What are we looking at

  • USD is gaining ground again: After the USD bulls saw a day of reclaiming lost ground yesterday, this move is again threatening to continue today.  
  • Indices supported for now: An unwind on the recovery has found a degree of support this morning. This outlook of buying into weakness needs to hold.  
  • Cryptocurrencies slip back slightly: The recovery has eased back slightly today. Breakout support needs to hold.
  • Data trading: Manufacturing PMIs come with UK and US ISM data. The UK data is a final reading so may not impact GBP greatly, however, USD will move on the ISM announcement. The Bank of Canada is expected to hike by 50bps, but the forward guidance of the pace of future hikes will be the key take. CAD positions will see elevated volatility


Overview

The threat of renewing USD strength has emerged in recent days as US bond yields have moved higher again. This is showing primarily in a rally on USD/JPY (which remains very closely positively correlated to yields) but it is also weighing on commodities such as gold. Subsequently, the path that yields take continues to be important for the overall outlook for major markets. As US yields jumped higher yesterday, indices also pulled back in their recoveries. Equities are finding support this morning, but can this continue if yields continue to pull higher?

The first trading day of the month is always packed with tier one data on the economic calendar. The Manufacturing PMIs come throughout, with the UK and US ISM data expected to continue to deteriorate in their expansion. The ISM Manufacturing is the one to watch, with any surprises key for USD positions. The Bank of Canada is expected to hike by 50 basis points. However, the key move will be how aggressive the need for future hikes is. Yesterday’s GDP disappointment will be food for thought. 


Today's news

Market sentiment mixed today: a deterioration in market sentiment has been stabilised overnight, with European indices and US futures ticking slightly higher today. The USD is showing minor gains.

Treasury yields track higher: Yields were higher yesterday (helping USD to rebound) and are higher again today, although only moderately. The 10-year yield is +3bps higher, the 2-year yield is +2bps.   

OPEC may suspend Russia from production cuts: Given Western sanctions, OPEC may suspend Russia from the oil production agreement. This could mean that there is more scope for the big OPEC producers (such as Saudi Arabia and UAE) to increase their production. Oil fell on this news yesterday.

Australian GDP was slightly better than expected: Q1 GDP was +0.8% QoQ which was above the consensus of +0.5%. 

China Caixin Manufacturing PMI all but in line: The unofficial manufacturing PMI increased to 48.1 (48.0 expected) from 46.0 in April. This is still in contraction but is improving.

Cryptocurrencies just easing back slightly: After two days of strong recovery gains, there is a slight pause in the recovery this morning. Bitcoin is down just under -1% however, remains above the $31,500 level which is near term breakout support.

Economic Data:

  • UK final Manufacturing PMI (at 0930BST) The final PMI is expected to be unrevised from the flash at 54.6 in May (down from 55.8 in April)
  • Eurozone Unemployment (at 1000BST) The headline rate is expected to continue to improve slight, falling to 8.2% in April (from 8.3% in March)
  • ISM Manufacturing (at 1500BST) The survey is expected to fall to 54.5 in May (from 55.5 in April).
  • Bank of Canada interest rates (at 1500BST) The BoC is widely expected to hike rates by +50 basis points to 1.50% (from 1.00%)
  • Fed Beige Book (at 1900BST) 


Major markets outlook

Broad outlook: Markets are slightly mixed, with the USD showing gains, but indices have found support. Commodities are also mixed. 

Forex: USD tending to strengthen (especially vs JPY) but there is a less decisive look to the gains this morning.

  • EUR/USD has fallen back from the resistance band at 1.0750/1.0800 (pivotal medium overhead supply) to leave a key high at 1.0787. This move tested the support of a two-week uptrend (today c. 1.0710) and is again testing it today. However, the important support remains the breakout at 1.0640 which is now a key pivot. Initial support is yesterday’s low at 1.0678. This is becoming an important moment. 
  • GBP/USD is backed away from the resistance around 1.2640/50 and this has broken a recovery uptrend. Being close to the three month downtrend, this is a concern for the recovery now. This could induce a near term unwind towards 1.2470/1.2500 which is the key basis of support now. Below 1.2470 turns the market bearish again.
  • AUD/USD has held on to the two-week uptrend as a basis of support, and despite yesterday’s negative session, the recovery is on track. This is reflected in the RSI holding above 50 and whilst the support at 0.7125 remains intact, the outlook remains positive. This will sustain the expectation of a move back towards a test of 0.7265. Initial resistance is at 0.7203.

Commodities: Precious metals are deteriorating again, but oil is looking to rebound after yesterday’s decline.

  • Gold has started to track lower as the USD strength has weighed once more. A near term break below $1840 support completed a small top on the 4-hour chart which implies a retreat to $1810. There is now overhead resistance between $1840/$1847 that needs to be overcome to prevent the corrective pressure from mounting.


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  • Silver has broken below the support around $21.60/$21.75 which points to mounting corrective pressure again. This area will be overhead supply today, but unless Silver can get above $22.00 this is a market that is now looking towards the downside. A test of $21.27 support is preferred and below that would re-open the $20.45 low.
  • Brent Crude oil posted a bull failure yesterday within the resistance band $122.20/$124.40 and formed the first negative candlestick for almost two weeks. There is a threat of near term correction, but holding support at $117.60, the reaction early today has been positive. A positive close today would help to settle corrective nerves.

Indices: Wall Street is settled today after a pullback correction threatened the recovery yesterday. European markets are holding ground this morning. 

  • S&P 500 futures encouragingly found support on a pullback yesterday, at the 4100 breakout, almost to the tick. With the RSI still above 50 on the daily chart, this is consolidating the recent gains. If 4100 can continue to hold then the prospects of a continuation of the recovery will remain solid. Near term, resistance has formed at 4201 and this needs to be overcome to re-ignite a test of key resistance at 4300.
  • German DAX still looks strong in a recovery having broken above 14,320 resistance. However, the mid-April lower high at 14,602 remains a barrier to overcome to open the bigger test of resistance at 14,800/15,000. The support around 14,220/14,320 needs to continue to hold and then near term slips will be seen as a chance to buy. Initial support is at 14,350. 
  • FTSE 100 could be a canary in the coalmine for the recovery of indices. The UK index is starting to find the key resistance between 7624/7695 as a significant barrier. A bull failure yesterday is again being repeated this morning as gains have been sold into. Below 7575 support would be a concern but a breach of 7540 would signal another near term swing lower. 


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