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Sunrise Market Commentary

• Rates: Summer trading set to continue
  Today's eco calendar remains razor thin with only US housing starts and building permits. Normally they are no market mover, but a downward surprise won't go unnoticed and could benefit US Treasuries further. Overall, we expect trading to remain confined to tight ranges ahead of the ECB. If any, core bonds could trade with a small upward bias.
• Currencies: Dollar decline slows, at least for now
  Yesterday, the USD was aggressively sold in Asia and in Europe, but tensions eased in US trading. US housing data probably won't be a game-changer for USD trading. The dollar desperately needs high profile good news, but that isn't available right now. Some consolidation might be on the cards today, but a sustained USD rebound isn't around the corner yet.

The Sunrise Headlines

• After an initial decline due to the failure of Republican efforts to end Obamacare, American equity markets rebounded. The tech-heavy Nasdaq closed at a record high. The good mood transferred to Asian markets.
• The Australian Prudential Authority announced that the country's four major banks would need to have tier 1 capital ratios of at least 10.5%. The announcement was less onerous than expected.
• China's holdings of US Treasuries climbed to the highest level since the country ceded its status as America's largest creditor nation to Japan last year. China's total holding of US paper rose by $10B from a month prior to $1.1T in May.
• Greece's return to bond markets is held off partly due to a ceiling set by the IMF on the amount of debt the country can hold, according to unnamed officials. The IMF is expected to discuss a new credit line to Greece tomorrow.
• US President Trump said he was disappointed about the collapse of Republicans' efforts to replace or repeal Obamacare and added that his plan was now to “let Obamacare fail”.
• Not much on the eco calendar today apart from the US housing starts and building permits data and a German bond auction

Currencies: Dollar Decline Slows, At Least For Now

Dollar decline takes a breather

On Tuesday, the dollar nosedived after Conservative lawmakers in the US admitted that a repeal/replacement of Obamacare won't occur anytime soon. Dollar selling was aggressive in Asia and in Europe, but eased later in US dealings. EUR/USD settled north of the 1.1489/1.15 resistance and finished the session at 1.1554. LT interest rate differentials between the US and Germany narrowed further. USD/JPY dropped temporary below the 112 handle but finished the day at 112.07.

Overnight, Asian equities mostly show modest gains as the tension due to the Obamacare stalemate are ebbing. USD/JPY stabilizes near the 112 pivot. EUR/USD trades in the 1.1535 area, off yesterday's correction top (1.1583 area). There is no high profile story to guide trading. Investors are looking forward to tomorrow's BOJ and ECB policy meetings. The Aussie dollar takes a breather after its recent impressive run. AUD/USD is changing hands in the 0.7920/25 area.

Today, the eco calendar is thin with only US housing starts and permits able to move markets. They will get more attention than usually. Starts disappointed over the previous three months, permits during three of the last four months. A rebound is expected as special (weather) factors were probably in play during spring. If the rebound fails to materialize, it might weigh push US yields and the dollar lower. In a day-to-day perspective, we expect some USD calm to return as investors are looking forward to tomorrow's BOJ and ECB decision. We don't expect a meaningful rebound of the dollar. Investors will be cautious to be euro short going into the ECB meeting. We expect the ECB to maintain a balanced approach, but hints on a gradual policy normalisation may trigger more euro gains.

In a broader perspective, the dollar was in the defensive of late. Mediocre US wage growth, Yellen's focus on the recent setback in inflation and soft eco data made markets questioning the pace of future Fed normalisation and weighed on the USD. Initially, EUR/USD didn't retest the 1.1489/1.15 resistance, but this area was broken yesterday on the failure to replace Obamacare. In a longer term perspective, the market discounts very little Fed policy normalisation. At some point this might lend the dollar support. However, in a day-to-day perspective there is no reason to try to catch the falling USD. The dollar needs high profile good news and that isn't available at this stage.

USD: technical picture worsens further

End June, EUR/USD rebounded above the 1.1300/66 resistance. The payrolls and other recent data were not good enough to trigger a sustained USD rebound. Yesterday EUR/USD broke beyond the 1.1489/1.15 resistance. This break opens the door to the LT-correction tops at 1.1616/1.1714. A break would end the long consolidation that followed the sharp decline of EUR/USD in 2014/early 2015. Such a key area is not easy to break. We don't preposition for a break, but the pressure is mounting. Return action below 1.13 would be a first indication of a loss in upside momentum. EUR/USD 1.1119/10 is the next support.

The USD/JPY rally ran into resistance in May and the pair returned lower in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair above the 112.13 correction top, but follow-through gains remain modest. USD/JPY 114.37 resistance was tested, but for now the test is rejected. This suggests a pause in the recent USD/JPY uptrend. We stay cautious on USD/JPY long positions despite the recent decent performance.

EUR/USD nears top of LT consolidation pattern as dollar tumbles on failure to repeal Obamacare act

EUR/GBP

EUR/GBP holding near recent top

Sterling was mostly driven by technical considerations of late. Eco data again came in play yesterday. UK CPI unexpectedly declined from 2.9% Y/Y to 2.6% Y/Y (2.9% was expected).The report eased market expectation/speculation that the BoE would raise its policy rate in the near future. EUR/GBP jumped from the 0.88 area to levels just shy of 0.89 and closed the session at 0.8860. EUR/USD strength reinforced the move. Cable initially lost a full big figure despite broad-based US weakness but rebounded slightly later as USD-selling eased. The pair finished the session at 1.3040.

Today, there are no important eco-data in the UK. Given the thin calendar in the US and Europe, trading in the euro and to dollar will probably also provide little guidance. Brexit remains a wildcard, but it is probably too early to expect big news from the negotiations. So, sterling might also shift into consolidation mode today.

From a technical point of view, EUR/GBP recently broke above the 0.8854/66 resistance (2017 top) to set a new correction top north of 0.89, but the move finally fell prey to profit taking (sterling short squeeze). A break below 0.8720 would suggest that upside momentum is easing. For now, we see all sterling rebounds as technical in nature and don't expect them to last very long. We still look to buy EUR/GBP on more pronounced dips. For that the happen, EUR/GBP probably needs some help from a correction in EUR/USD. This isn't the case yet

EUR/GBP correction short-lived as sterling declines again after soft inflation data

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Market consensus of for now change of policy tomorrow, yet with bond markets continuing to give BoJ a headache then a change of some sort cannot be fully discounted at some point.

The Bank of Japan hold their monetary policy meeting tomorrow, which is already having a suppressive effect on price action as we near it. Alongside the usual press conference, statement and decision, the quarterly outlook report will also be released. As we expect no changes to policy tomorrow, it may be the outlook report that is more telling about their confidence of the recovery to be sustained. Yet we cannot rule out a surprise from BoJ regarding their 0% target on JGB's.

Since their last meeting the game has changed somewhat; ECB have turned slightly more hawkish (which prompted BoE ad BoC to follow suit) whilst the FED turned slightly dovish. BoC have since raised rates and there is potential for another hike to follow this year. To add to the list, the RBA crawled slightly out of the neutral zone by speaking of a neutral interest rate being as high as 3.5%. So, from a global policy standpoint is has been a busy period since the previous quarterly outlook. This seemingly combined coordination to tighten is only going to add to the BoJ's job harder regarding policy.

Since September '16 the BoJ have been battling markets to keep the 10yr JGB's ‘around' 0%. This has proven a tough match at times, especially when global stock markets sell off amid expectation of central bank tightening which sends yields higher. As we continue to suspect that ECB are behind the curve and will later be forced to ‘talk taper', this leaves bonds yields susceptible to further upside. In turn, this places extra pressure on the BoJ to keep their rising yields ‘around' 0% as the bond market sell-off rags the 10yrs higher.

Additionally, there have been a couple of BoJ members which have constantly doubted the expansive pace of their QQE program and remain concerned at the financial stability or long-term impact of these actions. Additionally, a recent report, or leak, suggested liquidity concerns are only growing as the BoJ continue their purchase of assets. So, the question now becomes whether the BoJ may announce a change to their policy and of so, how will it be changed?

We do not think such a change will be announced tomorrow but we will look out for subtle clues with the outlook report. There is potential for the inflation forecast to be lowered (again) although markets are likely expecting this due to the lack of inflation in general. With household spending, low wage growth and weak producer prices it is hard to justify their forecasts, let alone a 2% target. A more telling sign may be if they slightly lower their growth outlook, as it is this part which was revised higher on three occasions since 2016. Whilst potential for growth remains, there are just as many headwinds with capex and machinery tool orders printing heavy declines.

We doubt BoJ will announce an end to the 10yr target tomorrow, but it is something that will eventually make sense if yields continue to rise. We note that USDJPY printed an important lower high just days after BoJ announced their new policy with Trump's (now defunct) reflationary policies, sending it into hyperbole. Perhaps the reverse may occur if they are to throw in the towel on the 10yr target. This is something to seriously consider in the light of a hawkish Fed (weaker USD) and headwinds the BoJ face with this particular policy. We doubt it will completely reverse the moves seen since September, but it may have a decent move lower none the less.

Technical indicators are often used by traders for a number of reasons, but primarily to detect the changes in the markets. Technical indicators are relied upon for signs of any change in direction, or the momentum in the price of the underlying security as well as volatility in the markets.

Among the different types of indicators and the variables that they seek to measure, identifying trends in prices are the most commonly used indicators.

While there are various trend based indicators, the moving average indicators are the most commonly used technical indicators. However, while the indicator tends to show trends clearly during trending markets, the moving average often succumbs to flat markets.

Traders using the moving averages and caught with the flat markets are often subject to whipsaws which can turn out to be extremely risky when trading.

A question that is commonly asked by traders is in knowing when the trend is the strongest to maximize the profits for the risk taken. In this article, we look at how two standard indicators can help traders to identify the strongest part of the trend.

In this two-part article, we take a detailed look at how to identify the strongest parts of the trend and also look at some ways on how to trade the trends when they are at the strongest in terms of momentum.

Identifying strong trends with the ADX and MACD

Replacing the moving average with the Average Directional Index (ADX) and the Moving average convergence and divergence (MACD) indicator offers a better alternative to catch the trends in the market, including identifying whipsaw markets.

The ADX is used as a trend detection indicator, but it has a major shortcoming. The ADX does not show the direction of the trend, but only the strength of the trend. This is overcome by making use of the MACD which can signal trends as well as sideways price action.

The chart below shows the ADX line added along with the MACD and the signal line. The default values are used.

ADX and MACD applied on the price chart

Identifying the trends

The trend identification is very simple.

In an uptrend, you should see the MACD line above the signal line. It doesn't really matter if the MACD and the signal line are above or below the zero-line. Once the first criterion is met, the next rule is to look at the ADX line.

Typically, an ADX above 20 signals a moderate trend and above 30 signals a strong trend.

In a downtrend, the same rules apply. Look for the MACD line to be below the signal line while looking to the ADX to signal the trend strength.

The chart below gives a few examples.

Downtrend and the uptrend examples using ADX and MACD

In the first example, you can see the downtrend that was signaled by the MACD and later confirmed as the ADX started to rise above 30. Of course, one can also start trading when the ADX rises above 20. It is a matter of personal opinion.

The short position is held until the ADX rises and then falls back to 30 or within the 20 - 30 level.

The first example positioned the trade to trade a move of $29.75 in gold.

A few sessions later, as the markets start to move sideways, the ADX also falls within the 20 - 30 level before starting to rise again, following the bullish trend signal given by the MACD oscillator.

Here, a long position is taken on the uptrend and this trade would have kept the trade running for a $19.23 move in gold.

In the second example note that we are no longer concerned by the subsequent bearish or bullish signals triggered by the MACD. Once a trade is entered, we simply exit when the ADX falls back to the 20 - 30 line.

Now that we have an understanding of how to use the ADX and the MACD, in the next part we will look at how to trade using this system.

USD/JPY - 112.08

Most recent candlesticks pattern   : N/A

Trend                      : Near term down

Tenkan-Sen level              : 112.06

Kijun-Sen level                  : 112.03

Ichimoku cloud top             : 112.73

Ichimoku cloud bottom      : 112.38

New strategy  :

Sell at 112.70, Target: 111.70, Stop: 113.05

Position :  -

Target :  -

Stop : -

Although the greenback has recovered after falling to 111.68 yesterday and minor consolidation above this level would be seen, as the selloff from 114.50 signals top has been formed there, reckon upside would be limited to the upper Kumo (now at 112.73) and bring another decline, below said support at 111.68 would extend the fall from 114.50 top to 111.50, then 111.20-25 but reckon 111.00 would hold from here due to loss of downward momentum.

In view of this, would not chase this fall here and would be prudent to sell dollar on recovery as 112.70-75 should limit upside. A firm break above resistance at 112.87 would defer and risk a stronger rebound to 113.10-20 but price should falter below resistance at 113.58, bring another selloff later.

Key Points:

• Despite recent bullishness, gold should reverse rather shortly.
• The ongoing ABC wave is likely to enter its final stages.
• Losses should not extend past the 1180.05 handle

Gold prices have been on the mend in recent weeks but, in doing so, they could be preparing the metal for another slide to the downside in the near-term. Indeed, the rally back to the 100 day moving average could simply be a prelude to a major tumble - the final push lower in the broader ABC pattern that we have been tracking for some time.

As shown below, despite reversing somewhat later than originally anticipated, gold has beenfairly faithful to the forecasted corrective wave and is now reaching the final reversal point in the structure. As a result, selling pressure should now be on the rise and the bears could soon be back in the driving seat for the metal. However, we don't have to rely solely on the chart pattern to reach this conclusion as numerous other technical signals also indicate that downside risks are increasing.

For one thing, the 12, 20, and 100 day moving averages are almost certainly goingto be having a bearish influence on the yellow metal. As shown, even after a notable uptick in buying pressure over the prior weeks, all three averages remain in the most bearish configuration possible. What's more, the 100 day measure is perfectly placed to encourage a reversal as it rests just above price action and, coincidentally, at the 38.2% Fibonacci retracement.

Further adding to our bearish bias is gold's proximity to the old trendline which could now prove to be a source of resistance, rather than support. However, the metal could also stray above this line briefly as the stochastic and RSI readings remain neutral which leaves the upside somewhat exposed to a brief surge in buying pressure - potentially from a fundamental or political upset.

Overall, keep a close eye on gold prices moving forward as the metal could still have some surprises instore. Nevertheless, for the reasons detailed above, the technical outlook is rather grim which should predispose gold prices to a reversal or at least mitigate the effects of any bullish fundamental results posted in the immediate future. In the event that we do see a reversal and subsequent downtrend, losses should be capped at around the 1180.05 handle. At this point, the bulls should stage a bit of a comeback and might even push the metal back to around the 1200.00 mark.

Daily Pivots: (S1) 129.09; (P) 129.42; (R1) 129.77; More...

Intraday bias in EUR/JPY remains neutral as consolidation from 130.76 continues. Deeper fall might be seen. But downside should be contained by 127.43 cluster support (38.2% retracement of 122.39 to 130.76 at 127.56) and bring rebound. Above 130.76 will extend the larger rally to next key fibonacci level at 134.20.

In the bigger picture, the down trend from 149.76 (2014 high) is completed at 109.03 (2016 low). Current rally from 109.03 should be at the same degree as the fall from 149.76 to 109.03. Further rise is expected to 61.8% retracement of 149.76 to 109.03 at 134.20. Sustained break there will pave the way to key long term resistance zone at 141.04/149.76. Medium term outlook will remain bullish as long as 124.08 resistance turned support holds.

Daily Pivots: (S1) 145.23; (P) 146.27; (R1) 147.16; More

GBP/JPY is staying in range of 145.5/147.76 and intraday bias remains neutral first. On the upside break of 147.76 will resume rise from 138.65. And firm break of 148.42 key resistance will also resume the whole rally from 122.36 to long term fibonacci level at 150.43 and above. Meanwhile, on the downside, break of 145.25 will revive the case of rejection from 148.09/42 resistance zone. Intraday bias would then be turned back to the downside for 55 day EMA (now at 143.88) and below.

In the bigger picture, rise from medium term bottom at 122.36 is expected to continue to 38.2% retracement of 196.85 to 122.36 at 150.43. Decisive break there will carry long term bullish implications and pave the way to 61.8% retracement at 167.78. In case the sideway pattern from 148.42 extends, we'd be looking for strong support from 135.58 and 50% retracement of 122.36 to 148.42 at 135.39 to contain downside.

Daily Pivots: (S1) 0.8794; (P) 0.8846; (R1) 0.8911; More

Intraday bias in EUR/GBP remains neutral for the moment as it's staying in range of 0.8742/8948. On the downside, below 0.8742 will target 38.2% retracement of 0.8312 to 0.8948 at 0.8705 first. Break will target 61.8% retracement at 0.8555 next. However, break of 0.8948 will extend the rebound from 0.8312 towards 0.9304 resistance.

In the bigger picture, price actions from 0.9304 are viewed as a medium term corrective pattern. It's uncertain whether it is finished yet. But in case of another fall, we'd expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside and bring rebound. Whole up trend from 0.6935 is expected to resume after consolidation from 0.9304 completes.

Daily Pivots: (S1) 1.4492; (P) 1.4634; (R1) 1.4734; More...

Intraday bias in EUR/AUD remains on the downside as current fall from 1.5226 is targeting 100% projection of 1.5226 to 1.4625 from 1.4472 next. Firm break there would pave the way to larger fibonacci level at 61.8% retracement of 1.3624 to 1.5226 at 1.4236. On the upside, above 1.4624 minor resistance will turn intraday bias neutral first.

In the bigger picture, we're holding on to the view that corrective decline from 1.6587 medium term has completed at 1.3624. But we will monitor the structure of the decline from 1.5226 to adjust our view. Above 1.5226 will target a test on 1.6587 key resistance. However, further downside acceleration will dampen our view and would drag EUR/AUD lower to retest key support zone around 1.3624.

Daily Pivots: (S1) 1.1010; (P) 1.1040; (R1) 1.1063; More...

EUR/CHF lost momentum after hitting 1.1072 and intraday bias is turned neutral first. As long as 1.0983 support holds, further rally is expected in the cross. Current rise from 1.0629 should target 1.1127/98 resistance zone. However, break of 1.0983 will indicate short term topping and turn bias back to the downside for 55 day EMA (now at 1.0906).

In the bigger picture, the price actions from 1.1198 are seen as a corrective move. Such correction could have completed after defending 38.2% retracement of 0.9771 to 1.1198 at 1.0653. Decisive break of 1.1198 will resume the long term rise from SNB spike low back in 2015. In such case, EUR/CHF could eventually head back to prior SNB imposed floor at 1.2000. However, rejection from 1.1198 will extend the multi-year range trading with another fall.