Espresso Morning Call: USD gains as trends strengthen again

What we are looking for

• USD strengthens again: With US Treasury yields jumping as bond markets open again following the US public holiday, the USD continues to strengthen versus major forex.
• Indices fall again: Risk appetite remains negative. US futures are just under -1% with European indices trading similarly lower in early moves.
• Commodities fall back: Precious metals have been under mounting pressure to the downside in recent sessions, but now the oil price is also turning lower.
• Data trading: After the UK employment data earlier, there is no further major data due today. However, with several central bank speakers from the Fed, ECB and BoE, traders of the USD, EUR and GBP should be on alert.

Overview

Market sentiment continues on a negative trend. Traders remain worried over the constant hawkish signals from central banks. They also continue to look at the economic data that point to high inflation, economic contraction and labour market tightness. The US Nonfarm Payrolls on Friday reflected the tightness in the US labour market which adds pressure on the Fed to hike rates. 

This morning we have also seen the UK labour market showing similar signs. Record lows on unemployment and rising wages. This points to the Bank of England hiking by at least 75 basis points, and maybe as much as 100bps in November. Furthermore, the dysfunction in the UK Gilt (government bond) market is forcing the Bank of England to continue to intervene. An announcement this morning to extend its Gilt purchases to index-linked gilts too, and up the daily limit to £10bn. The likely aggressive tightening of the BoE at the same time as a need to intervene in bond markets will only add to market concerns.

Major market moves continue to see the USD strengthen across major forex. US Treasury yields are within touching distance of their September highs again. This is souring risk appetite, with commodities falling again and equity markets also lower.  

The economic calendar is all about central bankers today. There are a couple of Fed speakers to watch for (Harker and Mester). However, elsewhere there are also important speeches that will impact EUR and GBP. The ECB’s chief economist Philip Lane has the power to move the EUR, whilst GBP traders will be watching out for the Bank of England Governor Andrew Bailey.

Today’s news

Market sentiment continues to dive: The negative sentiment on major markets in the wake of Friday’s US jobs report continues to play out this week. USD maintains its trend of strength, with commodities and indices lower.

Treasury yields tick higher once more The 10-year yield is close to 4.02% and the 2-year is near 4.36%. These are the previous September highs.

UK unemployment falls to record lows: The jobless rate fell to 3.5% in August which is the lowest level since 1974. The consensus forecast was for the rate to stay at 3.6%. This also came with wage growth (not including bonuses) increasing to 5.4% (5.3% exp). With inflation at 9.9%, this will all maintain the pressure on the Bank of England to hike aggressively in the November meeting. The rate hike could potentially be +100 basis points.

Fed’s chief dove Brainard reiterates restrictive policy stance: Lael Brainard is arguably the most dovish on the FOMC. She believes that policy will need to be restrictive for some time and it will take time to bring inflation down.

Cryptocurrencies continue to drop back: Crypto remains closely aligned with the outlook for risk appetite. Bitcoin fell yesterday and is lower again today, down -0.8% at $19100. Ethereum is down -1.8% at $1284.

Two Fed speakers today: Patrick Harker (2023 voter, hawkish) speaks at 15:30 GMT, with Loretta Mester (2022 voter, very hawkish) speaking at 16:00 GMT.

Other central bankers today: There are a few more speakers for the ECB and Bank of England too. The ECB’s chief economist Philip Lane is speaking at 12:45 GMT, he is seen as being very dovish on the Governing Council. For the Bank of England, Governor Andrew Bailey is speaking at 18:35 GMT, along with Jon Cunliffe (slightly dovish) just before him at 18:00 GMT. Furthermore, the Swiss National Bank Governor Jordan is speaking at 16:00 GMT.

Economic Data:

• There are no more major economic announcements due today. 

Major markets outlook

Broad outlook: Market sentiment remains negative. 

Forex: USD is strong again, even if the EUR has held up well. Once more, AUD is struggling, CAD is also lower as oil is falling back. 

• EUR/USD fell again yesterday with a breach of the support at 0.9735. This puts the pair decisively on the road to a test of the lows at 0.9535. There has been a minor tick higher this morning, but there is initial resistance 0.9735/0.9750 and rallies continue to be seen as a chance to sell. A rebound above resistance at 0.9815/35 would be a more considerable move. The next support is at 0.9635.
• GBP/USD has been edging lower in recent sessions and is now breaking the support at 1.1025. A close under 1.1000 would confirm that a deeper correction is developing. Momentum indicators remain negatively configured and rallies are seen as a chance to sell. Initial resistance is at 1.1225. Under 1.1000 the next support band is 1.0760/1.0915.
• AUD/USD continues to drive lower having decisively broken the near-term key support at 0.6363 and is moving sharply lower. The move to a new two-and-a-half-year low is now testing the next support at 0.6250. The daily RSI is confirming the breakdown with a move below 30. We favour using rallies as a chance to sell, but this is a move that is strongly negative on momentum. The old breakdown support at 0.6363 is now a basis of resistance.

Commodities: The sharp sell-offs on precious metals continue. However, oil is also now starting to correct.

• Gold has turned sharply lower in the wake of the US payrolls data. A move back under $1700 also broke the old pivot around $1680. If there is a decisive break below $1680 which is a key negative signal (back under the 21-day moving average too). The next downside test is $1659 and then $1641. Once more we see near-term rallies as a chance to sell. The initial resistance is once more $1680/$1690. 
• Silver continues to sharply retrace the previous bull run higher of last week. The swing back lower is back under the near-term pivot at $19.90/$20.and this is now being seen as a basis of resistance. The next support is $19.00/$19.25.
• Brent Crude oil is starting to fall away. Having hit a high of $99.50 the market posted a “Dark Cloud Cover” candlestick yesterday and is retreating this morning. This plays into a new corrective move. The initial support band of $96.60/$98.30 has already been breached which questions the bull control. Furthermore, if the market falls back through the bottom of the $93.25/$96.60 support band then the corrective momentum will decisively take hold.

Indices: US markets continue to fall back towards their early October lows. European indices are following their lead.

• S&P 500 futures continue to fall away and a retest of the 3571 support could easily be seen today. A breakdown would be near two-year lows and open the next leg of the bear market. There is minor support around 3515 but the next key support is not until 3220. Yesterday’s bull failure at 3667 is now the initial resistance for rallies.
• German DAX continues to trend lower despite the positive candle yesterday. Near-term rallies continue to be seen as a chance to sell. This is leaving initial resistance now between 12400/12485. The corrective configuration on the RSI continues to point towards further downside below initial support at 12107 for a test of the recent low at 11796.
• FTSE 100 has been tentative in recent sessions but continues to fall away. Intraday rallies continue to be sold at lower levels and with the market down once more today a retest of the October low of 6781 is increasingly likely. Initial resistance is 7003/7025.

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.