Espresso Morning Call: A tentative mood ahead of the weekend

What we are looking for

• USD is holding ground: After the post-CPI weakness, there is a sense of more support starting to build on USD as consolidation is forming. This may be a near-term respite from corrective pressures though.
• Indices showing tentative gains: Wall Street pulled back from intraday highs to close all but flat yesterday. There are tentative gains today but the recent positive momentum is less decisive now.
• Commodities mixed: Precious metals have been less decisive in recent sessions. Despite early gains today there is still a sense of caution. Oil has recovered well recently but still looks to be a bear market rally. 
• Data trading: EUR traders will be watching Eurozone industrial production. Only small growth is forecast, with any miss putting pressure on EUR positions. Michigan Sentiment will be a key mover for USD today. An expected improvement would help to support the USD.   

Overview

Market look set to end the week on a slightly more cautious note. The weakness in the USD following the lower than forecast US CPI has eased and is starting to reverse this morning. Despite the factory-gate (US PPI) inflation also suggesting peak inflation in the US yesterday, US Treasury yields moved higher on the day. This is helping to support the USD. Lower inflation is a positive for equities and there is another tentative move higher this morning on US futures and European indices. 

Despite a decline, UK GDP was very slightly better than expected in June meaning there was a Q2 GDP decline of -0.1%. However, this has done little for GBP. The signs of a slowdown in consumer spending are ominous for the months and quarters ahead. Traders will now turn their attention to the outlook for the US consumer, with Michigan Sentiment later. 

Consumer sentiment in the US is key for the economic calendar today. However, initially, traders will be watching Eurozone Industrial Production this morning. Since Q4 2022, year-on-year production has fluctuated between growth and contraction, with consensus again forecasting a lack of positive traction once more. Prelim Michigan Sentiment is the main focus for the US session. A forecast of 52.5 would be a second consecutive month of improvement. Given the USD declines from the falling CPI on Wednesday, traders will also be watching the Michigan 12-month inflation expectations component too. It is forecast to drop slightly to 5.1% (from 5.2%). 

Today’s news

Market sentiment is tentatively positive: Indices and US futures are slightly higher, but the USD is finding support again. 

Treasury yields are edging higher again: Yields closed yesterday solidly higher, with the US 10-year yield +10bps. Yields are higher again today.

Fed’s Daly still focusing on inflation: Daly (dove, not a voter until 2024) believes that inflation is still too high and must be reduced. Her baseline is +50bps in September but is open to +75bps  depending upon the data.

UK Q2 GDP with a slight beat: June GDP fell by -0.6% (-1.3% exp) as the UK had an extra bank holiday to celebrate the Queen’s Platinum Jubilee. This meant that Q2 GDP was very slightly better than forecast at -0.1% (-0.2% exp). Industrial Production for June was also better than expected at +2.4% YoY, up from 1.4% in May (1.6% exp).

Cryptocurrencies ease back: A slight early decline today with Bitcoin -1% and back just below $24,000.

Economic Data:

• Eurozone Industrial Production (at 09:00 GMT) – Production is forecast to grow by just +0.2% in June, which would drag the year-on-year production down to +0.8% (from +1.6% in May). 
• US Michigan Sentiment – prelim (at 14:00 GMT) – Sentiment is expected to improve slightly to 52.5 in August (from 51.5 in July). 

Major markets outlook

Broad outlook: Risk appetite remains slightly positive, but tentative. Indices are positive, but the USD regaining ground is tempering the mood slightly. 

Forex: USD is clawing back some lost ground this morning. AUD and NZD are still performing well.

• EUR/USD is holding the breakout of the 1.0095/1.0293 range, but the upside momentum of the move is waning. . That this is coming as the confluence of resistance from the overhead supply at 1.0350, the six-month downtrend and the 55-day moving average will be a concern. Breakout support is between 1.0250/1.0295 and needs to hold to sustain the positive momentum. The daily RSI holding above 50 (a two-month high) will also be a gauge. 
• GBP/USD is pulling back again having failed to overcome the resistance at 1.2293. This is re-asserting what is essentially a trading range now between 1.2000/1.2295. The RSI is above 50 which lends a mild positive bias to this range, but for now the shackles are on. A breakout above 1.2293 (and preferably above 1.2330) is needed to suggest a sustainable recovery. Initial support is at 1.2130 and then 1.2165.
• AUD/USD is increasingly the bullish chart of the major pairs. Driving through resistance at 0.7045/0.7070 the outlook is increasingly positive. The 0.7045/0.7070  band is also now a basis of support. Daily RSI into the mid-60s is increasingly positive We look to use weakness as a chance to buy for a medium-term recovery towards 0.7265/0.7280.

Commodities: Consolidation on precious metals, whilst an oil recovery has now broken through resistance.

• Gold is losing traction in its recovery and the three-week uptrend has been broken. This comes as gold failed around the resistance at $1805, posting a high at $1807 before pulling back. For now, this is a consolidation, but moving consistently below $1783 would complete a small top pattern and imply a correction towards the $1760 area. Momentum is starting to wane, especially on the 4-hour chart. Support between $1754/$1765 is key. A close above $1805 opens $1840/$1858 as the next test.
• Silver has been tailing off over the past 24 hours as the price has moved back below the $20.45/$20.60 breakout support. The lack of traction in the breakout is a worry, but for now, the selling pressure is being held back. Dropping back below $20.30 would increase concern, but the key support is the higher low at $19.54. Initial resistance is now $20.73/$20.83.
• Brent Crude oil has started to find recovery. Closing positively in four of the past five sessions, the resistance between 99.50/$101.35 has now been broken. The near-term bulls will be looking for another higher low between $100.75/$101.75 and to push towards the next resistance at $106.40. We still see this as a near-term move within a bigger downtrend phase. We favour using rallies as a chance to sell for further weakness towards the support at $95/$96.

Indices: Wall Street continues to move higher. Europe is straining to follow the move.

• S&P 500 futures have sustained the break above 4201 in an important move that is a key break of a lower high in the sell-off. It confirms a shift in the medium-term outlook to buying into weakness. There is a slight air of caution starting to form though as the market closed well off yesterday’s highs and with the daily RSI hitting 70 there is a potential for profit-taking. We would still look to use weakness as a chance to buy though. Initial support is between 4170/4200 with 4080 now key support. 
• German DAX has been choppy this week, but holding the breakout support at 13440 was important. After weakness yesterday, the market is back higher today and is trying to break clear of the 13786/13796 resistance. With RSI momentum pushing into the 60s, this shows that weakness is still a chance to buy in this recovery. Above 13796 the next resistance is around 14300.
• FTSE 100 fell back decisively from 7533 yesterday in a move that serves as a warning for potential profit taking. The market is back higher this morning and needs to sustain this move to push back above 7533 otherwise the corrective forces will begin to grow.  Initial support is at 7457 now. With strong momentum and daily RSI in the 60s, we would still see weakness as a chance to buy. There is good support in the band 7370/7415. 

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.