Yet another closing high on Wall Street last night (albeit only slight gains) has encouraged traders in Asia once again. The Nikkei 225 was also buoyed once again by the sustained period of weakness that the yen is experiencing. Asia markets were also positive after data showed that the Chinese services PMI climbed to 55.5 (from 54.8) which is a 6 month high and that the HSBC Manufacturing PMI (the unofficial reading that looks at the smaller companies in the economy) confirmed the significant improvement from 48.1to a revised 49.4 (from the flash 49.7), all of which suggests that China is showing encouraging signs of stabilizing. European markets are though trading cautiously ahead of the significant inflation data this morning.
Forex trading has been fairly cagey through the Asian session and is likely to continue until the Eurozone flash CPI. The only real exceptions have been with the slight recovery in the Aussie and Kiwi dollars which have both gained after the Reserve Bank of Australia kept interest rates flat at 2.5% early this morning.
Traders will be glued to their screens at 10:00BST this morning with the announcement of the flash Eurozone May CPI data. This is conceivably the last time data that could prevent the ECB from engaging a programme of monetary easing. However the guessing game will begin after the data as to what the ECB will actually do, from the likely options of a main refinancing rate cut, negative deposit rates, an LTRO extension and full quantitative easing. This could make for an extremely volatile day for currency markets. Furthermore, if the inflation data comes in above the 0.7% expected then there could be profit taking on equity markets too as it would significantly reduce the possibility of QE.
Chart of the Day – USD/CAD
Could yesterday’s rally for the dollar be the beginning of a change in outlook? The Canadian loonie has been gaining ground for much of the past 10 weeks, but a sharp dollar rally has taken the RSI to a 5 week high and has left support at 1.0818. it also means that the rate is now within striking distance of a test of the key near term high at 1.0941. The hourly intraday chart shows that a series of lower highs over the past two weeks has been broken and that hourly momentum indicators are now is a more positive configuration. However this resistance at 1.0941 will need to be overcome to prevent this move being just another chance to sell. However this is the first time in a while where the outlook for the dollar looks to be improving.
As we move into a huge day for Euro traders, the single currency remains under threat once more. After two days of looking to build a recovery, almost all of the move has been undone and it looks as though the key support at $1.3584 is again under pressure. All technical momentum indicators are in bearish configuration as the outlook remains negative. The intraday hourly chart shows another lower high has been left at $1.3649. However, today will see the fundamentals take centre stage as the Eurozone flash CPI data for May is released at 10:00BST. This data will have a profound influence on the ECB staff projections and subsequently the Governing Council’s decision on what monetary easing measures to deploy. Expect significant volatility around the release and subsequently as traders look to decipher the impact of either hitting, beating or missing the consensus of +0.7%. A higher number could be the most volatile reaction of all and produce a significant short squeeze which pulls the Euro sharply higher.
Cable is a difficult call of late. The broken uptrend since November muddies the waters as it questions the medium to longer term bull dominance, while the lower high and lower low in May also adds to this uncertainty. However, the 89 day moving average remains supportive of the big corrections in the past few months and this comes in at $1.6691. The near term outlook is fairly uncertain too, with the bounce of the past few days failing to re-ignite the bulls, whilst daily momentum indicators remain corrective and suggest Cable being pulled lower. The intraday hourly chart suggests a sizeable resistance around $1.6800 could be the key near term. Already the rally has failed once around $1.6776 and another such failure would suggest the rallies are being sold into an that this is just another opportunity to sell. There is a big caveat with this chart though today as if the dollar comes under significant selling pressure should there be a relief rally for the Euro after the inflation data, this would pull Cable higher too.
Yesterday the pivot level which had been holding back the dollar, give way to the upside. This now means that the pair has broken above the key higher low at 102.36 as the dollar bulls look to change the outlook. However there is still much to be done to convince as the underside resistance from the 144 day moving average is at 102.58 and the underside resistance of the old primary uptrend is at 102.77. These are levels that will need to be overcome, however, daily momentum indicators are looking to now improve and progress has been made near term. The intraday hourly chart shows the use of the pivot level around 102 yesterday and this should now be seen by the bulls as a base line to work from.
Maybe the first signs of support coming in for gold after five straight days of declines. Yesterday’s low at $1240.69 has remained intact overnight with the RSI at below 30 and the lowest since June 2013. The outlook remains extremely weak but the intraday hourly chart is showing bullish divergences on momentum indicators which may suggest a technical rally is due. With consistent lower highs in place though it would need to be a move above $1251.71 which is a reaction high from Friday to even think that a rally might be setting in. Even then the resistance band around $1260 is sizeable and the likelihood is that any rallies would be seen as a chance to sell. This should be the outlook all the way at least until the resistance at $1268.24 is breached.