Espresso Morning Call: USD selling pressure mounts on Monday

What we are looking for

• USD weakening to continue: Friday’s US data has increased expectations of the US moving towards recession. With expectations of Fed tightening reducing, the USD is under selling pressure on major forex pairs.
• Indices are rallying: Indices are being buoyed by the expectations of a less aggressive Fed tightening. US futures are slightly higher this morning (c.+0.1% higher) although off earlier highs. European indices have started slightly more positive (c. +0.2% higher).
• Commodities rallying too: Precious metals have stormed higher since Friday, whilst oil has formed support and has picked up well today.
• Data traders: It will be a relatively quiet day for data traders. The EUR might get some action from any surprise in the Eurozone Unemployment. However, the consensus being unchanged and being data for November, this may not move markets too much. 

Overview

Friday’s tier-one US data has caused a significant shift in market pricing. The Nonfarm Payrolls report (US Employment Situation) was fairly much in line with expectations, however, under the bonnet showed some interesting trends. Jobs growth was not as strong as other employment metrics had led us to believe (JOLTs, ADP especially), whilst there is a lead lower in the temporary employment data. It is seen that temporary employment is the first to be cut back into a recession. Also, there is a decisive decline in wage growth too, which reduces inflation pressures. Add in the ISM Services PMI falling below 50 and into contraction and this has significantly hit US bond yields. 

A sharp move lower in US yields is weighing on the USD but also boosted risk appetite. This move has been sustained into the new trading week. Traders will now be watching for the US CPI inflation data on Thursday. Any downside surprises there will certainly bring forward expectations of how soon the Fed may be forced into cutting rates.

It is is a relatively quiet start to the week on the economic calendar. Eurozone Unemployment is the main announcement and that is expected to be unchanged at 6.5%.

Today’s news

Market sentiment remains positive: The positive sentiment from late Friday in the US session has been held into Monday. There is arguably a slightly more cautious feel, with equity markets holding back slightly. However, a USD decline is broadly risk positive still.

Treasury yields have rebounded slightly: Yields were sharply lower across the curve on Friday, but there is a slight unwind higher this morning, retracing a small amount of the move.

Risk appetite boosted as China re-opens its borders: Thousands of travellers are going into China as border restrictions have almost entirely been removed. This is providing a boost to commodities markets and Asian stock markets. It is also allowing the outperformance of AUD and NZD amongst major forex.

Political risk in Brazil: Supporters of former President Bolsonaro took over government buildings and the Congress over the weekend. The military has declared a federal security intervention until 31st January in Brasilia. 

Cryptocurrencies are buoyed by improved risk appetite: Crypto jumped on Monday. Bitcoin is +1.7% at $17200 with Ethereum +3.5% at $1310.

Economic Data:

• Eurozone Unemployment (at 10:00 GMT) Headling jobs rate for the Euro area is expected to remain at 6.5% in November (6.5% in October)

Major markets outlook

Forex: A sharp turnaround has seen the USD falling decisively across major forex. The higher-risk, pro-cyclical currencies (AUD and NZD) are the outperformers.

• EUR/USD has decisively turned higher since Friday. After a choppy series of candles, Friday’s bullish engulfing is a positive development that is now opening a retreat of the highs again. The resistance between 1.1712/1.1735 (December highs) is preventing a retest of the key 1.1785 May 2022 highs. Momentum has picked up again, but more importantly, the market has left a key low at 1.0480 within the 1.0440/1.0495 breakout support band.
• GBP/USD has ended the drift lower of recent weeks with a bullish engulfing candle on Friday. This has swung the market higher and through the resistance at 1.2125 and back above the 21-day moving average. With RSI momentum confirming the improvement the market is continuing higher today. A move above 1.2240 minor resistance re-opens the 1.24450 December high. There is a key low now in place at 1.1840. Initial support is 1.2075/1.2125.

• USD/JPY The technical outlook was questioned last week by the move higher but has turned sharply lower again as US Treasury yields fell on Friday. The downtrend has been creaking without seeing a confirmed break. We continue to see the falling 21-day moving average (c. 133.80 as a key gauge of resistance. The bull failure at 134.75 also strengthens resistance now overhead at 133.60/134.75. RSI momentum remains negatively configured to suggest selling into strength for a retest of the 129.50 low. The initial resistance is 132.95/133.25.  

Commodities: Gold remains strong whilst silver is less bullish. Oil is looking to build from near-term support.

• Gold has once more accelerated higher following Friday’s bull move and is testing the key resistance of the June 2022 high at $1789. RSI momentum is strong and any hints of negative divergence have been removed. The market has just pulled back slightly from an early move to $1880 this morning, but we look to use weakness as a chance to buy. The breakout and pullback at $1825 is prime support now, just above the two-month uptrend and rising 21-day moving average. Initial support is at $1859/$1865.
• Silver picked up on Friday to improve what looked to be a struggling rally. However, there is still a tired feel to the move that leaves a far less positive outlook than compared to gold. With a two-month uptrend broken and questions over arguably faltering momentum, the RSI needs to hold up above 50. The support of the low at $23.11 is now key, as is the resistance at $23.88. Ranging conditions could begin to take hold.
• Brent Crude oil has been building support around $77.50/$77.80 in recent days and has picked up decisively this morning. The move now needs to sustain as the last two sessions have seen intraday bull failures. Reaction to the initial resistance at $81.00/$81.55 will be a gauge now. Holding a move above this band would improve the outlook and potentially bring the resistance at $86.75 back into play. 

Indices: Equities have picked up well from Friday and are looking to hold the gains today.

• S&P 500 futures have rallied through the top of a three-week range between 3788/3919 and are looking to now build a move higher. The key is a closing break above the old pivot band 3912/3945. RSI momentum has picked up above 50, and encourages the move higher. Above 3945 confirms a small base pattern move that implies a move towards 4050.
• German DAX continued to move higher on Friday and closed through the resistance of the old highs between 14605/14680. Another positive close above the resistance would continue the improvement. However, there is massive resistance of an old long-term pivot band between 14700/14800 that also needs to be cleared. There is good support now at 14380.
• FTSE 100 has accelerated higher and has moved to test the top of the crucial long-term resistance at 7695/7738. An intraday five-year high has been hit this morning but has initially pulled back slightly. This is an area where so many rallies fail over the past few years have failed. It makes this move extremely important that it continued now. There is a positive bias to momentum but the RSI is now hitting 70 and could start to become overbought. Initial support for a pullback is 7635/7695.

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