Market Insight: Week Ending 18 August

Last week was all about US inflation data. According to the Bureau of Labour Statistics (BLS) on Thursday, headline consumer price inflation (CPI) printed a softer-than-expected increase of 3.2% in the twelve months to July (vs 3.3% expected [up from 3.0% previous]). This followed a year’s worth of easing prices since pencilling in a top at 9.1%.

Core US inflation for the same period cooled to 4.7% (vs 4.8% expected [down from 4.8% previous]), clocking levels not seen since late 2021. Meanwhile, MoM, both headline and core readings for July matched June, rising 0.2%, as expected. In addition to consumer price inflation metrics on Thursday, US weekly unemployment filings increased slightly more than 20,000 to 248,000.

Friday welcomed the latest PPI inflation numbers, revealing a higher-than-expected increase in both YoY and MoM values for July. This reversed a year-long easing of wholesale prices. YoY PPI headline inflation increased by 0.8%, up from June’s upwardly revised 0.2% and came in a touch higher than the median estimate of 0.7%. From June to July, headline PPI prices rose 0.3%, up from 0.0% and just above the 0.2% expected.

This marks the highest one-month increase since the beginning of this year. According to the BLS, the broad-based advance was largely driven by a lift in services, rising to 0.5% and denoting its fastest rebound in nearly a year. Interestingly, the increase in PPI (and headline CPI) inflation diverged somewhat from the UoM’s (University of Michigan) consumer inflation expectations release on Friday, which fell in August to 3.3%, down from 3.4% in July.

Overall, despite CPI data coming in largely aligned with market expectations, major US equity indexes ended the week on the back foot, and the buck traded higher. US Treasuries also marched higher across the curve last week, with the benchmark 10-year yield rising to a high of 4.178%. Current data, however, appears to have bought the Fed more time regarding policy as markets embrace the soft-landing narrative. Though, let’s not forget that we have one more inflation print to look forward to on 13 September (a week ahead of the Fed’s rate decision) and another employment release on 1 September.

Elsewhere, last week watched China’s economy fall into deflationary territory as consumer prices declined for the first time since early 2021. In the twelve months to July, the Consumer Price Index (CPI) fell 0.3 percentage points to -0.3% (vs. expected -0.4% [down from 0.0% previous]). According to the Producer Price Index (PPI), factory gate prices dropped -4.4% in the twelve months to July (vs. -4.1% expected [down from -5.4%]). Both the year-on-year CPI and PPI measures, therefore, are now in a deflationary state.

Over in the UK, preliminary growth data out of the UK for Q2 was released from the Office for National Statistics (ONS), revealing that the UK economy grew by 0.2% between April and June compared to the prior year. This marks a slightly stronger-than-expected print; economists polled ahead of the event anticipated the UK economy to show no change. The latest QoQ data follows 0.1% growth in Q1 of 2023 and Q4 of 2022.

This Week…

Moving forward, the key events in the US for the week ahead consist of retail sales for July and the Empire State manufacturing index for August. Softer-than-expected data here could help reinforce the soft-landing story. The FOMC minutes subsequently take centre stage on Wednesday, which, if it shows Fed officials leaning towards a pause in September/November, could weigh on the dollar and lend support to equities and bonds. The implied rate path for the next rate decision on 20 September currently reveals a 90% chance that the Fed will hold the current target range at 5.25%-5.50%.

Across the pond, UK inflation data for July will be on the watchlists for many this week on Wednesday. Market consensus heading into the event shows consumer prices on a YoY basis may cool to 7.4%, down from 7.9% in June, while core inflation for the same period is expected to be more stubborn at 6.8%. MoM, for both headline and core, economists are expecting data to remain unchanged from June to July, increasing by 0.1% and 0.2%, respectively.

Markets currently price in a 70% chance that the Bank of England (BoE) will increase the Official Bank Rate by another 25bps at the next meeting on 21 September, with a projected terminal rate of 5.75% in March 2024. Soft inflation data this week could see rate forecasts fall and subsequently weigh on the British pound, and vice versa for any upside surprise in data. The Technical Research Team released a piece on the GBP/USD’s technical position below. Additional UK data to be conscious of this week is UK employment and wage numbers (June) on Tuesday, as well as UK retail sales data for July on Friday.

Elsewhere, the latest Reserve Bank of Australia (RBA) meeting minutes is being released on Tuesday, alongside the Aussie wage price index QoQ. In addition, the Reserve Bank of New Zealand (RBNZ) are in the spotlight on Wednesday; there is a broad consensus among economists that the central bank is done tightening. Thus, I am not anticipating much from this event.

G10 FX (5-Day Change)

Technical View: Markets to Watch for the Week Ahead

Currencies

US Dollar Index Closing in on Resistance

According to the US Dollar Index, the buck rallied for a fourth consecutive week in recent trading, adding +0.8%. This follows a punchy rebound from support at 99.67 on the monthly chart in July (complemented by two neighbouring Fibonacci ratios [38.2% and 61.8%] at 98.72 and 98.95, respectively). August has added +1.0% MTD.

Regarding the trend on the monthly and daily timeframes, my outlook remains unchanged from previous writing (italics):

The monthly scale reveals that price action has been northbound since bottoming in 2008 at 70.70 if one focusses on the longer-term swings. Q4 (2022), as you can see, printed a noteworthy correction from 114.78 (from channel resistance), which remains active in 2023. Consequently, this timeframe remains USD positive in the longer term.

Predictably, due to the fractal nature of the markets, the Q4 (2022) correction on the monthly chart has displayed a visible downtrend on the daily chart, which also remains active.

Technical structure on the daily timeframe has seen price end north of the nearby 50-day simple moving average at 102.23 (as of writing) to come within touching distance of resistance at 102.92 (the high of Friday’s candle reached 102.91). Complementing the aforementioned base is trendline resistance, drawn from the high of 114.78, and the 200-day simple moving average, currently circling 103.34.

As a result of the above-noted analysis, the combination of daily resistance from 102.92, daily trendline resistance, and the 200-day simple moving average deliver a resistance zone between 103.34 and 102.92 to be conscious of this week. While the daily timeframe’s downtrend bolsters a response from here, the caveat is that the monthly timeframe’s technical picture displays an uptrend and a recent rebound from support, consequently indicating a breakout higher could be in the offing. As a result, interested sellers at current daily resistance are likely to seek additional confirmation before pulling the trigger. On the other hand, a higher breakout north of daily trendline resistance (as the monthly timeframe suggests) will likely spur breakout buying on the daily scale, targeting at least 103.54 tops (July 2023).

GBP/USD Vulnerable to the Downside

Ahead of this week’s UK inflation data, you will note that GBP/USD ended last week on the ropes after retesting the underside of a recently breached support on the weekly timeframe at $1.2767 (resistance). Eking out a fourth consecutive week in the red, this directs the technical spotlight towards a weekly support zone between $1.2331 and $1.2433, thus echoing a bearish presence despite the currency pair trending higher since late 2022.

Adding to the bearish vibe on the weekly timeframe, the daily chart reveals price recently pencilled in a lower low at $1.2620 (demonstrating early signs of a downtrend on this timeframe) and retreated beneath the 50-day simple moving average at $1.2763 (as of writing). This, aided by the daily chart’s Relative Strength Index (RSI) exploring sub-50.00, unearths support from $1.2584. If we push beyond here, the weekly support area highlighted above between $1.2331 and $1.2433 could make a show, which happens to share chart space with the 200-day simple moving average at $1.2349 (as of writing).

From the H1 timeframe, the week finished with buyers and sellers battling for position around $1.27 after fading resistance from $1.2737. Support at $1.2684, as you can see, is also in play; a push south of the noted support in early trading this week would help corroborate the bigger picture’s downside bias, unmasking a short-term bearish scenario and throwing light on H1 support from $1.2629 as an initial target, closely shadowed by $1.26 and, of course, daily support mentioned above at $1.2584.

Commodities

XAU/USD Targeting $1,900?

Spot gold in $ terms wrapped up the week underwater, pencilling in a third consecutive week in the red and erasing -1.5%. Despite the recent decline, the precious metal technically remains in an uptrend. Support calls for attention on the weekly timeframe at $1,898, a level merging with a descending resistance-turned-support taken from the high of $2,070. Should the yellow metal dethrone the support level, this bodes poorly for buyers, as the next downside support target visible on the weekly scale is set as far south as $1,823.

Having seen weekly flow exhibit scope to navigate lower this week, price movement on the daily chart shares a similar vision. Wednesday overthrew key support at $1,919, underpinning a bearish setting until the 200-day simple moving average at $1,900 (as of writing) and neighbouring support from $1,895.

Out of the H1 chart, limited support is visible until around $1,900 (not shown on the H1), which conveniently aligns with the 200-day simple moving average on the daily scale and support on the weekly and daily timeframes ($1,898 and $1,895). However, you may also acknowledge that downside momentum has noticeably slowed, compressing between two converging descending lines (drawn from $1,972 and $1,943) to form what is referred to as a falling wedge pattern: a potential bullish reversal formation.

Based on price action from all three timeframes, additional underperformance might be seen in gold until $1,900. Should the above come to fruition, the precious metal may remain between the limits of the H1 timeframe’s falling wedge pattern; therefore, selling rallies from the upper boundary could be something short-term sellers adopt this week.

Equities

Apple (APPL) Oversold?

MTD, Apple (AAPL) shares are down -9.5%, and are on track to snap a seven-month winning streak. This follows an all-time high of $198.23 formed in July. At the close last week, the stock ended down -2.3%.

APPL recently tumbled on the back of soft sales of iPhones and other hardware, eventually landing the stock on the doorstep of support at $177.83 on the weekly timeframe. In a market exhibiting a dominant uptrend, this—coupled with neighbouring support at $174.03—is potentially a major floor and may persuade long-term dip buying.

Shorter-term price action on the H1 timeframe also recently crossed paths with a support zone at $176.40-$177.48, which happens to be accompanied by positive divergence out of the Relative Strength Index (RSI). Interestingly, prior to forming the divergence, the RSI touched lows of around 11.00, its lowest value since mid-2017.

Considering weekly support, and given the lack of downside strength at the moment in the short term, H1 support from $176.40-$177.48 could be an area the charts witness a recovery unfold from.

S&P 500 Update

After chalking up a fifth consecutive month in the green (July +3.1%), aided by the Relative Strength Index (RSI) on the monthly timeframe rebounding from support between 40.00 and 50.00 (common in strong uptrends), the S&P 500 is down -2.7% MTD. To the upside, the all-time high at 4,818 (set at the beginning of 2022) remains a logical target as this market continues to emphasise a strong upside bias (trend). To the downside, support warrants attention at 4,102.

Price action on the weekly timeframe connected with resistance at 4,595 and channel resistance drawn from the high of 4,100 and guided the index lower at the beginning of this month. Downside momentum noticeably slowed last week, shedding only -0.3%. Should we break north of the current weekly resistance, resistance calls for attention at 4,743, followed by the all-time high; extending the recent correction swings the technical pendulum toward support at 4,325.

On the daily timeframe, 4,473 relinquished its position as support last week (now a marked resistance level) and uncovered a combination of a 50-day simple moving average at 4,438 (as of writing) and a 61.8% Fibonacci retracement ratio at 4,436.

The blend of daily support forming around 4,436, downside momentum slowing on the weekly scale, and monthly price demonstrating room to investigate higher levels highlights a potential bullish showing this week from the aforementioned daily structure.

Cryptocurrencies

XRP/USD Eyeing Lower Levels

Following a three-week losing streak for Ripple against the US dollar (XRP/USD), buyers stepped in last week and offered some mild respite. Adding +0.9% on the week, we have seen an indecision candle form on the weekly chart, highlighting a tentative market last week.

After a series of negative weeks, the aforementioned candle formation could be a sign of bullish intent (a reversal signal), though owing to a lack of obvious support until $0.53650, this may be simply a breather before resuming its downward trajectory. Should further underperformance materialise and we eventually shake hands with $0.53650, this area might draw in dip-buying interest in view of the uptrend in play since mid-2022.

Over on the H1 chart, resistance at $0.63679 caught sellers’ attention in the second half of last week. The base withstood an upside attempt on Friday, following Thursday’s downside support breach. Although follow-through selling has not been anything to get excited about, support from $0.61723 is a key base that will likely be on traders’ watchlists this week. Ultimately, though, this level is unlikely to deliver much of a floor due to the weekly timeframe displaying room to continue retreating until $0.53650 support, and the H1 timeframe has been trending southbound since mid-July.

Therefore, a breakout beneath $0.61723 this week might encourage follow-through breakout selling towards H1 support from $0.60580, fixed a touch north of last week’s low at $0.59604. Alternatively, renewed buying interest in the short term may pull the unit back to H1 resistance from $0.63679, which, given the surrounding technical picture, could also be a location sellers put in an appearance from this week.

Charts: TradingView

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