- The US dollar has bounced back with a vengeance in the past couple of weeks. The Dollar Index has now rallied from a low a 93.14 on 15th May by over 4%. This rally has coincided with the rally on Treasury yields which has turned lower again. Although this may be counter intuitive, Bund yields have also come off their recent highs and there is also a strong positive correlation between Bund yields and the performance of the Euro. That would suggest that the driving force of the rising yields which had impacted across markets in recent weeks is no longer driving sentiment. The dollar focus has returned and markets are looking at when the Fed is going to fire the gun on the first rate hike again.
- Janet Yellen’s speech on Friday had some hawkish undertones to it, talking about continued improvement in the labor market, wages growth and also inflation. The Improvement of core CPI has got traders back on the dollar bull path again. Improvements in consumer and housing data yesterday have added to the outlook. Markets remain data dependent still, but noises out of the Fed (FOMC hawk Jeffrey Lacker apparently is close to voting for a rate hike in June) are pointing to a hike in late 2015 (maybe even in September).
- It is likely that it is more of safe haven plays coming into the market. Concerns over Greece are still high (see next point) and with equity markets seeing some pressure, Treasuries and Bunds are an option once more.
- The negotiations over Greece and the payment of its final €7.2bn of bailout money remain unresolved. Greece seems to be moving closer to the edge of the cliff again. On 5th June there is a €300m payment due to the IMF, whilst across the whole of June Greece owes the IMF €1.6bn. Without the final bailout tranche there will be no way that Greece will be able to pay. Germany believes that an agreement will be made, but as per usual it seems to be going down to the wire. My feeling remains as it always has been. The Eurozone is a political entity probably more so now than an economic entity, subsequently they will all find a way to fudge through the issue.
- The euro should remain under pressure (front loaded QE purchases by the ECB in the next month or so), but a resolution of the Greece situation could induce a rebound, but it is likely that after a short term rally the corrective pressure would resume
- The DAX has become very choppy in recent weeks, and having been negatively correlated to the euro (due to the impact of better trade conditions for Germany’s exporters), the Greece situation has seen this relationship breakdown slightly. I would expect this negative correlation to resume if/when Greece comes to an agreement with its creditors.
- There is not a huge amount of economic data to look for in the remainder of the week remainder of this week but the second reading of Q1 US GDP growth on Friday could suggest a downward revision from +0.2% down to -0.9%. That will put extra emphasis on Monday’s ISM Manufacturing data which has not shown any improvement since October but is currently expected to show a minor up-tick. This would help the market to believe that a corner may potentially be being turned following the recent weakness in US data.
- In other events, watch for the release of growth data across major economies such as Switzerland, UK and Canada. Also watch out for the forward looking manufacturing PMIs giving an idea of how the second quarter could end.
- Watch for: US GDP, ISM Manufacturing
EUR/USD – Looking to sell rallies now
- With sentiment for the dollar improving and the euro under pressure from Greece/falling Bund yields, the near term outlook for EUR/USD does not look too great. The one caveat to this is Greece successfully receiving its €7.2bn bailout.
- The breach of $1.1065 was the key near term development and suggests testing key pivot levels around $1.0900 and then $1.0800. With momentum in negative configuration use any rallies as a chance to sell. Key resistance at $1.1065.
- Watch for: Greece & Eurogroup developments, US GDP, ISM Manufacturing
GBP/USD – A deteriorating outlook suggests that technical rallies will now be sold
- Although the US economic data has been decent in recent weeks, the focus is now squarely on the US after expectations of data almost went too far to the negative. The downward revision of preliminary GDP is widely expected and more focus will come on Monday’s ISM manufacturing. Positive US data in the past week has driven the correction on Cable.
- Breaking $1.5450 support confirmed the sequence of lower highs and lower lows which means that rallies will now be seen as a chance to sell. There is 100 pips of resistance between $1.5450/$1.5550 to look for selling opportunities as technical indicators deteriorate.
- Watch for: UK GDP, US GDP, ISM Manufacturing
USD/JPY – Buy on dips towards 122 breakout support
- The breakout has been largely a dollar play, however inflation in Japan is still on the reverse which if continues could drive the BoJ to act further. It is difficult to see a huge rally on Dollar/Yen in the absence of a game changer of Japanese monetary policy.
- Breakout above 122 has opened the 2007 highs at 123.65/124.15. The momentum indicators are strong, but the RSI is over 70 and this may induce a near term pullback correction towards the old 122 breakout which is now supportive.
- Watch for: FOMC minutes, Japanese CPI & Industrial Production, US GDP and ISM Manufacturing
Gold – Bears to put pressure on the range
- The negative correlation is back as the dollar strength has dragged gold from what had been looking previously like a breakout, to one which is putting pressure on the support.
- The range between $1178/$1224 continues, with near term momentum putting pressure on the support an intraday rallies being sold into.
- Watch for: US data to drive the dollar trade.
Indices – S&P threatens a correction. DAX choppy sideways range whilst FTSE is a more calm sideways range
- S&P 500 – a drift towards all-time highs has been tempered and valuations remain stretched, whilst the divergence with the declining Dow Transports questions the longevity of the bull run
- DAX Xetra – the near term negative correlation between the DAX and the euro has stopped working for now. DAX is increasingly trading around a pivot range 11,620/11,710. Volatility remains elevated.
- FTSE 100 – Continues to struggle for any meaningful direction as a consolidation continues. The resistance levels 7084/7123 are holding back the advance, whilst the support and 6810/6885 is supportive.
WATCH OUT FOR THIS WEEK
Wednesday 27th May
- Canada – BoC monetary policy
Thursday 28th May
- US – Weekly Jobless Claims
- US – Pending Home Sales
- US – Crude Oil Inventories
Friday 29th May
- Japan – CPI
- Japan – Industrial Production
- Switzerland – GDP
- UK – GDP (second reading)
- Canada – GDP
- US – GDP (preliminary)
- US – University of Michigan Sentiment (revised)
Monday 1st June
- China – Manufacturing PMI
- Japan – Manufacturing PMI
- Eurozone – Manufacturing PMI
- UK – Manufacturing PMI
- US – ISM Manufacturing PMI
Tuesday 2nd June
- Australia – RBA monetary policy
- UK – Construction PMI
- US – Factory Orders
Wednesday 3rd June
- Australia – GDP
- China – Services PMI
- Eurozone – Services PMI
- UK – Services PMI
- Eurozone – Unemployment
- OPEC Meeting
- US – ADP Employment Report
- Eurozone – ECB monetary policy + press conference
- US – Trade Balance
- US – ISM Non-Manufacturing PMI
- US – Oil Inventories
Thursday 4th June
- UK – BoE monetary policy
- US – Weekly Jobless Claims
Friday 5th June
- US – Non-farm Payrolls
- US – Unemployment rate
- US – Average hourly earnings