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by Charalambos Pissouros

Market Sentiment Improves, Australia’s CPIs Enter the Limelight

European shares traded in negative waters yesterday, mainly dragged by travel stocks. However, sentiment took a 180-degree spin during the US session, with all three of Wall Street’s indices ending their session positive. The somewhat sanguine morale rolled over into the Asia session today as well. As for tonight, during the Asian session Wednesday, the main release on the agenda is probably Australia’s CPIs for Q2.

Equities Rebound During and After the US Session

The US dollar traded mixed against the other G10 currencies on Monday and during the Asian morning Tuesday. It gained against CHF, NOK, and NZD in that order, while it underperformed versus SEK, EUR, and CAD. The greenback was found virtually unchanged against GBP, AUD, and JPY.

USD performance G10 currencies

The weakening of the Swiss franc suggests that markets traded in a risk-on fashion. However, the weakening of the risk-linked Kiwi and the fact that the greenback failed to capitalize against the yen point otherwise. Thus, in order to clear things up with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, most of the major EU indices ended their session in negative waters, with the exception being the German DAX, which closed virtually unchanged. Nonetheless, sentiment took a 180-degree spin during the US session, with all three of Wall Street’s main indices gaining on average 0.95%. The somewhat sanguine investor morale rolled over into the Asian session today as well. Although Japan’s Nikkei slid 0.31%, China’s Shanghai Composite and Hong Kong’s Hang Seng gained 0.35% and 0.48% respectively.

Major global stock indices performance

European markets traded in the red, mainly dragged by travel stocks, after Britain imposed a two-week quarantine on travelers returning from Spain, following the surge in coronavirus infections. On top of that, Ireland’s Ryanair cut its annual passenger target by a quarter and warned that a second wave of infections could bring that number even lower. Lufthansa and Air France slid as well after the UK government said that it is watching closely the virus situation in both Germany and France.

However, the picture was totally different during the US session, with investors betting on some of the most high-profile stocks ahead of their earnings reports. Apple, Amazon, Facebook, and Alphabet, which are schedule to publish their earnings this week, were among the top boosters, with Netflix and Microsoft also rising. It seems that market participants took the opportunity to jump back into those stocks after the latest corrective retreat, enhancing our view that the heightened tensions between the US and China, combined with the acceleration in global infections, are just resulting in deep downside corrections, for now. Reports that Moderna Inc’s virus vaccine may be ready for distribution by year-end may have also fueled the rebound in the equity world, which dragged into the Asian session today.

Moving ahead, investors are likely to pay extra attention to the FOMC decision, due to be announced tomorrow, looking for clues as to how ready officials are to act again if the situation worsens. They may also be eager to find out whether the US Congress will reach consensus on a new coronavirus-aid bill. Yesterday, the Republicans raced to complete details of their USD 1trln proposal, which is likely to include a reduction in emergency unemployment benefits from USD 600 to USD 200. That said, the proposal would need to be negotiated with Democrats, who see it as a not-sufficient support. Their proposal is for a USD 3trln plan. In our view, for equities to continue yesterday’s rebound, a common ground should be found before Friday, when the enhanced unemployment benefits expire, and the agreed plan has to be as close as possible to Democrat’s proposal. Anything near the 1trl, or even lower, may come as a disappointment. This plan is not considered insufficient only by Democrats, but also by many market participants.

Nasdaq 100 – Technical Outlook

After declining in the end of last week, Nasdaq 100 found good support near a short-term upside support line taken from the low of June 15th. We can now assume that this initial move lower might have been a corrective one, as the price has rebounded from that upside line, suggesting there could be more upside to come. For now, we will take a positive approach and continue aiming for slightly higher areas.

A push above today’s current high, at 10769, may invite a few more buyers into the game, who might lead the index further up. Nasdaq 100 could then travel to the high of July 23rd, at 10950, which may provide a temporary hold-up. That said, if the bulls remain unwilling to give up, a break of that obstacle might open the door for a move to the all-time high level, at 11070, reached on July 13th.

On the downside, if the aforementioned upside line suddenly breaks and the price also falls below the 10315 zone, which is the low of last week, that could spook the bulls from the field temporarily. More bears may join in and help bring Nasdaq 100 even lower. The index might drift to the 10182 obstacle, or even to the 10088 area, marked by the lowest point of July. That area might halt the slide, or even allow the price to rebound somewhat. However, if Nasdaq 100 stays below the 10315 zone, the sellers may take advantage of the higher price and push it down again. If this time the 10088 hurdle fails to provide support and breaks, that would confirm a forthcoming lower low and could lead the index to the low of June 30th, near the 9950 level.

Nasdaq 100 4-hour chart technical analysis

Will Australia Slip into Deflation?

As for tonight, apart from headlines surrounding the broader market sentiment, Aussie traders may also pay attention to Australia’s CPIs for Q2.The headline CPI rate is forecast to have fallen into negative waters, to -0.4% yoy from +2.2%, while the trimmed mean rate is anticipated to have declined to +1.4% yoy from +1.8%.

Australia's CPIs inflation

At its latest meeting, the RBA kept the targets for its cash rate and the yield on 3-year government bonds unchanged at 0.25%, adding that they remain prepared to scale-up bond purchases again if deemed necessary. Officials noted that the worst of the global economic contraction may have now passed, but still, the outlook remains uncertain and the recovery is expected to be bumpy and dependent upon containment of the coronavirus. With all that in mind, and also considering the newly adopted lockdown measures in the state of Victoria, a deflationary CPI print may raise speculation that the RBA may indeed consider scaling up again its QE purchases at some point soon.

This could prove negative for the Aussie, but we don’t expect it to prove so determinant with regards to its broader trend. We believe that the risk-linked currency will stay mainly driven by developments surrounding the broader investor morale. If the US Congress agrees on a decent stimulus package, the currency is likely to get benefited, while the opposite may be true if there is a disappointment. In case sentiment remains supported, we prefer to exploit any potential rebound in the Aussie against the safe havens, which tend to come under selling interest during periods of market optimism, like the US dollar and the Japanese yen.

AUD/USD – Technical Outlook

Although AUD/USD continues to form higher lows, it is currently struggling to overcome the high of last week, at 0.7182. That said, the pair is still balancing above a short-term upside support line drawn from the low of July 20th. If the rate continues to trade above that upside line, it has a good chance of rebounding again. However, we would prefer to wait for a break above last week’s high first, before examining higher areas.

If AUD/USD gets a push above the aforementioned 0.7182 barrier, that may attract more buyers into the arena, as such a move would confirm a forthcoming higher high. The pair could then drift to the 0.7206 hurdle, marked by the highest point of April 2019, where it may get a temporary hold-up. That said, if the buying is still strong, the bulls might give AUD/USD another boost and lift it above that hurdle, potentially targeting the 0.7245 level. That level marks the high of February 6th, 2019.

Alternatively, if the previously-discussed upside line breaks, this may open the way to some lower levels, especially if the rate also slides below the 0.7106 hurdle, marked by an intraday swing high of July 24th. More sellers could join in and drive the pair towards Friday’s low, at 0.7064, a break of which might set the stage for a drop to the 0.7037 zone. That zone marks the high of July 15th.

AUD/USD 4-hour chart technical analysis

As for Today’s Events

The only releases on the calendar worth mentioning are the US Conference Board consumer confidence index for July and the API (American Petroleum Institute) weekly report on crude oil inventories. The CB index is anticipated to have declined to 94.5 from 98.1, while, as it is always the case, no forecast is available for the API report.

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