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by Charalambos Pissouros

Oil Gains on Tanker Attacks, Investors Await US Retail Sales

Oil prices rose yesterday following attacks on two oil tankers in the Gulf of Oman. The attacks sparked fresh tensions between Iran and the US and generated concerns over supply flows through one of the globe’s most vital sea lines. Today, investors will turn attention to the US retail sales as they try to figure out whether and by how much the FOMC is willing to cut rates in the months to come. In the UK, Boris Johnson took a strong lead in the first voting round among Conservative MPs, while in Switzerland, the SNB stood pat, revising slightly higher its inflation projections.

Oil Rebounds Following Attacks on Oil Tankers, US Retail Sales in Focus

The dollar traded higher against all but three of the other G10 currencies. It gained the most against NZD, which came under strong selling interest after the slide in New Zealand’s Business PMI for May, while the second and third place were taken by NOK and SEK respectively. The dollar underperformed somewhat only against CHF, while was found virtually unchanged against CAD and JPY.

USD performance G10 currencies

The strengthening of the franc and the resistance of the yen suggest that investors’ appetite remained soft yesterday as well. However, although most Asian indices closed in negative territory today, that was not the case with the EU and US bourses yesterday. Most EU and US indices ended their sessions in the green, with metal and mining companies helping European stocks, and US energy shares lifting Wall Street.

Energy shares gained on the back of the rebound in oil prices, which was triggered by attacks on two tankers in the Gulf of Oman.  The attacks sparked fresh tensions between Iran and the US and generated concerns over supply flows through one of the globe’s most vital sea lanes. Both Brent and WTI gained 2.32% and 1.86% respectively, a day after they suffered due to a surge in US crude inventories.

With data pointing towards growing US production and the OPEC cutting its forecasts for growth in global oil demand, we remain skeptical as to whether yesterday’s recovery can last for long. The broader trend in oil prices remains negative, and thus, we would not rule out a U-turn back south soon. Nevertheless, with OPEC and its allies due to meet in the coming weeks to decide whether to keep the previously-decided production cuts, we would not be very confident on longer-term declines either, as the group appears more likely, than not, to extend the output curbs.

Now back to the dollar and the broader market sentiment, today, investors are likely to turn their attention to the US retail sales data for May, as they try to figure out whether and by how much Fed officials are willing to reduce interest rates in the months to come. Headline sales are expected to have rebounded to +0.7% mom after sliding 0.2% in April, while the core rate is anticipated to have risen to +0.5% mom from +0.1%. Such positive data may encourage a few investors to take some of their Fed cuts off the table, and thereby support somewhat the greenback.

Fed funds futures Market vs FOMC interest rate expectations

However, the event that would result in a clearer picture with regards to the Fed’s intentions, and thereby affect market expectations, is next week’s FOMC gathering, and especially the Committee’s new “dot plot”. According to the Fed funds futures, a 25bps rate decrease is now more-than-fully priced in for August, while a second one is nearly factored in for October. So, having that in mind, a downside revision of the 2019 median dot just to point only one cut for this year may not be enough for investors to increase their risk exposure and sell the dollar. This may come as a disappointment and could even have the opposite effect, namely lower equities and a higher dollar. In our view, for stock indices to rally and the dollar to slide, a plot pointing towards 2 cuts this year (or even more) is needed.

Brent Oil – Technical Outlook

Brent oil has been drifting lower from around the end of April, trading below a tentative downside resistance line taken from the high of April 24th. The commodity is also below another short-term tentative downside line drawn from the high of May 20th, which is keeping the price down. That said, recently, we saw the 59.00 support area holding Brent oil twice from falling, which could become an important level on our radar. For now, we will stay cautiously-bearish and wait for that confirmation break of the 59.00 zone, before examining further declines.

As mentioned above, a price-drop below the 59.00 hurdle would confirm a forthcoming lower low and could send Brent oil to the 57.15 obstacle, marked by the low of January 8th. If the commodity gets a hold-up there, we may even see a small rebound. But if the price stays below the aforementioned short-term downside line, this could trigger another round of selling, potentially sending Brent below the 57.15 area and aiming for the 56.35 mark, which is the high of January 3rd.

On the other hand, if the aforementioned short-term downside line breaks and the price climbs above the 63.30 barrier, marked by the high of June 10th, this could invite the bulls back into the field, at least temporarily. This could increase the commodity’s chances to push further up, potentially bypassing the 64.50 obstacle and testing the 65.90 hurdle, marked by the lows of March 22nd and 28th, also near the low of May 23rd. This is where Brent oil could meet its 200 EMA, which may provide some initial resistance and bring the price back down a bit. That said, if the price still remains above the 63.30 zone, this might be seen as a good sign for the buyers, who might drive the black liquid back up again for a larger correction. A break above the 65.90 obstacle, could open the door to the 66.60 level, marked by the low of May 29th.

Brent crude oil 4-hour chart technical analysis

USD/JPY – Technical Outlook

From the end of April, USD/JPY continued to move lower, trading below its short-term downside resistance line drawn from the high of April 24th. That said, lately, the pair tried to recover some of its losses after finding support near the 107.82 zone and shifting back up closer to the above-mentioned downside line. But the pair failed to reach that downside line and now started slightly moving sideways. We will remain careful, for now, and wait for a confirmation break through one of our important levels, before examining a further directional move.

In order to continue comfortably with the prevailing trend, we would like to see a break below the 107.82 support area, which held the rate from falling on June 4th and 5th. Such a move would confirm a forthcoming lower low and could send the pair to its next potential support zone, at 107.40. If that zone fails to withstand the bear pressure, a break of it could drag USD/JPY further down, bringing the rate to the 107.00 hurdle, which is marked by the intraday swing low of January 3rd.

On the other hand, in order to start examining higher resistance levels, at least in the short run, we will wait for a clear break above the aforementioned downside line and a move above the 109.15, which marks the lows of May 14th, 15th and 29th. This move could change the course of the short-term trend to the upside, where the next potential resistance zone could be seen around the 109.65 level, marked near the high of May 28th. The rate could stall around there, or even retrace slightly lower, but as long as it remains above the previously-mentioned downside line, we will continue aiming higher. If the bulls decide to take advantage of the lower rate, the pair might accelerate once again, bypass the 109.65 obstacle and aim for the 109.93 level, which is the high of May 30th.

USD/JPY 4-hour chart technical analysis

Boris Johnson Takes Strong Lead, SNB Stands Pat

Flying from the US to the UK, yesterday, Conservative MPs held their first round of voting in the process of finding Theresa May’s replacement. Boris Johnson took a strong lead, gaining 114 votes, with Foreign Secretary Jeremy Hunt taking the second place with 43 votes. The last three contenders, Andrea Leadsom, Esther McVey and Mark Harper were eliminated. The second round is scheduled for next Tuesday, and candidates need 33 votes to make it through. The pound’s reaction was positive following the announcement of the results. Perhaps this was a “buy the fact” market response, as the outcome was more or less expected and thereby, largely priced in. That said, the voting-related recovery remained short-lived, with Cable coming back under selling interest, to retest the lower end of the short-term range it’s been recently trading in, at around 1.2670.

As for our view, we stick to our guns that with Boris Johnson being the most likely candidate for replacing May, the likelihood of a no-deal Brexit remains decent. Yes, on Wednesday he said that he is not aiming for such an outcome, but he did not rule it out either. He remains willing to do whatever it takes in order to ensure that the UK leaves the EU on October 31st, which means that if no accord is found on time, he may not hesitate to pull the plug.

We also had a Swiss National Bank monetary policy decision yesterday. Officials kept the sight deposit rate unchanged at -0.75%, reiterating that they will remain active in the FX market as necessary and that the franc remains highly valued. They also introduced a new rate, the SNB policy rate, which, from now on, will be used for communicating monetary policy. The policy rate is also at -0.75%. What’s more, officials upgraded their inflation projections, which may have been the trigger behind the franc’s modest strength at the time of the release, but they still see the yoy CPI rate falling short of their 2% objective at the end of their forecast horizon. Specifically, they see the CPI rate being at +1.5% yoy in Q1 2022, and remember that this is conditional upon interest rates staying at current levels.

As for the Rest of Today’s Events

During the European morning, we have Sweden’s CPIs for May. The CPI rate is expected to have ticked down to +2.0% yoy from +2.1%, while the CPIF one is forecast to have remained unchanged at +2.0% yoy. That said, as we noted several times in the past, we prefer to pay more attention to the core CPIF metric, which excludes energy. At their latest gathering, Riksbank policymakers kept their key repo rate unchanged at -0.25%, but they decided to push back the timing of when they expect interest rates to rise further. While they have previously noted that the next rate increase will be “during the second half of the year”, this time, Swedish policymakers said that “The repo rate is expected to be raised again towards the end of the year or at the beginning of next year”.

Sweden CPIs inflation

In April, the core CPIF rate ticked up to +1.6% yoy from +1.5%, while GDP data showed that the Swedish economy slowed less than expected in the first three months of 2019, keeping the door open for a hike by year end. However, the ECB’s decision to push back the timing of when it expects rates in Eurozone to start rising may have put a Riksbank hike this year into doubt, and a potential slowdown in Swedish inflation could start raising speculation that the Bank might consider the start of next year as a better option for acting. In any case, we prefer to wait for the upcoming Riksbank meeting in order to get clear signals of whether and when Swedish policymakers could bring interest rates up to zero.

In the US, apart from retail sales, we also get industrial and manufacturing production for May. Both IP and MP are expected to have rebounded 0.2% mom and 0.1% mom, after both sliding 0.5% in April. The preliminary UoM consumer sentiment index for June is also due to be released, alongside the 1-year and 5-year UoM inflation expectations.

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