Espresso Morning Call: Slight hints of a USD revival appear

What we are looking for

• USD is trying to settle after significant corrective pressure: This may only be early session calm, but there are some signs of support forming for the USD against major forex.
• Indices slip back slightly: After some strong recent gains, markets are slipping back slightly. US futures are drifting off and this is weighing on European indices in early moves.
• Commodities also slip back: After Friday’s strong gains on precious metals, moves consolidated yesterday and are now drifting lower this morning. It is a similar move on oil.
• Data traders: EUR traders will be keeping an eye on EU Retail Sales. Aside from that, it is another quiet day for data traders.

Overview

After the considerable corrective selling pressure on the USD following Friday’s Nonfarm Payrolls report, the move continued yesterday. This was especially the case moving into the US session. These moves have taken several major markets towards an important crossroads. Important resistance and key downtrends are being tested on markets such as EUR/USD, GBP/USD, AUD/USD and Gold. The moves have been predicated on an assessment of a less hawkish Fed and fuelled (certainly on Friday) by lower yields). However, yields are starting to creep higher again. We are still mindful that this USD corrective move could be short-lived. 

With yields drifting higher once more this morning, there is a basis of support forming for the USD. There is little data of note until Thursday’s US CPI inflation and this may just be a sense of consolidation has set in. The US Midterm elections are held today and if the Democrats lose control of both the Senate and the House of Representatives, it would make for a very difficult last two years for President Biden. This could weigh on risk appetite once more.  

It is another quiet day on the economic calendar. The only data of note are the EU Retail Sales. Consensus is expecting slight growth month-on-month which would mean a slight improvement in year-on-year sales. However, sales remain negative on a 12-month basis. 

Today’s news

Market sentiment begins to sour slightly: Sentiment has been positive in recent sessions but has just soured slightly this morning.

Treasury yields tick higher: Yields have stabilised this week and are starting to edge back higher once more.

US Mid-terms today: The US votes in the mid-term elections today. Two years into his Presidency, Joe Biden looks set to lose control of the House of Congress, whilst the Senate looks in the balance.

RBNZ Governor Orr to continue: Governor Orr has been reappointed for another five years.  

Cryptocurrencies falling hard: Selling pressure has taken hold this week and crypto is falling again this morning. Bitcoin is -4.3% at $19800, with Ethereum -5.3% at $1492.

Economic Data:

• EU Retail Sales (at 10:00 GMT) Sales are expected to be +0.4% MoM in September, meaning a slight improvement in YoY sales to -1.3% (from -2.0% in August)

Major markets outlook

Broad outlook: is an edge back towards USD strength and negative risk appetite. This is weighing on commodities and indices.

Forex: The USD is showing mild outperformance versus major forex. The JPY is holding up relatively well.

• EUR/USD a huge swing in sentiment continued yesterday with a move above parity resistance. However, this move above parity needs to now hold as the USD starts to reclaim some lost ground. If this latest move can stick then the outlook would be more neutral near to medium term, especially with the RSI oscillating between 40/65 for the past five weeks. It would need a decisive break above 1.0093 for a shift to a more positive outlook. Given how volatile the moves are, this leaves the potential for false breaks though. Initial support is at 0.9965 with a move back below 0.9900 renewing the downside bias.
• GBP/USD has swung sharply higher in the past two sessions and is looking to break free of not only the resistance band between 1.1380/1.1500 but also the seven-month downtrend that falls at 1.1560 today. However, the move has just eased back from this important test. There is support in the band 1.1380/1.1420 that needs to hold for the upside pressure to sustain. The key October reaction high is at 1.1638. We still favour selling into strength for now but are cautious as this test continues. 
• AUD/USD has rallied back to test the three-month downtrend. Resistance at 0.6490 is an initial barrier under the more considerable price resistance band around 0.6520/0.6545. This is an important crossroads, with RSI momentum just tailing off slightly once more a shade above 50. There is initial support at 0.6405.

Commodities: Precious metals have just eased back after the sharp moves higher. Oil is consolidating.

• Gold has rallied sharply to a test of the key medium-term resistance that is stacked between $1670/$1690. A six-month downtrend is also being tested, along with the 55-day moving average which is a strong gauge of resistance. For now, we still see this move as a bear rally, but a reaction in the coming days to this confluence of resistance will be important. The market consolidated yesterday and is just drifting back today towards initial support at $1657/$1666.

• Silver is just starting to consolidate the massive swing higher. The market has eased back from yesterday’s high of $21.00  and leaves the top of the medium-term trading range at $21.23 intact. This remains a very volatile market and prone to big retracements, so we are cautious about what is a positive bias now. Initial support is at $20.37 and then around $20.00.
• Brent Crude oil broke above $99.50 resistance last Friday and has been testing above $100 for the first time since late August. However, with the market pulling back slightly, there is a feeling of consolidation this morning. However, a six-week uptrend and positive configuration on momentum are leaving a bias of buying into weakness. There is good support now between $96.00/$98.40. Above $101.20 the next important resistance is the $105.20 lower high.

Indices: After two days of decent gains, equity markets are into a bout of consolidation this morning.

• S&P 500 futures have bounced well since Friday, closing higher again yesterday. The market is testing the old resistance at 3820 but has eased back slightly this morning. However, with the RSI hovering around 50, the move needs to continue higher to suggest a sustainable improvement. The buyers need to respond by pulling the market above 3820 to re-engage the positive outlook. Support at 3705 is strengthening with an old pivot at 3757 now a basis of initial support. 
• German DAX closed higher again yesterday however, for now, is still just shy of clearing the resistance of the September high at 13560 resistance. Holding a breakout would decisively improve the outlook and be on course for a test of the key medium-term resistance at 13970. The support at 13017 is now an important higher low with initial support at 13370/13440.
• FTSE 100 has been less encouraging since Friday’s huge move higher. A pullback has lost the upside momentum for the time being and the market is struggling again today. However, with the strength of RSI (above 60), we look to use near-term weakness as a chance to buy within a three-week uptrend. There is decent near-term support between 7179/7228.

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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