Espresso Morning Call: An early kickback against USD rebound

What we are looking for

• USD giving back gains: The USD is weaker on major forex to start the week. The question is whether this is a brief respite for major currencies or something more sustainable.
• Indices rebound after the sell-off: Indices managed to rebound on Monday morning. US futures are just under +0.5% higher with similar moves on European indices.
• Commodities are mixed: Precious metals rebound as the USD has slipped. Oil has fallen back again.
• Data traders: There are no major announcements to bother data traders today.

Overview

The lasting legacy of the hawkish Fed and ECB last week has been to put a floor under US Treasury yields, support the USD and weigh on risk appetite. There has been a kickback against this on Monday, although with US yields holding up still, it remains to be seen just how far a USD weakening will go. Furthermore, after the breakdowns on major indices last week, the initial rebounds could simply be seen as a pullback into resistance.

Into the final week of serious trading on major markets before Christmas, the economic calendar. is looking bare today. There are no major economic announcements due. 

Today’s news

Market sentiment rebounds slightly: A kickback on the souring sentiment that ended last week. 

Treasury yields flat to higher: The 10-year yield is 3bps higher with the 2-year yield flat.

German Ifo Business Climate improves slightly: The Ifo has improved to 88.6 in December (from 86.4 in November). This was ahead of the expected pick-up to 87.4.

Cryptocurrencies fall back: Crypto has fallen over the weekend and is down from Friday’s close, with Bitcoin -0.5% at $16750 and Ethereum -0.9% at $1183.

Economic Data:

• There are no major economic announcements due today.

Major markets outlook

Broad outlook: Sentiment is more positive as USD strength has eased off today.

Forex: USD is giving back gains across major forex.

• EUR/USD has breached the five-week uptrend (a warning sign for the bulls) but is holding on to the support of the previous breakout now around 1.0585/1.0595. Momentum remains positively configured with the daily RSI holding above the high-50s. Given the strength of momentum and the uptrend, until otherwise, we still look to use near-term weakness as a chance to buy. The importance of the support band 1.0450/1.0500 is growing. Resistance at 1.0735 ahead of the key May highs of 1.0785.
• GBP/USD has retreated to break the six-week uptrend. However, now it will be the reaction to the first higher low of the recovery (at 1.2100) that will be key now. A breakdown below there would turn the market decisively corrective, opening 1.1900 as the next key support. The market has ticked higher this morning up from 1.2120 suggesting this could be a crucial inflexion point. Initial resistance is 1.2225 under 1.2300. The reaction high at 1.2446 is now a key high. 
• AUD/USD has fallen sharply, but for now the reaction low at 0.6668 is intact. If this support is breached on a closing basis it would break the run of higher lows, complete a top pattern and be the basis of a new trend formation. The 21-day moving average (c. 0.6735) has already rolled over, whilst the daily RSI is hovering around 50. This looks to be a pivotal moment. Below 0.6668 opens 0.6640 initially and then the key support at 0.6585. The initial resistance is 0.6735/0.6770.

Commodities: Precious metals have rebounded well, but oil is looking vulnerable to selling pressure again.

• Gold has recovered well from selling pressure last week, with a positive candle on Friday and early gains today. However, this move needs to continue higher. A bull failure around here would add to the warning sign already from the broken six-week uptrend. We see $1765 as the first key higher low of the recovery and if that is broken it would effectively complete a top that would imply c. -$60 of downside and at least would suggest a retest of the key support around $1728/$1735. Initial resistance is now c. $1808.

• Silver has rebounded well from the support of the old breakout band c. $22.00/$22.50. A “bull hammer” candle on Friday is also encouraging, with further gains today. With the RSI positively configured above 50, weakness remains a chance to buy. Above initial resistance at $23.42 re-opens the $24.12 high again.
• Brent Crude oil has seen the technical rally faltering around the resistance of the old support band of $81.40/$83.55 and is now tracking lower again. With the confluence of the falling 21-day moving average and the five-week downtrend also a basis of resistance, near-term rallies are a chance to sell. Under initial support at $78.50 could see the market re-opening the lows again at $75.50.

Indices: Equity markets are in pullback mode following last week’s breakdown of key support.

• S&P 500 futures ended last week with a decisive move lower and below the key support at 3912. This breakdown completed top on a close below 3912 which implies a move towards 3720. The rebound this morning looks to be a pullback towards the neckline resistance. A bull failure under 3912/3945 resistance would be a sell signal. Initial support is at 3855.
• German DAX completed a top pattern with the decisive close below 14125 in a move that implies a correction back towards 13700/13800. The market has ticked slightly higher this morning but momentum has turned decisively corrective with the RSI in the low 40s and at two-month lows. The concern is that rallies now look to be a chance to sell, with neckline resistance 14125/14195. The broad support band 13600/13970 is being tested, but a break below 13600 would be bearish now.
• FTSE 100 has completed a top pattern with a decisive break below 7437 in a move that implies c. -200 ticks of downside target towards 7240. The next support is a reaction low at 7355 with 7304 being an important higher low of the rally. The RSI has turned decisively corrective below 50 and increasingly, near-term rallies are a chance to sell. There is initial resistance now c. 7385/7440.

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.

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