Market Insight for the Week Ending 16 June

It is an important week for the financial markets.

Following the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) defying market consensus and increasing rates by 25 basis points last week, the question is whether the Federal Reserve will follow suit at Wednesday’s meeting at 7 pm GMT+1. Most economists (Bloomberg) forecast no change (or a skip) to the Federal Funds target range, which stands at 5.00%-5.25%, though do bear in mind that the forecast range resides between a high of 5.50% and a low of 5.00%.

Market pricing suggests there is a 73% probability priced in for a pause before potentially hiking again in July. Interestingly, while further rate hikes are not off the table, the market has priced out any rate cut expectations this year.

The Summary of Economic Projections (SEP) will be released alongside the rate decision on Wednesday, with the median dot plot likely to be a key talking point (expected to forecast one more hike to bring the target range to 5.25%-5.50%). With most expecting the Fed to pause/skip policy firming, a surprise hike on Wednesday would trigger increased volatility across key asset classes. A pause, on the other hand, may underpin markets like gold and weigh on the dollar. However, should Fed Chair Jerome Powell keep the door ajar at the press conference thirty minutes following the rate decision, then any dollar downside could be short-lived.

Since the previous FOMC meeting in May, many will know that the US debt ceiling has been raised. In addition, markets witnessed a bumper non-farm payrolls print (out of the Establishment Survey) at the beginning of this month, adding 339,000 new jobs to the economy in May (nearly double the median consensus).

However, the unemployment rate (derived from the Household Survey) increased from 3.4% to 3.7%. Another key observation is that the core PCE index increased by 4.4% on a YoY basis (up from 4.2%). This—coupled with US housing market indicators pointing to possible stabilisation/recovery—echoes that the Fed’s job is not done yet. So, even if the Fed elect to pause this week, another rate hike is likely.

An hour or so ahead of the US cash open on Tuesday, US inflation numbers are also out this week. A deviation beyond the forecast range for this release, of course, would heighten tensions heading into the rate decision. YoY headline inflation is anticipated to cool to 4.7% (median consensus) in May, down from April’s 4.9% reading, marking an eleventh successive decline since peaking in July 2022 at 9.1%. YoY core inflation (excludes food and energy) is anticipated to slow to 5.4% in May, 0.1 percentage points lower than 5.5% in April.

The European Central Bank (ECB) will also steal some of the limelight in the second half of the week (Thursday), poised to increase its benchmark rates by another 25 basis points. Markets have fully priced this in. Therefore, the reaction to this event may be limited and focused more on commentary: whether the central bank signals further policy firming at the July meeting or offers more of a cautionary stance.

While inflation is cooling (euro area inflation eased to 6.1% in May, down from 7.0% in April), recent news saw the Eurozone enter a very mild technical recession in Q1 of this year. Economic output (GDP) slowed to a quarterly rate of -0.1% for two consecutive quarters after Q4 (2022) figures were revised to display a 0.1% fall.

Tuesday 13 June

UK Claimant Count Change for May at 7:00 am GMT+1

The change in people claiming unemployment benefits in the UK is expected to be 22,000 in May from 47,000 in April.

Annual Inflation Rate for the US for May at 1:30 pm GMT+1

Released a day ahead of the FOMC rate decision, this will be a widely watched event. Economists estimate that inflation will slow to 4.7% in May, marking an eleventh consecutive decline in headline consumer prices.

Wednesday 14 June

Federal Open Market Committee (FOMC) Interest Rate Decision at 7:00 pm GMT+1

Markets are pricing in a 70% probability that the Fed will hold the Federal Funds target range between 5.00% and 5.25%.

Thursday 15 June

European Central Bank (ECB) Interest Rate Decision at 1:15 pm GMT+1

Markets are almost fully pricing in 25 basis-point increases across all three key benchmark rates, with the ECB also likely to indicate further policy firming in the future.

Friday 16 June

Bank of Japan (BoJ) Interest Rate Decision at 4:00 am GMT+1

The Japanese central bank is widely expected to maintain its ultra-loose monetary policy.

US Preliminary (University of Michigan) Consumer Sentiment Survey for June at 3:00 pm GMT+1

The median consensus heading into the event is a marginal increase from May’s 59.2 to 60.8 in June.

Technical View: Markets to Watch for the Week Ahead

Currencies

Bearish Trend Reversal for the Dollar Index?

Daily Timeframe

With the FOMC in the limelight this week, a technical assessment of the Dollar Index will help highlight the key levels to watch for the week ahead. First and foremost, against a basket of six major currencies, the US dollar’s strength further diminished last week, down -0.5%. This somewhat questions the strength of the current trend on the daily timeframe, northbound since bottoming in mid-April at 100.79. In fact, Thursday, in the shape of a near-full-bodied daily bearish candle, pencilled in a fresh low, penetrating the 103.38 low (2 June) and thus displaying early signs of a bearish trend reversal. Time will tell whether we see continuation selling unfold, given the Relative Strength Index (RSI) ending the week posting a modest rebound from the 50.00 centreline.

In terms of technical structure, two immediate areas jump out this week. To the downside, the 50-day simple moving average can be seen at 102.51, a dynamic value sharing chart space with local support at 102.26. At the same time, any meaningful attempt to explore higher terrain this week will unmask familiar resistance between 105.82 and 105.36, which merges with trendline resistance extended from the high 114.78, the 200-day simple moving average at 105.45 and two Fibonacci retracement ratios (38.2% and 61.8%) at 105.54 and 105.25, respectively.

Commodities

 Gold (XAU/USD): Range Breakout?

Out of the weekly chart, following a near-test of the all-time high of $2,075 in early May, I see an active (albeit tentative) support zone at $1,928-$1,960. Buyers are present here, though they have yet to demonstrate much bearing. Consuming the aforementioned area shines the headlights on support as far south as $1,807. Interestingly, and somewhat supportive of a support breach, the weekly chart’s Relative Strength Index (RSI) demonstrates a trendline support break and indicates that upside momentum may continue to slow.

Meanwhile, on the daily timeframe, we have not seen much from spot gold since mid-May, meandering between $1,978 and $1,940 at channel support taken from $1,616. Overhead, the 50-day simple moving average is seen north of the aforesaid range at $1,990, with support calling for attention at $1,919 in case of a breakout beyond channel support this week.

Although the weekly timeframe has been trending higher since bottoming in September 2022, the daily scale is in the early stages of a downtrend (basic price structure: lower lows – lower highs). A break of the current channel support could emphasise this downside movement. The RSI remains working with space south of the 50.00 centreline, which informs market participants that average losses exceed average gains (negative momentum) and, for now, aligns with the current downtrend on the daily chart.

Shorter term, I see H1 price consolidating between $1,939 and $1,970. While price action could remain within these limits this week, bullish strength is visible at the upper limit of the said range. Following a wafer-thin reaction from the upper boundary on Thursday, Friday challenged the said boundary again and touched a high of $1,973. This tells me that buyers are perhaps gathering steam, and sellers are out of breath. As a result, a breakout north in early trading this week places resistances at $1,974 and $1,982 in immediate view.

A breakout higher would align with the weekly timeframe’s uptrend and current support zone, as well as the active daily channel support. The concern, of course, is the early downtrend on the daily chart and the RSI on both weekly and daily charts, emphasising slowing (negative) momentum.

Equities

Tesla (TSLA) Dip-Buying?

I feel this is a stock certainly worth a revisit.

The previous week’s analysis noted the following from a long-term perspective (italics):

… The monthly timeframe shows June making its way north … after discovering dynamic support from the 50-month simple moving average at $178.79. This implies additional outperformance for TSLA and shines the technical spotlight on potentially completing a monthly AB=CD resistance between the 200% extension ratio and the 100% projection ratio at $286.18 and $267.35, respectively.

As evident from the monthly chart, TSLA is 20.0% higher (MTD) and, as suggested, is closing in on the aforementioned AB=CD resistance. According to this, further outperformance could develop this week.

Offering more of a granular view, the daily timeframe shows the stock fast approaching a downside gap between $263.03 and $257.33 (likely a common gap [I see no evidence of it being a breakaway gap]) formed in October 2022 that was left unfilled. Some traders view these gaps as potential support and resistance; therefore, it is worth noting that $263.03-$257.33 is a potential technical headwind. What may add weight to a possible reaction at the noted resistance this week is that the Relative Strength Index (RSI) is trading at a high of 85.76 (levels not seen since November 2021) and nearing resistance (previous peak) of 94.20.

Lower on the daily price chart, I see support at $234.22, closely shadowed by another layer of support from $221.40.

Regarding trends for both the monthly and daily timeframes, we are now in alignment and trending higher.

Across the page on the H1 timeframe, Friday printed a considerable gap higher at the open (many refer to these as opening gaps). Given that we have room to move higher on the monthly timeframe, some space to manoeuvre on the daily timeframe and room to punch higher on the H1 until resistance at $255.12, filling the opening gap in early trading should not surprise. Consequently, the lower boundary of the opening gap ($235.23) and H1 support coming in from $237.32 could be an area dip buyers welcome this week.

Charts: TradingView

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