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by Charalambos Pissouros

Strategic Report, 2019 Newsletter 24

Technical Analysis

 1. USD/JPY WEEKLY OUTLOOK

REVIEW

USD/JPY ended the week virtually unchanged, but at the same time remained below a short-term downside resistance line taken from the high of April 24th. There is a possibility to see some further correction to the upside, before a continuation move to the downside. This is why for now, we will stay cautiously-bearish in the short run.

OUTLOOK (SCENARIO A / B)

USD/JPY is trying to climb back and regains some of its losses made in May. But if the pair struggles to overcome the aforementioned downside resistance line, this might result in another round of selling, potentially bringing the rate back to the 108.20 mark, a break of which could clear the path towards the 107.75 zone, which is the low of January 10th and near the low of last week. If the rate falls below the 107.75 zone, this would confirm a forthcoming lower low and could send USD/JPY to the next good support zone, which is a few pips lower, at 107.40, marked near the closing and opening levels of January 2nd and 3rd respectively. 

Alternatively, a break of the aforementioned downside line and a push above the 109.60 area, could lift the rate a bit higher, to test the psychological 110.00 barrier, which could provide some additional resistance. But if that barrier eventually surrenders to the bulls and breaks, this could open the door to some higher levels, where one of those could be around the 110.67 hurdle, marked by the high of May 21st.

USD/JPY daily chart technical analysis

 2. GBP/USD WEEKLY OUTLOOK

REVIEW

Finally, GBP/USD managed to close the week well in the positive zone, but still below one of its key resistance areas at 1.2750, marked near the highs of May 20th and 27th. Given that the pair broke above its short-term downside resistance line taken from the high of May 6th, and our oscillators have showed some signs of bottoming, we will take a more positive approach and aim for slightly higher areas, at least for now.

OUTLOOK (SCENARIO A / B)

A further push higher and a break above the 1.2750 barrier, would confirm a forthcoming higher high and send the pair towards the next potential resistance area, at 1.2815, marked by the high of May 21st. The rate could get held around there, or even correct back down a bit. But as long as it continues to trade above the 1.2750 zone, we will target the upside again. If this time the 1.2815 hurdle fails to withstand the bull pressure, a break of it could clear the path to the 1.2865 area, which is the lowest point of April.

On the other hand, if GBP/USD falls below the 1.2667 hurdle, marked by the low of June 6th, this could spook the bulls from the field and allow the bears to take control again. Such a move could send the pair further down towards the 1.2607 hurdle, a break of which could set the stage for a possible test of the May 31st low, at 1.2559.

GBP/USD daily chart technical analysis

 3. EUR/SEK WEEKLY OUTLOOK

REVIEW

Last week, EUR/SEK managed to gain some of its previously lost grounds and moved a bit higher. That said, the pair is currently stuck between two lines, the medium-term upside support line drawn from the low of December 31st and the short-term tentative downside resistance line taken from the high of May 13th. As long as the rate continues to trade between these two lines, we will stay neutral and wait for a clear break through one of them, before we get excited with a further directional move.

OUTLOOK (SCENARIO A / B)

A break through the above-mentioned downside line and a push above the 10.682 barrier, could invite more bulls into the field, allowing them to charge the next potential resistance area, at 10.735 obstacle, which is the high of May 27th. If initially, the pair struggles to move further up, we could see the rate retracing slightly back down. But if it remains above the previously-mentioned short-term downside line, the bulls might join in again and drive EUR/SEK to upside, pushing it beyond the 10.735 hurdle and targeting the 10.777 level, marked by the high of May 22nd.

On the downside, a break of the aforementioned medium-term upside support line and a rate-drop below the 10.566 zone, marked by the low of  April 26th, could invite more sellers into the game and send the pair towards the 10.520 support zone, marked by the high of April 23rd. If that zone is not able to withstand the bear pressure, a break of it could lead the rate to the 10.488 hurdle, which is the low of April 24th. This is where EUR/SEK may also test its 200-day EMA.

EUR/SEK daily chart technical analysis

 4. AUD/NZD WEEKLY OUTLOOK

REVIEW

After a disappointing last week, AUD/NZD closed well in the red and remained below its short-term tentative downside line, taken from the high of May 8th. The pair found good support near the 1.0500 area and stayed above it. Given that the New Zealand dollar is slightly on a stronger side than its Australian counterpart, the rate could continue sliding, especially if it drops below the 1.0500 barrier, hence we will take a somewhat bearish stance for now.

OUTLOOK (SCENARIO A / B)

A drop below the 1.0500 hurdle, marked by the low of last week, could send AUD/NZD further down to test the 1.0450 area, marked by the low of April 3rd. The pair might rebound a bit and recover some of its losses, but if the rate continues trading below the 1.0500 obstacle, we may see another leg of selling. If this time the 1.0450 zone fails to withstand the pressure from the sellers, this could push the pair further down towards the 1.0422 level, which marks the lows of March 31st and April 1st.

Alternatively, in order to shift our short-term view to the upside, we will wait until we see a clear break above the aforementioned downside line and a push above the 1.0580 barrier, marked by the high of June 5th. This is when we will target the 1.0630 hurdle, a break of which could lift the rate to the 1.0662 zone, which marks the lows of April 18th and 23rd.

AUD/NZD daily chart technical analysis 

 5.  XAG/USD WEEKLY OUTLOOK

REVIEW

Silver had a great run last week, managing to close heavily in the green. The precious metal closed the week at its psychological 15.00 barrier. Also, the price broke above its 200-day EMA, but failed to close above it. What’s also important is that silver is above its previous medium-term downside resistance line and even though the commodity is sliding right now, we will class such a move as a correction before another leg of buying. For now, we will stay cautiously bullish and observe the price action carefully.

OUTLOOK (SCENARIO A / B)

Silver could travel a bit lower to test the 14.64 hurdle, marked by the high of May 23rd and the low of June 4th, which might provide some support for the rate. If that hurdle continues to hold, then we may see the rate bouncing from there and potentially making its way back up towards the 14.85 zone. A break of that zone could open the door to the highs of last week, near the 15.07 level, which also coincides with the 200-day EMA. 

On the other hand, a drop below the support area at 14.47, marked by the inside swing high of May 29th and the low of May 31st, could invite more sellers into the game and we could see the price sliding to the 14.28 area, which is the lowest point of May. If that area fails to withstand the bear pressure, a break of it would confirm a forthcoming lower low and silver could drift a bit lower, where the next potential target could be around the 14.20 level, marked near the lows of December 2nd and 3rd. 

Silver XAG/USD daily chart technical analysis

 6. BRENT CRUDE OIL WEEKLY OUTLOOK

REVIEW

Overall, Brent oil is still trending lower. Even though it closed last week in the positive territory, still, the price wasn’t able to travel above its short-term tentative downside resistance line taken from the high of May 20th. As long as that line remains intact, we will continue aiming to the downside, at least for a while more.

OUTLOOK (SCENARIO A / B)

A small push higher could force Brent oil to test the above-mentioned downside line, which, if holds the price down, could invite the bears into the game again. The commodity could then slide to the 61.20 hurdle again, a break of which may open the door to the 59.00 zone, marked by the low of last week. If that zone fails to withstand the bear pressure, a drop below it could send Brent to the 57.10 obstacle, marked by the low of January 8th. 

However, if the aforementioned downside line breaks and the price rises above the 64.00 barrier, marked by the low of March 8th, this could increase the commodity’s chances to move a bit higher for a larger correction. This is when we will aim for the 65.90 area, a break of which could lift Brent oil to the 69.25 level, marked by the high of May 28th. Slightly above runs another short-term downside line, taken from the high of April 24th, which could provide additional resistance.

Brent crude oil daily chart technical analysis

 7. EURO STOXX 50 WEEKLY OUTLOOK

REVIEW

Last week, the Euro Stoxx 50 index closed strongly in the positive territory, wiping out all the losses made the week before. The index also managed to break and close above its short-term tentative downside line taken from the high of April 30th. Also, our oscillators started pointing to the upside again, hence why we will continue aiming higher, at least in the short run.

OUTLOOK (SCENARIO A / B)

If Euro Stoxx 50 overcomes the 3396.00 barrier, marked by the high of May 22nd, this might attract more buyers and the price could get lifted to its next potential resistance zone, at the 3440.50 obstacle, which is the high of May 16th. We may see the index stalling near that area, but if the buying-power is still strong, a break of that obstacle may lead to a test of the 3476.00 zone, which marks the low of May 2nd and the high of May 6th.

Alternatively, a drop below the 3325.50 zone could spook the bulls from the field and allow the bears to take control again. The price may then slide to the 3274.50 hurdle, marked by the low of June 4th. If the index rebounds from there but fails to push itself above the previously mentioned downside line, this could result in another leg of selling. Such a move might break the 3274.50 area and send Euro Stoxx 50 to the 3246 level, which is the low of last week.

Euro Stoxx 50 daily chart technical analysis

 FX Weekly Market Preview 

Weekly Outlook: June 10 – June 14: US CPIs, UK and Australia Jobs Data, SNB meeting

Following hints from several Fed officials that they could cut rates, as well as Friday’s disappointing NFPs, investors are now likely to turn attention to the US CPIs, as they try to figure out when the Fed may consider to start acting. The UK and Australian job reports will also be released. However, with regards to the UK, we expect investors to stay more focused on the political landscape and especially, on headlines pointing to who could be the nation’s new PM. Australia’s employment numbers are likely to attract more attention, as they could prove determinant with regards to the RBA’s future course of action. We also have an SNB meeting, but we don’t expect any change in monetary policy.

On Monday, markets in Australia will be closed in celebration of the Queen’s Birthday. Switzerland’s, Norway’s and Germany’s bourses will also stay closed due to the Whit Monday.

We get data from the UK, Canada and the US. Kicking off with the UK, industrial and manufacturing production data for April are due to be released, as well as the monthly GDP and the trade balance for the month. Both industrial and manufacturing productions are expected to have slid 0.7% and 1.0%, after rising 0.7% and 0.9% in March, something that would drive the yoy rates down to +1.0% and +2.2%, from +1.3% and +2.6% respectively. This is supported by the manufacturing PMI for the month, which slid to 53.1 from 55.1. No forecast is currently available for the monthly GDP, while the nation’s trade deficit is expected to have narrowed somewhat, to GBP 12.96bn from GBP 13.65bn.

UK industrial production vs manufacturing PMI

Given that we already got the PMIs for May, we believe that aforementioned April data are unlikely to prove major market movers. The uncertainty surrounding the UK’s future relationship with the EU appears to be leaving its marks on the economy with the modest expansion among services firms in May barely offsetting the weakness in the manufacturing and construction sectors. According to IHS Markit economist Chris Williamson, the PMIs suggest that the economy remained close to stagnation during the month.

We believe that GBP-traders will stay more focused on the political landscape. On Friday, Theresa May officially stepped down as leader of the Conservative Party, triggering a contest for her replacement. She will keep her position as Prime Minister until her successor is found, and thus market participants will keep their gaze locked on developments pointing to who that person might be. Up until now, the favorite is Boris Johnson, a hardline Brexiteer who wants Britain out of the UK by the end of October, with or without a deal.

Later in the day, the US JOLTs job openings for April are coming out, while from Canada, we get housing starts and building permits for May and April respectively. The US JOLTs are expected to have declined somewhat, while both Canada’s housing starts and building permits are expected to have slowed.

Monday was also the day that US was set to officially impose a 5% tariff rate on Mexican goods imported to the US. However, on Friday, US President Trump said that the US has reached a signed agreement over immigration with Mexico and thus, tariffs against Mexico are indefinitely suspended.

On Tuesday, during the Asian morning, we have Australia’s NAB business survey for May. Although this is not a major market mover, given the RBA’s emphasis on the labor market, we will take a close look to the Labor costs sub index.

Later, during the European day, Norway’s inflation numbers for May are coming out and both the headline and core rates are expected to have held steady at +2.9% yoy and +2.6% yoy respectively. At its latest meeting, the Norges Bank maintained the view that its next hike would most likely come in “the course of the next half-year”, also noting that this could happen in June. With both rates well above the Bank’s objective of +2.0%, as well as above its own projections for the month, we doubt that policymakers will change their minds when they meet next week. We believe that a big disappointment is needed for officials to start worrying whether a June hike would be appropriate or not.

Norway CPIs inflation

From the UK, we get the employment report for April. The unemployment rate is expected to have remained at its 45-year low of 3.8%, while average earnings including bonuses are expected to have slowed to +3.0% yoy from +3.2%. The excluding bonuses rate is anticipated to have declined as well, to +3.1% yoy from + 3.3%. According to the IHS Markit/KPMG & REC Report on Jobs for the month, the rate of starting salary inflation was the softest seen in two years, but temp wages rose at the strongest rate since January. Thus, it’s hard to say to which direction the risks surrounding the earnings forecasts are tilted.

In the US, the PPIs for May are due to be released, just a day ahead of the CPIs for the same month. Both the headline and core rates are expected to have declined to +2.0% yoy and +2.3% yoy, from +2.2% and +2.4% respectively. This could raise speculation that the CPIs, due out on Wednesday may follow suit.

On Wednesday, during the Asian morning, China’s CPI and PPI for May are due to be released. The CPI is anticipated to have accelerated to +2.7% yoy from +2.5%, but the PPI rate is forecast to have declined to +0.6% from +0.9%.

We get CPI data for May from the US as well. The headline rate is forecast to have ticked down to +1.9% yoy from +2.0%, while the core one is anticipated to have held steady at +2.1% yoy. That said, bearing in mind that both the headline and core PPI rates for the month are expected to have slid, we see the risks surrounding the core rate’s forecast as tilted to the downside. The latest escalation in trade tensions led several Fed officials to express willingness to reduce interest rates in order to avert a steep economic downturn. Thus, following Friday’s disappointing NFPs, slowing CPIs may prompt investors to add to their already elevated bets with regards to lower US rates by year end. According to the Fed funds futures, market participants are now fully pricing in a 25bps rate decrease for August, while the probability for something like that happening as early as in July is 66%. Another cut is more than factored in for November.

US fed funds futures Market vs FOMC interest rate expectations

On Thursday, during the Asian morning, Australia’s employment report for May is due to be released. The unemployment rate is expected to have declined to 5.1% from 5.2%, but the net change in employment is anticipated to show that the economy gained 17.5k jobs, less than April’s 28.4k. When they last met, RBA policymakers decided to cut rates by 25bps, to +1.25% from +1.50%, and noted that they will continue monitoring developments in the labor market and adjust policy accordingly in order to support growth and the achievement of the inflation target over time.

ASX 30-day interbank cash rate futures

Thus, investors may pay extra attention to this data set as they try to figure out whether and when the RBA will likely hit the cut button again. According to the ASX 30-day interbank cash rate futures implied yield curve, another rate cut is nearly fully priced in for August. In our view, if the employment numbers come close to their forecasts, we doubt that this would change. We believe that for investors to push back that timing, a tick down in the unemployment rate should be accompanied by a stellar gain in jobs. On the other hand, a disappointment could have the opposite effect, bringing expectations over a cut forward to July.

Later, during the European day, the SNB decides on interest rates. At their latest gathering, Swiss policymakers kept interest rates unchanged at -0.75%, sticking to their guns that they will remain active in the foreign exchange market as necessary, and noting that the franc is still highly valued. They also revised further down their inflation projections. They expected the Swiss CPI rate to be at +1.5% yoy in Q4 2021, well below their 2% target, and this is conditional upon interest rates staying at current levels for the whole forecast horizon.

Swiss CPIs inflation Switzerland

Latest data showed that the Swiss economy accelerated to +0.6% qoq in Q1 from +0.3% in the last three months of 2018, but the CPI slowed further, to +0.6% yoy from +0.7%. Thus, with inflation well below the Bank’s objective, and the Swiss franc strengthening notable lately due to the increased tensions between China and the US, we believe that officials will keep their stance unchanged. On May 10th, SNB Chairman Thomas Jordan said that the Bank needs to stick to its current policy framework of negative rates and foreign exchange interventions to protect the country’s economy, which adds more credence to our view.

With regards to the European data, we get Germany’s final CPI for May and Eurozone’s industrial production for April. As usual, the final German prints are expected to confirm their preliminary estimates, while Eurozone’s IP is anticipated to have declined for the third consecutive month, and at a faster pace than in March (-0.4% mom from -0.3%).

Finally, on FridayAsian time, China’s fixed asset investment, industrial production and retail sales, all for May are scheduled to be released. Fixed asset investment is anticipated to have grown +6.1% yoy, the same pace as in April, while both IP and retail sales are expected to have accelerated, to +5.5% yoy and +8.2% yoy, from +5.4% and 7.2% respectively.

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.

Later in the day, US retail sales and industrial production for May are coming out. Headline sales are expected to have rebounded 0.6% mom after sliding 0.2%, while the core rate is anticipated to have risen to +0.4% mom from +0.1%. Industrial production is also forecast to have rebounded, +0.2% mom from -0.5%. The preliminary UoM consumer sentiment index for June is also due to be released, alongside the 1-year and 5-year UoM inflation expectations.

Disclaimer:

The content we produce does not constitute investment advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. The Group of Companies of JFD, its affiliates, agents, directors, officers or employees are not liable for any damages that may be caused by individual comments or statements by JFD analysts and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his investment decisions. Accordingly, you should seek, if you consider appropriate, relevant independent professional advice on the investment considered. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with the legal requirements for financial analyses and must therefore be viewed by the reader as marketing information. JFD prohibits the duplication or publication without explicit approval.

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