By Gaurav Kashyap
Forex and commodity markets still seem to be seeking inspiration while US equity markets march on.
Several of the currency majors maintained their ranges through the first half of July with the Dollar Index, for example, maintaining its range in the mid 94 levels with strong buying support coming in at 93.60 levels.
The euro, lacking any clear fundamental drivers over the past few weeks, consolidated between 1.16 and 1.18 levels on the Dubai Gold & Commodities Exchange (DGCX) while the New Zealand dollar found strong resistance at 0.6850 levels.
There was pronounced weakness in gold, with the precious metal falling to one-year lows before finding support at the $1,235 mark. Weakness is expected to continue in gold, with a move towards $1,204 levels likely in the weeks ahead.
It wasn’t all downside movement in the financial markets however with US equities breaking higher through July on the back of improving second quarter earnings. The S&P 500 is trading at our predicted 2800 top handle, while the Dow Jones Industrial Average moves above 25,000 levels. While the S&P is entering into a strong buying phase, the Dow should also make a run towards those 25400 levels, a break of which would confirm a buy trend.
The British pound has been particularly choppy, dropping as low as 1.31 levels on the DGCX following the surprise resignations of two of Prime Minister Theresa May’s key Brexit campaigners last week. While the data docket has been supportive of the pound, it promises to be a rocky few months for Ms May as she enters what promises to be her most testing period.
I favour short positions in the pound against the euro and more favourably against the US dollar. A move above 1.33 levels would provide an excellent opportunity to test the downside towards 1.31 levels.
On Wednesday, we will see the release of UK inflation data – expected at 2.6 per cent year-on-year and 0.2 per cent month-on-month. A surprise uptick could see the pound challenge 1.33, which would provide a good entry to build short positions.
Across to Asia Pacific where weakness is expected to underpin the Australian dollar and Kiwi dollar movement through the end of July. Look for a move towards 0.6850 levels to trigger short positions while 0.7485 remains a good short entry in the Australian dollar against the greenback.
Also on the calendar is the US GDP reading, due out on July 27. Figures are expected to show quarter-on-quarter growth at 4 per cent, well above the previous reading of 2 per cent. While these expectations may be too optimistic, an expected miss would see weakness in the US dollar.
Looking back at the US economic calendar, the key takeaway from July’s jobs report was a weakening overall unemployment rate (to 4 per cent) on the back of lagging wage growth. And while we maintain that the full effect of the trade war on the US economy would only be felt towards the middle to end of the third quarter - the US data docket is already showing some signs of steadying down.
Finally, crude oil prices came off hard through the early part of July, moving from 74 levels to the current 67 levels on the DGCX. While the effects of the increased output from Russia and Saudi Arabia announced last month are being felt now, watch for a strong test towards the 64 handle, which would open the door to our predicted channel of between 60-62.
The views and opinions expressed in this article are those of the author and do not reflect the views of EGM Securities.