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Dollar rebounds notably after St Louis Fed President James Bullard, the most dovish Fed official, dismissed a 50bps rate cut in July, in a Bloomberg interview. He said "just sitting here today I think 50 basis points would be overdone. And, "I don't think the situation really calls for that but I would be willing to go to 25. Though, Bullard emphasized that " I hate to pre-judge meetings – things can change by the time you get there – but if I was just going today that's what I would do."

Separately, Fed Chair Jerome Powell emphasized Fed's independence in a prepared speech. He said "the Fed is insulated from short-term political pressures—what is often referred to as our 'independence.' Congress chose to insulate the Fed this way because it had seen the damage that often arises when policy bends to short-term political interests. Central banks in major democracies around the world have similar independence."

On the economy, Powell said "the baseline outlook of my FOMC colleagues, like that of many other forecasters, remains favorable". But inflation would return to target "at a somewhat slower pace than we foresaw earlier in the year." And, " risks to this favorable baseline outlook appear to have grown." Hence, Fed will now "closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion."

Powell also emphasized "we are also mindful that monetary policy should not overreact to any individual data point or short-term swing in sentiment. Doing so would risk adding even more uncertainty to the outlook."

EUR/USD's retreat from 1.1412 temporary top extends lower after the comments. But for now, as long as 1.1317 minor support holds, further rise is still in favor.

The start of the New York session was greeted with weakness and stocks extended their declines after consumer confidence fell to the lowest levels since September 2017 and new home sales declined for a second consecutive month. Both the Dow Jones Industrial Average and S&P 500 index are down 0.4% in early trade. Markets are now awaiting the latest comments from Fed’s Powell this afternoon.

Over night, the focus was on President Trump’s additional sanctions on Ayatollah Ali Khamenei and eight senior military commanders, it was hardly an olive branch to restart negotiations on a new nuclear deal. The Trump administration’s willingness to have talks was met with a ‘hard no’ from foreign ministry spokesman Abbas Mousavi. The Semi-official Iranian Students News Agency reported that Mousavi noted that the diplomatic path with Washington is closed forever.

Iran has already been crippled by US sanctions and the fresh ones will likely have little impact to the economy. It seems difficult to imagine a scenario in the immediate future for tensions to ease in the Middle East. Treasury futures rallied, while both Asian and European equities sold off. Safe-haven flows supported the yen and the kiwi outperformed their major trading partners ahead of their rate decision. The RBNZ is in the middle of an easing cycle and today’s gains are supported on positioning and expectations that we will see the bank hold off on another rate cut until the August 7th meeting.

Iran

Trump’s latest sanctions on Iran’s supreme leader appears to be another move to gain bargaining chips in what may eventually become a return to the negotiating table. Middle East tensions have been on high alert since Trump abandoned the landmark 2015 Iran nuclear deal. The US has sanctioned more than 80% of the Iranian economy and if the US wants a regime change, that will require a military conflict. The likely scenario is that Trump will want a renegotiated deal to claim credit that he secured a better deal than his predecessor. Markets would be sharply lower if war was becoming the more likely scenario.

G20

Today’s risk off tone is also being supported by optimism that is heading into the G20 summit at the end of the week. Markets are becoming more hopeful now that something not terrible will happen and we could see a full punting of tariffs. The base case could likely become that a deal could be outlined by the fall, as the incentives are high right now for both sides.

Gold is flying once again as it looks to extend its winning streak to six days and build on the almost 7% gains it’s made in that time.

Gold Daily Chart

All you have to do is look at a US dollar chart to see what the trigger for the surge has been.

US Dollar Index Daily Chart

Previously when we’ve traded around these levels – and for that we’re talking earlier this decade – $1,440 has been a notable area of support and resistance which may explain why we’ve seen some profit taking around here today.

What’s interesting is that we the rally doesn’t seem to be dropping any momentum so there may be some more room to run. The MACD histogram failed to make a new high during the most recent peak in price so some divergence may be creeping in but everything else looks ok on the 4-hour chart.

Gold 4-Hour Chart

Above here, $1,475-1,488 was also interesting previously so perhaps we’re entering into a crowded area where momentum may start to slip.

Commodity markets keeping us entertained

We may be in pause mode when it comes to stock markets, after they hit new records last week but thankfully, commodity markets are providing plenty of interest.

The oil rally has stalled a little, with Brent running into some resistance around $66 but we’re hardly seeing the sellers coming in and taking charge. That said, if momentum starts to lag then that could make $67-68 an even tougher resistance for it to overcome without potentially seeing some profit taking or a correction first.

Brent Crude Daily Chart

Naturally, that may change very quickly in the event of another escalation in the Gulf which, given the events of recent weeks, seems a high risk. It’s also worth remembering the OPEC meeting which is now scheduled to take place on 1/2 July.

A look at the 4-hour chart show’s that Brent has already found some support in the $63.50-64.50 region which previously acted as resistance and the upper bound of which was the neckline of the double bottom. This could perhaps be a bullish signal, particularly if followed by a break above last week’s peak.

Data this morning from StatsCanada showed that Canadian wholesale sales increased +1.7% to +C$65.3B in April, the fifth consecutive monthly increase.

Higher sales were recorded in five of seven subsectors accounting for +86% of total wholesale sales.

Digging deeper, the motor vehicle and motor vehicle parts and accessories subsector were the leading contributor to April’s gains, followed by the machinery, equipment and supplies subsector.

However, after removing the effects of price changes, wholesale sales increased +1.6% from March to April.

Loonie takes flight

The USD has come under pressure against, in particular, G10 currency pairs, ever since the Fed dropped heavy hints last week that it’s ready to start a monetary policy easing cycle as soon as July.

CAD (C$1.3156) is along for the ride, supported by rate differentials, stronger commodity prices, crude oil and gold in particular (six-year high) and ‘not-so’ bad economic data of late, is lending support to the CAD ‘bulls,’ who have been comfortable adding to their net ‘long’ CAD positions on any USD rally over the past fortnight.

The loonie is encroaching on some key resistance levels (USD support) at C$1.3150. A clear break with momentum certainly opens up the C$1.3075-1.3100 target range.

Expect USD ‘bears’ to look to Fed speak today for more support. Fed Chair Powell is due to speak about the economic outlook and monetary policy at the Council on Foreign Relations, in New York at 01:00 pm ET. Audience questions are expected.

Powell has come under strong pressure from U.S President Donald Trump to cut rates sharply. The market is looking for signs on how much U.S policymakers will cut rates by next month, particularly now that Trump has upped his criticism of the central bank, saying it “blew it” in June.

Also not helping the U.S dollars cause is the market does not seem that confident of a Trump/Xi Jinping trade break through at this week’s G20 gathering.

Markets:

Today’s trading session lacked strong drivers, but core bonds nevertheless held their upward bias. Geopolitical risk was omnipresent this morning with the US upping sanctions against Iran, provoking an immediate diplomatic response. Sentiment around Friday’s supposed Trump Xi Jinping meeting dwindled as well. The German 10-yr yield is testing the -0.33% all time low with the US 10-yr yield extending the battle with the 2% area. US yields decline by 0.5 bps (2-yr) to 1.9 bps (10-yr) at the time of writing. Changes on the German curve range between +0.6 bps and -2 bps. The main event lies still ahead of us with a speech by Fed Chair Powell after European trading. Markets turned even more softer since the Fed’s June policy meeting. A July rate cut is 100% discounted, with market 60/40 split on whether it will be a 25 bps or 50 bps one. Will Powell align with one of these market views or try to tone down expectations?

The uptrend in EUR/USD took a breather today. The currency pair hovered near recent highs during a fragile Asian session but felt some slight selling pressure as European investors entered the market. EUR/USD dipped to an intraday low at around 1.138 but is now again filling bids close but below the 1.14 handle. USD/JPY barely manages to hold ground above 107 after slipping this morning amid Asian risk off. Today’s low volatility session suggests markets are looking for new clues in FX trading (data, monetary policy and/or geopolitical wise). End of this week’s G20 summit might prove a pivotal point in currency markets but so could tonight’s speech by Fed chair Powell. Will he confirm or dismiss market’s view of a July rate cut? We suspect investors are keeping a low profile and await how these events unfold.

Sterling trading remains mostly technical in nature as the Tory campaign to become the UK’s next prime minister heats up. Boris Johnson, still the front-runner, said during an interview he wants to renegotiate May’s brexitdeal completely, rather than just tweaking it and reiterated he won’t delay Brexit again. Johnson’s comments didn’t trigger much market volatility however. Investors realize that at least some of his talk (and Jeremy Hunt’s for that matter) is campaign rhetoric. Sterling initially strengthened to EUR/GBP 0.892 but retreated during early US trading hours to levels virtually unchanged vs. opening (0.895). Cable showed a very similar trend, currently changing hands at around 1.272 (vs. 1.274 at opening).

News Headlines:

The Hungarian central Bank (MNB) left rates stable at 0.90% (-0.05% for the overnight deposit rate). Although inflation remains in the upper band of the MNB’s 3% +-1% target range (3.9% in May), it said price data in the second half of this year will be “decisive” for monetary policy. The central bank raised both inflation and growth estimates for the next 3 years.

Mexico said it has sent almost 15 000 forces to its northern border to curb migration to the US. Mexico and the US agreed on June 7 to significantly reduce US migration within a 45 day period. President Trump said he will impose a 5% import tariff on all Mexican goods if the measures to limit the flow are considered insufficient.

The US Conference Board consumer confidence fell from (a downwardly revised) 131.3 to 121.5 in May as consumers were both less optimistic about the present situation and the future outlook. Markets expected the decline to be less dramatic (131.0).

US Conference Board Consumer Confidence Index dropped to 121.5 in June, down from 131.3 and missed expectation of 131.0. That's also the lowest level since September 2017. Present Situation Index dropped to 162.6, down from 170.7. Expectations Index dropped to 94.1, down from 105.0.

Lynn Franco, Senior Director of Economic Indicators at The Conference Board said: "The decrease in the Present Situation Index was driven by a less favorable assessment of business and labor market conditions. Consumers' expectations regarding the short-term outlook also retreated. The escalation in trade and tariff tensions earlier this month appears to have shaken consumers' confidence. Although the Index remains at a high level, continued uncertainty could result in further volatility in the Index and, at some point, could even begin to diminish consumers' confidence in the expansion."

Full release here.

Daily Pivots: (S1) 1.1310; (P) 1.1391; (R1) 1.1413; More......

A temporary top is formed at 1.1412 in EUR/USD, ahead of 100% projection of 1.1107 to 1.1347 from 1.1181 at 1.1142. Intraday bias is turned neutral first. Another rise is in favor as long as 1.1317 minor support holds. Break of 1.1142 will target 161.8% projection at 1.1569 next. However, firm break of 1.1317 will be an early sign of completion of rise from 1.1107. Intraday bias will be turned back to the downside for 1.1181 support instead.

In the bigger picture, considering bullish convergence condition in daily and weekly MACD, a medium term bottom should be in place at 1.1107 after hitting 61.8% retracement of 1.0339 (2016 low) to 1.2555 (2018 high) at 1.1186. Further rise should be seen to 38.2% retracement of 1.2555 to 1.1107 at 1.1660. Reactions from there could indicate whether rebound from 1.1107 is a corrective rise or reversing medium term trend.

Daily Pivots: (S1) 1.2709; (P) 1.2738; (R1) 1.2768; More....

GBP/USD loses some upside momentum as seen in 4 hour MACD, but outlook is unchanged. Rebound from 1.2506 is seen as a corrective move. In case of another rise, upside should be limited by 38.2% retracement of 1.3381 to 1.2506 at 1.2840. On the downside, break of 1.2642 minor support will turn intraday bias back to retest 1.2506 low. However, sustained break of 1.2840 will bring stronger rise to 61.8% retracement at 1.3047 next.

In the bigger picture, down trend from 1.4376 (2018 high) is still in progress. Break of 1.2391 would target a test on 1.1946 long term bottom (2016 low). For now, we don't expect a firm break there yet. Hence, focus will be on bottoming signal as it approaches 1.1946. In any case, medium term outlook will stay bearish as long as 1.3381 resistance holds, in case of strong rebound.

Daily Pivots: (S1) 0.9692; (P) 0.9738; (R1) 0.9766; More...

A temporary low is in place at 0.9695 in USD/CHF with current recovery. Intraday bias is turned neutral for some consolidations first. Upside of recovery should be limited by 0.9854 support turned resistance to bring fall resumption. On the downside, below 0.9659 will target 0.9587 fibonacci level. Nevertheless, break of 0.9854 will indicate short term bottoming and target 1.0014 resistance instead.

In the bigger picture, current development confirms that up trend from 0.9186 (2018 low) has completed at 1.0237 already. With 38.2% retracement of 0.9186 to 1.0237 at 0.9836 taken out, deeper fall should be seen to 61.8% retracement at 0.9587 and below. We'd pay attention to bottoming signal below 0.9587.