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• GBPUSD breaks 1.30 and nears nine month high;
• Spike in European yields may be aiding equities slip in recent days;
• Plenty of data today as central bankers take a day off.

Friday is shaping up to be much like the days that preceded it, with equities set for another negative start and sterling building on recent gains as yields continue to climb in response to this week’s central bank commentary.

Sterling has got off to another positive start on Friday as it takes another run at 1.30 against the dollar. Once again the pair has breached the level but has so far failed to break above the highs set in the middle of May of 1.3048, a break of which would see it trade at its highest level in nine months.

Rising yields in UK and European bonds are driving the moves in sterling and the euro – both of which are up more than 2% on the dollar this week – with the slew of commentary from prominent central bankers being deemed much more hawkish than anticipated. The quite deliberate shift, particularly from the Bank of England, is a significant shift from policy makers with previous comments being broadly neutral or erring on the dovish side. The inflation scenario in the UK is clearly spooking policy makers at the BoE – as seen by this month’s vote – far more so than it was investors who were largely shrugging it off.

The sharp moves in bond markets may also be aiding the declines in equity markets in recent days, while futures are indicating that we’re facing another day in the red with small losses seen at the open. It’s also worth noting that today is quarter-end which may have some impact on how equities trade throughout the session.

We may not be flush with central bankers today, as has been the case for much of the week so far, but there will be a constant stream of data released throughout the day which should keep things interesting. Flash CPI data from the eurozone is the most noteworthy this morning, coming as the ECB contemplates trimming the monthly bond purchases again. We’ll also get the final release of first quarter UK GDP, which is expected to remain unchanged at 2%. This will be followed this afternoon by a number of releases from the US including inflation, income and spending figures.

STOCKS

Almost all the global indices have fallen sharply and could test decent support below current levels. We would have to wait for confirmation if the indices would bounce back next week or continue to extend the downward correction for a few more days.

Dow (21287.03, -0.78%) has not surprised us by facing sharp rejection from the long term crucial resistance near 21500. To break above 21500 would be difficult just now and while that holds, we may look for sideways movement if not a further fall towards 21000 in the coming week. Some support near 21170 may keep it sideways and narrow ranged but we expect a fall in the medium term.

Dax (12416.19, -1.83%) came down to test 12400 in line with our expectation and could face a decent support near current levels. Dax could possibly rise in the early sessions next week but in case 12400 breaks, the fall could extend towards 12000 levels in the medium term.

Shanghai (3174.52, -0.42%) is almost stable and could test 3150 next week before again rising back towards 3200. Movement in the 3150-3200 region may continue for some more sessions.

Nikkei (20000.88, -1.09%) is headed towards 21000, a crucial medium term resistance which could produce some corrective dip back to 19000 in the coming sessions.

While Nifty (9504.10, +0.14%) is below 9600, there is scope of testing 9400-9380 on the downside. Narrow and stable movement is possible next week. The 9600 level is acting as an immediate resistance and while that holds the index looks sideways to bearish for the coming sessions.

COMMODITIES

Gold (1245) and Silver (16.60) keep trading in the narrow range of 1233-1248 and 16.30-17.10 respectively. If the 95 support hold for Dollar Index (95.25) then it could bounce back towards 97, limiting upside for bullion. Thus bullion may test the supports of 1230 and 16.30 where the price action may determine the near to medium term path.

Copper (2.68) moved higher in line with our expectation and trading within a range of 2.65-78. In the medium term 2.55-57 are going to be a strong support and we will remain bullish while it is trading above those levels.

Brent (47.80) and WTI (45.23) closed higher and trading as per our recommended levels. Both Brent and WTI may test the strong resistance of 48 and 46 today but it remains to be seen if it manages to rise above it to open the door for 50 and 48 or not. A rejection from 48 (Brent) and 46 (WTI) may push it down strongly towards 46 and 43 once again.

FOREX

Although the Euro (1.1440) continues to be strong, remain aware of Resistance in the 1.1450-1550 region on the Euro Weekly Candles. We would not want to get too excited about strength beyond 1.1550 while the German 30Yr (1.225%) remains below long-term trendline Resistance at 1.25%.

The Pound (1.3017) might be able to rise further towards 1.32 in the near term, but paradoxically, the Pound-Rupee (84.25) has an important Resistance near the current level. This might suggest Rupee strength. More on that later.

Dollar-Yen (11.85) did rise to 112.93 just after the better than expected US GDP data release yesterday, very close to our target of 113 but has come off sharply from there. This suggests that Dollar-Yen may now be sold on rallies while below 113. The Euro-Yen (127.98) has been unable to sustain yesterday's high of 128.86, suggesting limited upside for the Euro from here.

The Aussie (0.7698) has moved up well, coming up to the lower end of our target region of 0.7700-7800. It looks like it can advance into the 0.7700-7800 region also.

Good strength has been seen in the Chinese Yuan over the last few days as the USDCNY (6.7668) has fallen from 6.8425 on Tuesday to 6.76 today. This should reduce the scare on Emerging Market currencies.

Dollar-Rupee (64.63) had risen to 64.92 in the offshore market last night but has come off from there to trade near 64.75 on the NDF market just now. We allow for a test of 64.80 in the Onshore market today, but continue to look for sideways range trading overall.

INTEREST RATES

The US yields have risen sharply yesterday after the release of US GDP which came out at 1.42% higher than the market expectation of 1.20%. The 10YR (2.27%) is trading at the exact levels mentioned yesterday. In case it manages to break above 2.27%, we may negate an immediate fall towards 2.20% and focus on higher levels of 2.35%. Else a fall back to 2.20% is possible.

The US 10-5YR (0.42%) has risen sharply and could test channel resistance near 0.45% before again coming off from there.

The German 10Yr (0.45%) and the 30Yr (1.225%) have risen sharply in the last couple of sessions and has come up to test important resistance levels. The 30Yr is just below important resistance at 1.227% and if that holds, the Yield could come down in the near term; else a break above 1.227% could take it higher towards 1.40% next week. The 10Yr is also facing similar resistance near current levels and is probably on the verge of breaking on the upside. This could act as an important cue to identify movement in the Euro. (Refer to FOREX Section above)

Short term EURJPY Elliott Wave view suggests the decline to 122.35 on 6/15 low ended Intermediate wave (X). Rally from there is unfolding as an impulse Elliott Wave structure with extension. This 5 wave move could be a wave A of an Elliott wave zigzag structure structure, where Minute wave ((i)) ended at 124.46 and Minute wave ((ii)) ended at 123.62. Minute wave ((iii)) ended at 127.84, Minute wave ((iv)) at 126.46 and Minute wave ((v)) of A ended at yesterday’s peak 128.84. Near term, while bounces remain below there expect the pair to pull back in larger degree 3, 7, or 11 swings to correct cycle from 6/15 low before the rally resumes again. We don’t like selling the Index and expect buyers to appear after 7 or 11 swings pull back for extension higher. This view remains valid as far as pivot at 6/15 low 122.35 remains intact.

EURJPY 1 Hour Elliott Wave Chart

A co-ordinated game changer

A game changer of a week as hawkish central bank commentary steamrolled the markets. And as the G-10 central bank band plays on, traders are now contemplating who will be next to join the lineup No one want’s to miss out on this party realising there’s a co -ordinated policy shift afoot and the chance to catch the removal of an easing bias is far too seductive for traders to ignore.

Euro

EUR continues it’s relentless march higher driven as much by an omnipresent apprehension that one is missing out as it is about conviction. But the groundswell of support for the Euro is undeniable as traders see this as a rare opportunity to catch a ride on the wave of shifting policy.

Japanese Yen

After peaking at near 113.00 on the upside surprise to Q1 US GDP data, a broader shift in risk sentiment sent the pair toppling to below 112 before regaining some traction.Double-digit percentage corrections on the NASDAQ are unsettling investors and risk has turned sour.

Australian Dollar

Jumping on the bandwagon appears to be the trade of the day.Everyone including their dog is clamouring for the top side of exposure on the Aussie as the markets contemplate the possibility the RBA will join the ensemble of hawkish central banks. And while a rate hike is highly unlikely next week, shifting out of neutral would be sufficient to provide the spark to push Aussie even higher. If there was ever a case made for fear of missing out, I suspect we see that reflected in current AUD price action

Looking at the day ahead

The depth of today’s economic calendar is of epic so that traders will be glued to their screens most of the day… so back to it.

Unemployment rose unexpectedly and now sits above its 1yr average, an occurrence not seen since 2011. Industrial production also surprised to the downside by contracting by 3.3%. EURJPY tests support yet look ready to break higher over the coming week/s.

The employment sector has been one of the firmer parts of the economy, so today's rise of unemployment to 3.1% from 2.8% was rather unexpected. In absolute terms, a 0.3-point rise is its largest monthly increase since August 2013 and it now sits above its 12-month average. This is the first-time unemployment has risen above the 1yr average since December 2008, so if history is to repeat itself, perhaps this marks a significant turning point in the economy. Before we get ahead of ourselves e wold prefer to see another month or two above it, but it remains something of importance to monitor going forward.

Industrial production also threw a curve ball by contracting -3.3% MoM, its largest decrease since May 2011. This will weigh on GDP and raise concerns for the BoJ behind closed doors. We say that because we doubt they'll revise their rosy outlook for the economy until it is forced upon them.

There is not a huge amount to say about inflation other than it is ticking along at very low rates. There is little hope if this recovering whilst wage growth and consumer spending remain low. The larger issue arises if it begins to roll over once more.

Price action on EURJPY appears icreasingly bullish and now looks to extend gains towards the 132.34 highs. The gap higher (yellow box) marks the first round of the French elctions and is deemend to be a breakaway gap. This tends to mark the beginnings of a trend, alough typically we would see them following a bottom or top pattern. In this case it marked the end of a correction. At time of writing the weekly candle has hit resistance at 128.27. It will be pivotal level going forward and if sentiment allows, may provid support next week if Monday provides a gap higher above it.

If you were to pull up a chart of CHFJPY, you'd see a very similar setup. However, to help decide which of the two we'd prefer to consider for a long opportunity, we can look at EURCHF. The break of 1.0909 two sessions ago has already had this key level respected as support, which allows EURCHF to close higher for a 5th consecutive session. Although the pattern is reminiscent of a double bottom, we would need to see the recent trough higher than the first for tit to count. EURCHF appears ready to move up to 1.098 over the coming week/s, so we could either trade long EURCHF or EURJPY. As EURCHF appears bullish, we opt to choose EURJPUY over CHFJPY for long positions.

Back to EURJPY, it is debatable if you would want to initiate a long position to hold over the weekend. It is quite common for traders to hedge positions with Yen over the weekend, which adds potential for Yen to strengthen near the end of the week. However, there may be an opportunity to trade intraday bullish or bearish setups, depending on which side if 128.27 we find ourselves. As this also coincides with MR2 then we may find a correction occurs first, before the trend continues. As this is the last trading day of the month, the monthly pivots will be recalculated on Monday. But our next target remains 132.33 and we will monitor for setups next week.

The Canadian dollar gained 0.20 percent on Thursday thanks to a rise in oil prices and despite an improvement to the final GDP reading for the first quarter in the US. Oil rose 0.40 percent after the a slowdown in US production has energy rising in the last 6 sessions.

The main factor driving the strength of the loonie has been the shifting winds of central bank rhetoric. The Bank of Canada (BoC) Deputy Governor Carolyn Wilkins on a routing speech put the end of easing firmly on the table. She was followed by Govneor Stephen Poloz a day later to reiterate the message. The head of the BoC has hammered the message this week, as he attends the European Central Bank (ECB) Forum in Portugal, that the rate cuts have done their job, but tried to not too much emphasis on a rate hike with the upcoming July monetary policy meeting.

The Canadian central bank is part of a group of central banks that have shifted their verbal intervention of late. The Fed issued a warning to markets in March ahead of that month’s Federal Open Market Committee (FOMC) meeting though Fed member comments that the market was not pricing in a rate hike, which eventually happened. After a patient Fed for most of 2014, 2015 and 2016 it was a surprise to see a proactive central bank that has now 2 rate hikes in 2017 and continues to signal a third one as well as starting to reduce its balance sheet.

The Bank of Canada is a special case as the European Central Bank (ECB) and the Bank of England (BoE) have quantitive easing programs that will have to be gradually wound down whereas Stephen Poloz can jump on the rate hike bandwagon with relative speed. The BoC governor also does not have to worry about a vote as there is no monetary policy committee.

The timing of the first rate hike will be challenging. The three factors driving the loonie will have to be taken into consideration. Oil prices have been stable but the showdown between the US shale producers and the OPEC output deal nations is not addressing the tepid demand for energy around the world. Nafta renegotiations starting in August could change the economic landscape for Canada and that is something the central bank will have to address. The third factor is the Fed itself. The American economy has been softer in 2017 raising questions about what impact a third rate hike and a lower Fed balance sheet could have in the second half of the year.

The USD/CAD fell 0.208 percent in the last 24 hours. The currency is trading at 1.3002 as the loonie has broken below the 1.30 price level briefly. The Canadian dollar has been boosted by repeated comments from senior policy makers from the Bank of Canada (BoC) that have hinted at a rate hike coming sooner rather than later. Before June 11 the market was not expecting a rate move by the BoC, with the first quarter dependant on economic fundamentals. Now after the comments from two deputy Governors and the Governor himself there is now a higher than 60 percent chance the rate move could come in the July meeting.

Oil gained 0.404 percent on Thursday. The West Texas Intermediate is trading at $44.69. The change in fortune in oil prices came during the past two weekly crude inventory releases in the US. The expected large buildups have failed to materialize and US production has been hit by a storm in the Gulf of Mexico. Organization of the Petroleum Exporting Countries (OPEC) members Nigeria, Iran and Libya have increased their production but other members have complied with cuts and are still profitable although they face various challenges if they want to keep cutting to help prices rise, only to see US, Brazil and Canada producers take advantage as they are not bound by any deal to limit their output.

Market events to watch this week:

Friday, June 30
4:30 am GBP Current Account
8:30 am CAD GDP m/m

Gold has lost ground in the Thursday session. In the North American session, spot gold is trading at $1243.89 per ounce, down 0.31% on the day. On the release front, US Final GDP for the first quarter was stronger than expected, with a gain of 1.4%. This was above the forecast of 1.2%. As well, unemployment claims rose slightly to 244 thousand, higher than the estimate of 241 thousand. Friday is busy, so traders should be prepared for movement in gold prices. The key release of the day is UoM Consumer Sentiment, with the markets braced for a reading of 94.5 points in May, compared to the previous reading of 97.1 points. As well, we’ll get a look at Chicago PMI and Personal Spending.

The US economy did indeed slow down in the first quarter, but there was some good news on Thursday, as the revised GDP reading was raised to 1.4%, better than the initial estimate of 1.2% in May. The improvement was attributed to stronger consumer spending and an increase in exports. Earlier in the year, the markets were braced for a very poor quarter, with the first estimate in April projecting a gain of only 0.7%. Will we see better numbers in the second quarter? That may be a tall order, as consumer spending and manufacturing numbers in Q2 have missed expectations. Housing numbers have been mixed, and inflation remains below the Fed’s target of 2 percent. At the same time, the US labor markets remains very tight, with the unemployment rate at a 16-year low of 4.3%. Stronger global economic conditions have increased the demand for US products, boosting the export sector.

Aside from lukewarm economic data in 2017, investor confidence has been dampened by a Trump administration which has been plagued by scandals and crises. The administration continues to spend much of its time and energy on damage control, rather than focusing on its agenda of tax reform and increased fiscal spending. Will political paralysis in Washington affect interest rate policy? The Federal Reserve has all but promised one more rate hike in 2017, but the markets aren’t so sure, with the odds of a December rate hike at 57%, according to the CME Group. Gold prices are inversely linked to interest rate hikes, so if the odds of a rate hike decrease, gold could respond with gains.

Do you remember the last time we featured THE BEAST on the blog? GBP/JPY was showing bearish price action, capped by daily resistance and then stepping down between short term levels beautifully.

A great opportunity to trade in the direction that the market wanted to move.

Well after 800 or so pips of this clean, step taking price action, GBP/JPY has quickly erased those steps and come straight back up to where we last posted:

GBP/JPY Daily:

A round of risk aversion gave the yen a reprieve in New York trading on Thursday but how it unfolded speaks to changes in the market in a low-volatility environment. The pound was the top performer on the day while the kiwi lagged. There are 8 Premium trades in progress, including 2 equity indices.

A whip laying on the ground is a good metaphor to understand how markets are behaving this year. Most of the time, it's limp. Different part might be nudged in different directions while the rest remains stationary. Periodically, however, something in the global economy shakes it more aggressively. When that happens, the handle is jarred and a wave of energy moves through the entire whip.

That wave is like how energy is moving through cross-assets in 2017. Sometimes what happens in a faraway place isn't enough to create a jolt but when it does – like with comment from Draghi that set off a round of European bond selling – the wave quickly moves from one asset to the next as it circles the globe and the crack of the whip awakens sleepy investors to the risks.

Mechanically, this is taking place because there are so many bets on low volatility. As volatility creeps up, it raises alarms in funds or algos that are monitoring cross assets, so they pare back risk and it sets off the chain reaction.

Going forward, the takeaway is that intermarket analysis is more important than ever. Tremors anywhere are capable of rattling the whip and when any market makes a big move – like Eurozone bonds – it's only a matter of time until the wave of volatility hits something distantly related like tech stocks. Afterwards, the energy is released, the whip goes limp again and risk assets slowly recover.

USD/CHF - 0.9575

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9577

Kijun-Sen level                    : 0.9583

Ichimoku cloud top                 : 0.9657

Ichimoku cloud bottom              : 0.9615

Original strategy :

Sell at 0.9645, Target: 0.9545, Stop: 0.9680

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 0.9645, Target: 0.9545, Stop: 0.9680

Position : -

Target :  -

Stop : -

As the greenback has remained under pressure after recent selloff, suggesting the decline from 0.9771 top is still in progress, hence bearishness remains further weakness to 0.9545-50 (2 times extension of 0.9771-0.9676 measuring from 0.9738) but reckon downside would be limited to 0.9525-30 (50% projection of 1.10100-0.9613 measuring from 0.9771) and 0.9500 should hold, price should stay above 0.9470 (61.8% projection), bring rebound later. 

In view of this, would not chase this fall here and we are looking to sell dollar on recovery as resistance at 0.9647 should limit upside. Only above previous support at 0.9676 (now resistance) would defer and suggest a temporary low is formed, risk test of another previous support at 0.9692.