Espresso Morning Call: Consolidation forms ahead of the Fed

What we are looking for

• USD is fluctuating: The USD strength that once more dominated major forex last week had been easing off at the beginning of this week. However, another move back into the USD this morning has come. However, with a crucial Fed meeting announcement tomorrow, these fluctuations are unlikely to turn into trending moves. 
• Indices rebound but overhead resistance is a barrier: A strong close on Wall Street is allowing European indices to tick higher early today. However, as moves have rebounded into overhead supply on several major markets they have already been restricted.US futures are slipping back.
• Commodities slipping back again: There is little decisive move, but it is interesting to see silver falling back. Gold continued to see near-term rallies failing around overhead supply at $1680.
• Data trading: CAD traders will be on alert for the Canadian inflation data later. US Housing Starts and Building Permits may push USD positions slightly too.    

Overview

It has been a quiet start to the week. The UK public holiday for the funeral of Queen Elizabeth II left markets devoid of intent. A late jump on Wall Street has injected a little life into European indices this morning. For now, these moves are simply reclaiming ground lost at the end of last week. Reaction around the overhead supply of old support will be an important gauge. 

US Treasury yields continue to edge higher and although there was a mild move against the stronger USD overnight, as the European session has taken hold, once more the USD strength is coming through. At this stage, these are just fluctuations though. Traders are unlikely to take a decisive view ahead of such an important FOMC decision tomorrow.   

It is Canadian inflation and US housing on the economic calendar today. Canadian inflation is expected to be slightly mixed, similar to the US CPI. Headline inflation is expected to drop slightly, with core inflation expected to tick slightly higher. For the US data, Housing Starts are expected to drop by -1% in August. However, Building Permits are expected to fall even more, by around -4%. 

Today’s news

Market sentiment looking a little more positive: There has been a mild improvement in sentiment following the rebound on Wall Street last night. Equities are higher, whilst there is a slip back on the USD.

Treasury yields continue to edge higher: The US 10-year yield is again looking at 3.50% whilst the 2-year yield is edging to 3.95%.

Japanese inflation rises more than expected: Core inflation increased to 2.8% in August (from 2.4% in July. This was above the 2.7% expected by the consensus of analysts. Inflation remains above the BoJ’s target of 2%.

People’s Bank of China stays dovish: The 1 year Loan Prime Rate was kept steady at 3.65%, with the 5 year Loan Prime Rate at 4.3%.

Eurozone Current Account moves into deficit: A surplus of €3.24bn in June has turned into a deficit of -€10.1bn in July.

Cryptocurrencies recover some poise: After further declines over the weekend and into Monday, a late rebound has steadied the ship slightly. Bitcoin is a shade lower by -0.9% at c. $19350. Ethereum is +0.1% higher at $1358.

Economic Data:

• Canadian inflation (at 12:30 GMT) Headline inflation is expected to drop slightly in August to 7.5% (from 7.6% in July). Core inflation is expected to tick slightly higher to 6.2% (from 6.1%). 
• US Housing Starts (at 12:30 GMT) Starts are expected to fall to 1.433m in August (from 1.446m).
• US Building Permits (at 12:30 GMT) The consensus is expecting a reduction in permits to 1.615m (from 1.685m)

Major markets outlook

Broad outlook: Risk appetite has looked to be a shade more positive, but already this could now be faltering.

Forex: USD outperformance had eased off overnight, but is once more there again as the European session develops. 

• EUR/USD continues to hold up relatively well and continues to edge back higher as it looks to reclaim the losses a week ago. However, there is a lack of intent in the rebound ahead of the Fed and we will likely have to see how the market reacts to the FOMC meeting tomorrow. Resistance comes in around 1.0100 with 1.0197 a key lower high. The buyers continue to return around the support band 0.9900/0.9950. Momentum remains negatively configured and near-term rallies remain a chance to sell for what we favour as a test of the 0.9863 September low.
• GBP/USD downside has been restricted around 1.1350 for now as a near-term technical rally has set in from just above the lower bound of the six-month downtrend channel (today around 1.1300) today which could perhaps hold up the decline. Momentum remains bearishly configured and technical rallies are a chance to sell. The initial resistance of 1.1440/1.1480 is being tested.
• AUD/USD has picked up from support around 0.660/0.6680 with arguably two consecutive bull hammer candlesticks. However, the potential rebound has stuttered this morning. The daily and four-hour charts show continued negative momentum configuration and suggest that rallies are struggling for traction before the selling resumes. Initial resistance is between 0.6745/0.6770.

Commodities: Gold is struggling as old support becomes new resistance, whilst silver is still failing at lower levels. Oil is testing the resistance of overhead supply.

• Gold has tried to steady itself following the breakdown of crucial support at $1680. However, this old support had been a massive floor for the price since February 2021. It is now becoming a basis of resistance in recent sessions. There is an overhead supply now $1680/$1691. Having broken below $1680, below Friday’s low of $1654 the next support comes in between $1550/$1610.
• Silver has been in a choppy move lower over the past week. Intraday fluctuations but every day slipping lower highs. We wait to see if this can develop into a bull flag (an optimistic assessment) but once more this morning the price has dropped back.  $Above $19.70 could trigger the flag. Initial support at $19.21 with $18.77 more considerable.
• Brent Crude oil has rebounded to tick back higher towards a test of the resistance band between $93.25/$96.60. This is a sizable near to medium-term barrier, with the falling 21-day moving average (currently $95.45) also a basis of resistance for smaller technical rallies. We favour selling into strength to a retest of the $88.25 low once more.

Indices: Yesterday’s rebounds bring another test for the bulls. Once more it could be failing.

• S&P 500 futures picked up from a low of 3845 yesterday to complete a bullish engulfing (bullish key one-day reversal). This is a positive signal but the early reaction this morning has been less encouraging as the market has just slipped back slightly. A technical rally failed in the middle of last week and there will be fears that this might happen again. The breaching of support in recent sessions has also deteriorated the broader outlook. Important near-term resistance is at 3980.

• German DAX had a solid rebound into the close last night but the move this morning has slipped back. It will be disappointing for the bulls if another rebound fails. Initial resistance is at 12930. We favour using strength as a chance to sell for further pressure on 12590 support and back towards 12375/12425.
• FTSE 100 remains choppy as an early attempt to rebound has fallen back from the growing resistance around 7335. Technical signals remain mixed, but there is a hint of a negative configuration on the four-hour chart RSI which hints at selling into strength. Initial support is at 7225 with the early September lows of 7127/7172 being key.

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.