EURUSD and XAUUSD sold off on Friday as traders kept on exiting their USD shorts and pushed the USD index higher. As a result, the technical picture in gold is turning more bearish. The University of Michigan’s preliminary sentiment index rose more than expected 86.4 (vs. 84.1 expected) as the consumers interviewed saw their current and future economic conditions improving. The report didn’t have a significant impact on the USD that had started to rally earlier in the European session on Friday. USD strength seen on Friday pushed the major dollar counterparts lower forcing the EURUSD (-0.55%), GBPUSD (-0.49%), AUDUSD (-0.63%) and NZDUSD (-0.94%) to finish the week in the red. Gold (-0.89%) sold off while silver futures gained 0.41%. Bearish daily candle in silver, however, resulted in weakness in today’s trading. The price of WTI crude rallied by 0.88%. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
There have been significant inflows of funds into US Treasury bonds. This pushed the yield on 10-yr bonds to 1.428% on Friday, the lowest level in three months. This indicates that investors believe the Fed is going to stick to its dovish stance this week. We’ve heard some Fed bankers suggesting discussions on tapering but judging by the rising bond prices (and lower yields) that the majority of bond investors are counting on the Fed not tapering their bond-buying program any time soon.
The Nasdaq Composite showed some relative strength (+0.35%) while the S&P 500 gained only 0.19% and the Dow Jones Industrial Average DJI closed almost unchanged (+0.04%). The best performing S&P 500 sectors were financials (+0.64%), technology (+0.60%) and consumer discretionary (+0.55%). The healthcare (-0.70%) and real estate sectors (-0.63%) lost the most ground on Friday.
This should be a good week for trading with several major events in the pipeline. The main risk event this week is the FOMC meeting and the press conference on Wednesday. Even though the meeting is not likely to provide major policy updates, traders are still keen to see whether there are any hints of tapering or if the Fed going to repeat its mantra about inflation being transitory. Other significant risk events include the release of the Monetary Policy Meeting Minutes by the RBA and the US retail sales and PPI data on Tuesday. On Wednesday the Statistics Canada publishes its report on inflation and on Thursday we will have the NZ GDP and Australian employment data releases.
It was our view that should the price fail to rally on Friday, then a move to the 1.2080 – 1.2103 range (the 50-day SMA and a recent reactionary low) in EURUSD would be likely. This target was met as lack of follow-through buying on Friday in the EURUSD resulted in heavy selling and the market dropped by 0.55% or 90% of the daily ATR. At the time of writing this EURUSD is trading in a downward sloping trend channel which indicates that the market is likely to stay weak. Therefore rallies are more likely to fail. The key support and resistance areas are 1.2050 – 1.2065 (reactionary low and the channel low), 1.2145 (a recently broken support level), 1.2184 – 1.2200 (the 23.6% Fibonacci retracement level, the 20-day SMA and the channel high).
Now that the price of gold has broken below the rising trendline in today’s trading a lower reactionary high in the daily chart is created at 1906.90. Gold is approaching a key support level at 1855.60. If the support is broken it looks likely that the market will move to the 1820 – 1825 area (the 38.2% Fibonacci retracement level and the 50-day SMA). A higher low or equal low above the 1855.60 support level would indicate the bulls would be likely to rally the price to the 1890 – 1906 area.
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 FED||The Fed has on several occasions repeated its commitment to ultra-accommodative monetary policy. The rates are likely to stay near zero but now some Fed officials have said that the Fed should start considering potentially tapering their asset purchases.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration has indicated it will seek to deliver another two trillion dollars in infrastructure spending.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower or sideways. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Payrolls||The latest miss in payrolls was the second in a row (+559K vs +645K expected). The unemployment rate decreased from 6.1% to 5.8% but the fact that it happened while the labour force participation rate decreased makes it less good news.|
|Inflation||The year on year headline CPI change was 5% but not all inflation gauges agree with such a high number. The trimmed-mean inflation CPI index published by the Cleveland branch of the Federal Reserve Bank, rose only 2.6% y/y (0.4% m/m).|
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Market News & Facts
- Lagarde says that it’s too early to discuss the end of PEPP purchases.
- Elon Musk: Tesla accepts bitcoin payments if clean energy used in mining
- Germany wholesale price index for May +1.7% m/m (+1.1% previous)
- UK April GDP m/m +2.3% (2.4% expected)
- The UK Prime Minister Boris Johnson: A one-month delay to re-opening
- Large Manufacturer conditions in Japan for Q2 -1.4% (+1.6% previous)
- US Senator Warren: crypto regulation is needed.
- PBOC Governor Yi Gang: China’s 2021 consumer inflation less than 2%
- US Republican senators saw some progress in infrastructure talks
- RBA may start to dismantle some of the QE structure soon
- China May CPI came in at 1.3% y/y (1.6% expected)
- China PPI was confirmed at 9.0% y/y (8.5% expected)
- China state media to Australia: Diversify your iron ore exports away from China
The Next Main Risk Events
- GBP – BOE Gov Bailey’s Speech
- AUD – Monetary Policy Meeting Minutes
- USD – Core Retail Sales & Retail Sales
- USD – PPI
- USD – Industrial Production
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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