Trading sentiment is positive today after strong employment numbers from ADP yesterday afternoon suggest that perhaps we could be in for a strong Non-farm Payrolls. If that were to be the case then it would help to build expectations of the Fed tightening once more. US equity markets soared into new high ground yesterday and this is helping to drive global risk appetite today. However, strong jobs are one thing, but earnings growth seems to be harder to come by and will be the component of the Employment Situation Report that is closely monitored. Earnings growth remains difficult to find upside traction and could again stay around the 2.5%. This would likely limit the longevity of any dollar gains from a strong headline jobs figure. It does not appear yet that the decision of Donald Trump to pull out of the Paris Climate Agreement is impacting on global markets but the condemnation has been widespread as the US opts to go it alone. However it is notable that oil prices are well over a percent lower today despite the positive market sentiment. There are fears that Trump’s move could increase US focus on crude oil drilling.
Wall Street closed strongly around the highs of the day yesterday as the S&P 500 was up +0.8% at 2430. Asian markets were also positive overnight with the Nikkei +1.6% helped by yen weakness. European markets are also reacting strongly to the gains in the US, although the strength early in the session may become limited in front of the payrolls report. In forex there seems to be a broad risk positive bias although the moves seem to be rather stunted so far. The yen is the major underperformer, whilst sterling is again struggling. Gold is $5 lower on the improved sentiment whilst oil has dropped back by 1.5%.
Non-farm Payrolls will dominate the minds of traders today, but the first real data point of the day is UK Construction PMI at 0930BST which is expected to slip back marginally to 52.7 (from 53.1). However the Employment Situation at 1330BST is key as the June FOMC meeting fast approaches. Headline Non-farm Payrolls are expected to drop slightly top 185,000 (from last month’s 211,000) but in the wake of the very strong ADP number yesterday (which was 253,000) this increases the potential for a bullish surprise. Unemployment is expected to stick at 4.4% but keep an eye on the U6 underemployment which fell to 8.6% last month and is closing in on the bull market lows of 2006/2007 between 8.0%/8.5%. The Average Hourly Earnings are expected to be +0.2% for the month which would be around the +2.5% year on year earnings growth seen for April. Aside from the payrolls report there is also the US Trade Balance at 1330BST which is expected to deteriorate to -$46.1bn (from -$43.7 last month).
Chart of the Day – AUD/USD
In highlighting a strong improvement in the Kiwi a few days ago, it is notable that the Aussie has been a significant underperformer. There is a big top pattern on AUD/USD which completed below $0.7500 in early May that implies a 250 pip downside target towards $0.7250 within the next few months. The recent rally simply unwound the market back to the neckline resistance at $0.7500 and the pullback has been sold into. This comes as the Aussie has started to find significant selling pressure in the past couple of sessions with two consecutive strong bear candles. Yesterday’s candle took the pair to a three week low and broke through two support levels at $0.7415 and then $0.7385. This comes with a concerning deterioration in the momentum indicators with the RSI sharply lower (but also with further downside potential), the Stochastics accelerating lower and now the MACD lines now threatening to cross lower below neutral. The break below $0.7385 has now re-opened the May low at $0.7325. Rallies are now a chance to sell and today’s early rebound looks to be just that. The two support levels breached yesterday now become an area of overhead supply between $0.7385/$0.7415. It was also interesting to see on the hourly chart that an intraday rally failed at $0.7420 and adds to resistance.
The dollar bulls clawed back a degree of control in the wake of some strong US employment data and this helped to prevent the euro from breaking out above $1.1267 resistance. There are now two key levels to watch on EUR/USD ahead of Non-farm Payrolls today. The resistance at $1.1267 and the long term pivot at $1.1100. On a closing basis, a break higher would open $1.1300 and a continuation towards the medium/longer term target at $1.1350; whereas a corrective fall below $1.1100 would now complete a small top pattern. Technical momentum indicators remain positively configured and imply that corrections remain a chance to sell and there is little suggestion that a dollar rally would gain too much traction in pulling EUR/USD lower. Subsequently any Non-farm Payrolls related dip would likely be seen as a chance to buy once the volatility subsides. The hourly chart shows a near term pivot at $1.1200 above support at $1.1160.
The market is settling down after a choppy few days driven by varying polls regarding the UK election. However this settling is simply in front of Non-farm Payrolls today which are likely to ramp up the volatility again. The support of the long term neckline around $1.2775 remains key but the momentum indicators are certainly suggesting that there is a concern that this support is under increasing pressure. Where the rising 21 day moving average had been supportive throughout April and May, this is now a basis of resistance at $1.2920 and has capped the last two session highs. Yesterday’s small bodied candle and 85 pip range (average true range is currently 98 pips) suggests a cautious market. The hourly chart shows a market in consolidation mode, however with the Non-farm Payrolls today and more UK polling in the offing in front of next week’s election there could be some significant volatility ahead. A close above $1.2920 re-opens $1.3000 again.
The dollar bulls made a return yesterday in a move that has significantly helped to improve the outlook once more. A strong bull candle has been followed by early gains today and once more the bulls are testing the medium term pivot around 111.60. This is a choppy period of trading for the pair with a general dollar negative bias, reflected in the drifting lower configuration of the momentum indicators. However the bulls look to now be fighting back again. The resistance begins to increase around 111.60 but if the bulls can breakout (and preferably close above) another previous pivot of 112.20 then the outlook will significantly improve. The hourly chart shows positive configuration on momentum now ahead of the Non-farm Payrolls with initial pivot support around 111.20. A closing break above the mid-May high of 112.10 would complete a small base pattern too.
The breakout above the pivot of $1261 seems to be creaking now. Three of the four sessions that have come since the market achieved its first closing breakout have all been negative. Despite closing repeatedly above $1261 the market has never managed to break the shackles of this resistance and the pressure is increasing now as today’s early decline shows. The momentum is questionable with the Stochastics crossing lower and the RSI having continuously been unable to push above 60, however as yet there is no suggestion of a significant amount of selling pressure. It is just that the bulls may continue to struggle. The run of higher low supports is intact with $1252.50 and $1247.25. However a close below $1261 would question the bull control today. The resistance is at $1273.75 now. Expect volatility this afternoon with Non-farm Payrolls.
Despite the bigger than expected inventory drawdown, the oil price ended lower on the day and the technicals remain corrective. This comes with the market today again breaching the neckline support at $48.00 that has guarded from a completing head and shoulders top. A closing breach of $48.00 would imply a further $4 of downside. The momentum indicators remain corrective with the MACD lines crossing lower and the Stochastics in consistent decline. Rallies remain a chance to sell with the resistance band once more the old pivot area $49.60/$50.20 and the right hand shoulder high at $50.28. The hourly chart shows near term resistance around $48.20 with a minor pivot around $49.05. The hourly momentum indicators are now negatively configured with unwinding moves on the hourly RSI failing around 55/60 now. A breach of $47.75 support is also an indication of burgeoning bear control. Next support is $47.00 and then $45.55.
Dow Jones Industrial Average
With the positive medium term outlook on the Dow, corrections are still a chance to buy. The recent drift lower was little other than an unwinding move and the bulls has comes back strongly to burst through the resistance at 21,112 to achieve an all-time high of 21,144 (above the previous high from March at 21,116). Now comes the job of pushing through the intraday all time high of 21,169. The positive intent from the strong bull candle closing at the high of the day will give the bulls confidence moving into Non-farm Payrolls. The breakout means there is a series of support from the lows 21,033/21,070 and corrections are a chance to buy, with support now building around 21,000. The momentum indicators remain positively configured with the RSI back into the low 60s, MACD lines strong and Stochastics holding up well. The hourly chart shows strong momentum indicators with the MACD lines turning up around neutral and the bulls are well positioned ahead of payrolls.