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Uncertainty ahead of the UK general election and Comey's testimony in the US Congress on Thursday drove gold to a 7-week high in European trading today, while the US dollar made fresh lows.

The greenback has been under pressure since Friday when a disappointing non-farm payrolls report dampened expectations of a third rate hike by the Fed this year, although markets are still pricing a rate increase at next week's FOMC meeting. However, worries of an escalating political fallout in the US from James Comey's upcoming testimony are also weighing on the dollar. The former FBI director is due to appear before the Senate Intelligence Committee on Thursday about his discussions with President Trump regarding dropping the investigation into the ex-National Security Advisor Michael Flynn's alleged contacts with Russia.

Further exasperating the dollar's decline today was a plunge in US treasury yields. The yield on 10-year Treasury notes hit the lowest since mid-November on reports that China is readying to increase its holdings of US government bonds. The dollar index touched a fresh 7-month low of 96.53 earlier today before firming to around 96.62 in late European session. Against the yen, the dollar slid 1% to a 6-week low of 109.27 before later recovering slightly to around 109.45. The rebound came after a rise in the JOLTS job openings in May. Job openings in the United States increased to 6.04 million last month from a revised 5.79 million in April.

The pound meanwhile fell back from 1½-week lows, breaching below the 1.29 level against the dollar in afternoon European trading, having earlier hit a session peak of 1.2950 dollars. Britain goes to the polls on Thursday following Theresa May's call for a snap general election. Sterling has managed to stay resilient despite May's Conservative party sharply reducing its lead over Labour and two major terror attacks in the past two weeks. However, election jitters may finally be hitting traders as the Labour party continues to see rising support with just two days to go till voting day. The pound last stood at 1.2890 dollars in late session.

The euro stuck to a tight trading range on Tuesday and was trading near Friday's 7-month highs at 1.1270 dollars. Expectations that the ECB will change its tone to a less dovish one when it meets for its policy meeting on Thursday continued to support the single currency. There was little reaction to data out of the Eurozone today. The Eurozone sentix index rose by 1.0 to 28.4 in June, beating estimates of 27.5. Retail sales for the region were also released today, with the month-on-month rate falling short of forecasts of 0.2% to rise by 0.1% in April.

The Canadian dollar was slightly weaker in late European trading after the Ivey PMI unexpectedly fell in May. The Ivey PMI, which measures economic activity across all sectors in Canada, fell to 53.8 in May from 62.4 in April. Expectations were for a reading of 62.0. USD/CAD rose to 1.3480 after the data.

Gold prices surged to a 7-week high on Tuesday as Thursday's risk events generated increased demand for safe-haven assets. The yellow metal climbed more than 1% to $1294.80 an ounce in late session.

The yen also rallied today on the back of the increased risk-off sentiment. However, despite the risk aversion, the Australian and New Zealand dollars managed to head higher versus their US counterpart. The aussie was boosted earlier in the day from a positive outlook on Australian growth by the RBA, helping it hit a one-month high of 0.7517 against the greenback. The kiwi was even more bullish as it soared towards 3-month highs to break above the 0.72 level after another increase in global dairy prices. The GDT price index rose by 0.6% at the latest bi-weekly auction, making it the sixth straight increase.

USD/JPY has posted considerable losses on Tuesday, losing 0.84 percent. In the North American session, USD/JPY is trading at 109.60, marking a 6-month low for the pair. On the release front, Japanese Average Cash Earnings posted a gain of 0.5%, above the forecast of 0.3%. In the US, there was good news from the employment front, as JOLTS Jobs Openings jumped to 6.04 million, crushing the estimate of 5.65 million.

The Japanese yen received a boost on Tuesday, thanks to a solid wage growth report. Average Cash Earnings in April posted a respectable gain of 0.5%, rebounding from a 0.3% decline in the previous release. The dollar has dropped below the 110 level for the first time since April 25. The Japanese economy has shown some improvement, as stronger global demand has buoyed the export and manufacturing sectors. Japan will release Final GDP on Wednesday, and the markets are expecting GDP to be revised upwards to 0.6%, compared to 0.5% in the Preliminary GDP. If the GDP matches or beat this estimate, the yen's gains could continue.

The Federal Reserve holds its policy meeting next week, and the markets are widely expecting the Fed to raise rates for the second time in 2017. On Monday, the odds of a rate increase stood at 96%, but the odds have dipped to 91%, in response to the dismal Nonfarm Payrolls report on Friday. An increase in interest rates represents a vote of confidence in the US economy, but the Fed continues to have some concerns. Inflation remains stubbornly low, despite a labor market that remains close to capacity. Fed policy makers are also scratching their heads over soft consumer spending, which has not kept pace with high levels of consumer confidence. As for additional rate hikes in the second half of 2017, the markets remain skeptical, with the odds of a September rate hike at just 22%. However, stronger data in the third quarter will likely raise the likelihood a September hike.

USD/CHF - 0.9630

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9641

Kijun-Sen level                    : 0.9646

Ichimoku cloud top                 : 0.9671

Ichimoku cloud bottom              : 0.9654

Original strategy :

Sell at 0.9685, Target: 0.9585, Stop: 0.9720

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 0.9685, Target: 0.9585, Stop: 0.9720

Position : -

Target :  -

Stop : -

As the greenback has remained under pressure after Friday’s selloff, bearishness remains for recent decline to resume after consolidation, below support at 0.9622 would extend weakness to 0.9600-05 (50% projection of 1.0100-0.9692 measuring from 0.9808) but oversold condition should limit downside to 0.9570 and price should stay above support at 0.9550, risk from there has increased for a rebound to take place later.

In view of this, we are looking to sell dollar on recovery as 0.9685-90 should limit upside. Only break of resistance at 0.9720 would abort and signal a temporary low is formed instead, bring a stronger rebound to 0.9750 and then 0.9770 but price should falter below resistance at 0.9808.

GBP/USD - 1.2890

Most recent candlesticks pattern   : N/A

Trend                                 : Near term down

Tenkan-Sen level                 : 1.2927

Kijun-Sen level                    : 1.2906

Ichimoku cloud top              : 1.2873

Ichimoku cloud bottom        : 1.2872

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

As sterling has retreated after intra-day brief rise to 1.2950, suggesting consolidation below this level would be seen and pullback to 1.2865-70 cannot be ruled out, however, break of indicated support at 1.2830 is needed to confirm top has been formed and suggest the rebound from 1.2769 has ended, bring further fall to 1.2800.

On the upside, expect recovery to be limited to 1.2925-30 and said resistance at 1.2950 should remain intact, bring another retreat later. Only break there would extend the erratic rise from 1.2769 to 1.2970, however, as broad outlook remains consolidative, reckon upside would be limited to 1.3000 and indicated previous resistance at 1.3015 should remain intact. As near term outlook is still mixed, would be prudent to stand aside for now.

EUR/USD - 1.1270

Most recent candlesticks pattern   : N/A

Trend                      : Up

Tenkan-Sen level              : 1.1259

Kijun-Sen level                  : 1.1256

Ichimoku cloud top             : 1.1251

Ichimoku cloud bottom      : 1.1244

Original strategy  :

Bought at 1.1205, Target: 1.1305, Stop: 1.1235

Position : - Long at 1.1205

Target :  - 1.1305

Stop : - 1.1235

New strategy  :

Hold long entered at 1.1205, Target: 1.1305, Stop: 1.1235

Position : - Long at 1.1205

Target :  - 1.1305

Stop : - 1.1235

As the single currency retreated after faltering below resistance at 1.1285 in part due to cross-selling against yen, suggesting further consolidation below this level would be seen, however, as long as 1.1235-40 holds, mild upside bias remains for recent upmove to resume after consolidation, above said resistance at 1.1285 would extend rise to another previous chart resistance at 1.1300, break there would encourage for headway to 1.1340-45 but overbought condition should limit upside to chart point at 1.1366.

In view of this, we are holding on to our long position entered at 1.1205. Only below support at 1.1202 would abort and signal top is formed instead, risk weakness towards indicated support at 1.1164, once this level is penetrated, this would signal recent upmove has ended, bring further fall to 1.1130-40 first. 

USD/JPY - 109.60

Most recent candlesticks pattern   : N/A

Trend                      : Down

Tenkan-Sen level              : 109.51

Kijun-Sen level                  : 109.99

Ichimoku cloud top             : 111.01

Ichimoku cloud bottom      : 110.76

Original strategy  :

Sell at 110.00, Target: 109.00, Stop: 110.35

Position :  -

Target :  -

Stop : -

New strategy  :

Sell at 110.20, Target: 109.20, Stop: 110.55

Position :  -

Target :  -

Stop : -

As the greenback met renewed selling interest at 110.73 yesterday and decline has accelerated after breaking below indicated support at 110.24, confirming our bearish view that recent decline from 114.37 top is still in progress and bearishness remains for further weakness to 109.00-05 (1.236 times projection of 111.71-110.31 measuring from 110.73), then towards 108.70-75 but near term oversold condition should limit downside to 108.45-50 (1.618 times projection), bring rebound later.

In view of this, would not chase this fall here and would be prudent to sell dollar on recovery as previous support at 110.24 should turn into resistance and cap dollar’s upside, bring another decline. Above 110.31 (another previous support) would defer but only break of said resistance at 110.73 would signal low is formed instead. 

EURUSD is ticking higher at the start of the US session, now ideally into wave five, which is final leg of a potential ending diagonal within uptrend. Ending diagonal can indicate a very powerful reversal, but only when completed, so looking for a EURUSD top now can be too soon. We do not want to call something untill this is confirmed by a market price and reaction. In other words, we need a strong reversal down from around 1.3000-1.3100 area before we may start looking for evidences of lower euro.

• Caution reigns across markets ahead of risk events ranging from the FBI chief Comey's congressional testimony to the ECB's policy meeting and Britain's election fever. The rally to safe havens including gold, the yen and Treasuries continues while stocks lost ground. Main European indices drop up to 1% and the US opens up to 0.3% weaker.
• April Eurozone retail sales came in at 0.1% M/M, below 0.2% M/M consensus while the April reading was downwardly revised from 0.3% M/M to 0.2% M/M. On a yearly basis, retail sales stabilized at 2.5% Y/Y.
• French President Emmanuel Macron's party will have an absolute majority in the lower house of parliament, an Ipsos poll for France Televisions shows. If correct, this would defy widespread concerns that the political newcomer's plans for economic reform would be blocked by a hostile legislature.
• South Africa's growth contracted unexpectedly by 0.7% Q/Q in Q1 while the consensus had counted on a 1% expansion. All industries except agriculture and mining contracted in the first quarter, the statistics office said. On this news, the rand lost almost two points and tested the 12.9 USD/ZAR level.
• The debate in the Italian Lower House on the electoral law draft bill has started today. The draft bill could be passed by the Lower House assembly as early as the end of this week. The acceleration of the electoral law approval makes the scenario of early elections in autumn 2017 increasingly likely.

Rates

US yield support levels under severe test

Global core bonds gained ground today with US Treasuries outperforming German Bunds. Investors found their way to safe haven assets amid an extremely thin eco calendar (EMU retail sales 0.1% M/M in April vs 0.2% M/M consensus) and ahead of Thursday's big events (UK elections, ECB meeting, Comey hearing). The developing tensions in the Gulf region prompted more cautiousness. European stocks lost up to 1%, while the Japanese yen gained on FX markets. US yields extensively test key support levels (2017 lows). Investors started doubting US president Trump's pro-growth agenda since he tumbled from one political scandal into the other. US 5y5y forward inflation swap dropped from 2.4% at the end of April to 2.2% currently, matching levels from ahead of Trump's presidential elections. US yields crumbled in lockstep despite the prospect of more near-term Fed tightening (June rate hike) and the probable start of the central bank's balance sheet run-off in H2 2017. The US 5-yr yield tests 1.69% support, the US 10-yr yield dipped below 2.16% and the US 30-yr yield below 2.82%. The technical breaks aren't confirmed yet, but merit attention.

At the time of writing, the US yield curve shifts 2 bps (2-yr) to 4.4 bps (10-yr) lower, with the belly of the curve outperforming the wings. The German yield curve bull flattens with yields 1.4 bps (2-yr) to 3.5 bps (30-yr) lower. On intra-EMU bond markets, 10-yr yield spreads versus Germany narrow up to 3 bps with Greece & Portugal underperforming (+4 bps).

The Austrian Treasury tapped the on the run 7-yr RAGB (€0.575B 0% Jul2023) and 10-yr RAGB (€0.625B 0.5% Apr2027) for a combined €1.2B, the maximum amount on offer. The auction bid cover was strong (2.2). The Treasury set aside an additional €0.18B of both bonds for secondary market operations. The Italian debt agency announced the launch of a new 30-yr benchmark (Mar2048) in the near future via syndication. The bond will likely be priced tomorrow.

Currencies

'By default' yen-buying dominates in uneventful session

There were no important data or other high profile news to guide FX trading today. The yen outperformed on investors caution ahead of the key event risks later this week. USD/JPY dropped below the 110 barrier and hovers in the mid 109 area. EUR/USD shows no clear trend. EUR/USD dropped to the 1.1250 area as investors are cautious to add euro longs going into Thursday's ECB meeting.

Overnight, Asian equities traded cautiously negative with Japan underperforming. USD/JPY dropped below the post-payrolls lows, triggering additional yen buying. The pair fell below the psychological barrier of 110 and traded in the 109.70 area at the start of European dealings. USD/JPY's decline also weighed slightly on the dollar against the euro. EUR/USD returned to the 1.1275 area, but the recent top stayed out of reach. The decline of EUR/JPY prevented further EUR/USD gains.

There were hardly any data or other news to guide FX trading in Europa. Investors caution prevailed ahead of the multiple event risks that might disturb trading later this week. European equities fell prey to modest profit taking. Core bond yields lost a few basis points, but interest rate differentials between the US and Germany/Europe were little changed. USD/JPY remained under pressure as investors preferred safe havens. The pair filled bids around 109.28 at the start of US dealings. Dollar weakness initially pushed EUR/USD within reach of the recent top, but no break occurred. On the contrary, EUR/JPY selling and investors adapting euro long positions ahead of the ECB meeting, finally pushed EUR/USD back south to the 1.1250 area.

Trading dynamics didn't change during the US trading session. USD/JPY (109.35) remains in the defensive. EUR/USD hovers in the mid 1.1260 area. Waiting for Thursday remains the name of the game. Or will Trump surprise markets with a high profile policy initiative?

EUR/GBP holds within reach of recent top

There was also no clear story to guide sterling trading. The UK currency regained slightly further ground against the euro, but this move also mirrored a temporary setback in EUR/USD at that time. EUR/GBP dropped to the 0.87 area but soon found a bottom. There was no change in the election story. The Conservative Party maintains a (reduced) lead. Later in the session, some modest sterling pressure resurfaced. However, the moves were limited and technically insignificant. EUR/GBP is changing hands in the 0.8735 area. Cable hovers just sought of 1.29, awaiting the things to come in the UK, but also in the US.

EUR/GBP - 0.8742

 
Recent wave: Major double three (A)-(B)-(C)-(X)-(A)-(B)-(C) is unfolding and 2nd (A) has possibly ended at 0.6936.

Trend: Near term up

Original strategy  :

Sold at 0.8735, Target: 0.8610, Stop: 0.8775

Position : - Short at 0.8735

Target :  - 0.8610

Stop : - 0.8775

New strategy  :

Hold short entered at 0.8735, Target: 0.8610, Stop: 0.8775

Position : - Short at 0.8735

Target :  - 0.8610

Stop : - 0.8775

 
Although euro has rebounded after finding support at 0.8692, as long as resistance at 0.8771 holds, consolidation with mild downside bias remains for another retreat, below 0.8680-85 would suggest top is possibly formed there, then test of indicated support at 0.8655 would follow, however, break of latter level is needed to add credence to this view, bring retracement of recent rise to 0.8600-10 later.

In view of this, we are holding on to our short position entered at 0.8735. Above 0.8771 would extend recent rise from 0.8312 low to previous resistance at 0.8788, however, reckon upside would be limited to 0.8800-10 due to weakening of upward momentum.

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.

USD/CAD - 1.3469

 
Recent wave: Only wave v of c has ended at 0.9407 and wave C of major A-B-C correction is underway for headway to 1.4700

Trend:  Near term up

 
Original strategy       :

Sell at 1.3580, Target: 1.3380, Stop: 1.3640

Position: -

Target:  -

Stop: -

 
New strategy             :

Sell at 1.3580, Target: 1.3380, Stop: 1.3640

Position: -

Target:  -

Stop:-

Although the greenback retreated from last week’s high of 1.3547, reckon downside would be limited to 1.3435-45 and upside risk remains for another rebound to 1.3550 but 1.3575-80 (50% Fibonacci retracement of 1.3770-1.3387) should limit upside and bring another decline, below 1.3435-40 would signal the rebound from 1.3387 has ended, bring retest of this level first. A drop below this support at 1.3387 would extend the fall from 1.3794 top for further weakness to 1.3350, then towards 1.3300 but loss of near term downward momentum should prevent sharp fall below 1.3250-60.

In view of this, would be prudent to sell on further subsequent recovery as 1.3571-79 (previous support and 50% Fibonacci retracement of 1.3770-1.3387) should limit upside and bring another decline. Above 1.3620-25 (61.8% Fibonacci retracement) would defer and suggest a temporary low is formed instead, risk a stronger rebound towards resistance at 1.3670.

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.