds sliding lower and yields jumping to the highest levels over 10 years. The US 10-year yield hasn’t been this high since April 2011. This sent the USD Index back to the May high and pushed gold steeply lower. DJIA and DAX spent yesterday trading close to weekly support levels and the bids in cyclical commodity currencies were very soft. At the time of writing stock indices (DAX and its US cousins) are consolidating above yesterday’s lows. Profit-takers and bottom fishers are trying their luck. Today’s main risk event is the US PPI release and tomorrow we have the FOMC press conference that could really move the markets so make sure your account is adequately funded for trading. The PPI number is highly important now that the Fed could be hiking more than expected so we migh get some great opportunities today. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
In today’s report, I provide you with trade ideas, analysis and key technical levels on
- DAX – downside momentum waning
- DJ – At support but measured move from the market top points deeper
- USOIL – Found buyers at support
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DAX is trying to turn higher after dropping hard over the previous days. Profit-taking and bottom fishing support the index at the time of writing. The key S&R levels in the 4h chart are 13378, 13557, 13650 and 13750. If the market remains strong intraday I’ll give a greater emphasis on long trades today. If, however, DAX fails to break resistances decisively I’ll be happy to take intraday trades on the short side. As always, trading is about reading the price action. So don’t trade what you expect to see but instead what you see price action confirming.
DJ is also showing signs of early recovery. The market has violated a minor trendline and the SMAs are converging. Clearly the panic selling is turning into profit-taking as we speak. This could provide us with trading opportunities on the long side. But again, if the market rallies and then turns weak or starts to consolidate, then short trades could also come into question today. The nearest key S&R levels for DJ are 30371, 30928 and 31386.
USOIL bounced higher from the channel low I focused on yesterday. This was my threshold level for the trend continuation. I said yesterday: “The market is now trading at a bull channel low at 1154.24 that could act as a support but if the level doesn’t hold the next key support is at 109.92”. Now yesterday’s low at 115.14 is the new key support level while the nearest key resistance levels are 119.01 and 123.80.
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 0.5% in May but according to Powell 0.75% hikes are off the table.|
|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 drifting lower since early May as equity investors have moved over to T-Bonds in search of safety.|
|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 – PPI m/m
- USD – Core PPI m/m
- CNY – Industrial Production y/y
- CNY – Retail Sales y/y
- USD – Core Retail Sales m/m
- USD – Retail Sales m/m
- USD – Empire State Manufacturing Index
- EUR – ECB President Lagarde Speaks
- USD – FOMC Economic Projections
- USD – FOMC Statement
- USD – Federal Funds Rate
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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