Market Insight for the Week Ending 5 May

We have quite a week ahead of us.

Central bank decisions from the Reserve Bank of Australia (RBA), the Federal Open Market Committee (FOMC) and the European Central Bank (ECB) will be firmly in the spotlight this week.

The RBA is widely expected to keep its Official Cash Rate (OCR) unchanged for a second consecutive meeting at 3.6% on Tuesday. Annual Aussie inflation cooled to 7.0% in Q1 2023, down from 7.8% (a 30-year high) in Q4 2022, according to the Australian Bureau of Statistics (ABS). According to the ASX 30-Day Interbank Cash Rate Futures, a no change to the benchmark rate is now fully priced into the market. So, we will unlikely see much movement unless a surprise move occurs.

Wednesday then welcomes the FOMC rate decision. Despite ongoing turmoil in the banking sector—First Republic Bank (FRC) plunged on Friday, with a rescue deal looking thin. FRC dropped a whopping 75% on the week and refreshed record lows of $2.99—the FOMC is widely anticipated to increase the Fed Funds Target range to 5.0%-5.25%. Inflation in the US continues to slow. Annual headline inflation cooled for a ninth consecutive month to 5.0% in March, which marks the lowest inflation rate since mid-2021.

However, core inflation (excluding volatile components such as food and energy) increased by 5.6% in the twelve months to March, up from 5.5% in February. Fed Funds futures traders forecast another 25bp hike and cuts into the year-end. Given the sticky core inflation rate, it will also be interesting to see if the Fed keeps the door ajar for additional rate increases. If Fed’s Powell does indeed push back against imminent rate cuts, this will likely drive USD demand.

Then on Thursday, we have the ECB rate decision, with many desks pricing in a 25bp increase. We do have inflation data out before the rate decision on Tuesday, though this is unlikely to sway the decision. Economists estimate that headline YoY inflation for April will increase to 7.0%, 0.1 percentage points higher than March’s 6.9% reading. Core YoY inflation for the same month is expected to match March at 5.7%, while the MoM headline rate is anticipated to cool to 0.3%, down from 0.9% in March.

Also in the headlights, of course, is Friday’s latest US jobs data. The median forecast for non-farm payrolls is around 180,000 in April, down from March’s 236,000 print. The forecast range heading into the event resides between 220,000 and 150,000. According to the median forecast, the unemployment rate is expected to increase to 3.6%, 0.1 percentage points higher from the previous 3.5%.

Technical Markets to Watch for the Week Ahead

Currencies

Downside Vibe Remains for the Dollar

I remain a USD bear, which has not changed for the past few months. Therefore, much of the following text will echo thoughts put forward in previous writing.

While the buck managed to find some respite the week prior, price movement echoed an indecisive vibe last week, consequently pencilling in a weekly doji indecision candle.

There is still the potential to move higher in the short term. Yet, medium-term analysis suggests USD bears are likely to remain in the driving seat until monthly support at 99.67. In previous writing, I noted that although the monthly chart displays an uptrend (since 2008), there is scope to extend the 7-month correction from 114.78, targeting monthly support from 99.67, hence the medium-term bearish setting for the buck. As a result, although the overall longer-term trend faces north, I feel USD bears still have some gas in the tank.

I also aired the following in recent research (italics):

The Relative Strength Index (RSI) on the monthly timeframe shows that the indicator remains on the doorstep of its 50.00 centreline, which happens to be shadowed by a trendline resistance-turned-support from the high of 82.87. While this puts forth a possible bullish view, the RSI on the daily chart remains nestled comfortably beneath its 50.00 centreline (telling market participants that average losses exceed average gains: negative momentum), consistent with the bearish outlook in the medium term.

Before sellers attempt to overthrow the 100.27-100.77 demand on the daily scale, however, chartists—given the demand—may want to pencil in the possibility of a pop higher. Nevertheless, this will unlikely be anything to write home about and is unlikely to move beyond the 50-day simple moving average at 103.09: a sell-on-rally scenario will likely be on the watchlist for many going forward.

Thus, the US dollar remains a sell-on-rally market for me, targeting an eventual breach of daily demand at 100.27-100.77 to monthly support from 99.67.

GBP/USD Showing Room to Continue North

The pound outperformed against its G10 peers last week, with GBP/USD gaining 1.0% and closing in on prominent resistance. As evidenced from the weekly timeframe, the aforementioned currency pair is nearing trendline resistance taken from the high of $1.4250, sheltered just south of resistance at $1.2767. These remain two key levels as we enter the first full week of May.

Meanwhile, on the daily timeframe, price action is absent of resistance until $1.2638, which shares chart space closely with the weekly resistance mentioned above at $1.2767 (and a long-term 61.8% daily Fibonacci retracement ratio).

It should be clear that both weekly and daily timeframes are trending northbound, visible through the basic price action: higher highs/lows. Therefore, according to the bigger picture’s trend and price structure, buyers have room to manoeuvre until touching gloves with resistance between $1.2767 and $1.2638.

Shorter-term flow shows H1 price jumped on Friday, leaping beyond several key technical resistances to $1.2584 and unmasking the $1.26 handle, together with two Fibonacci projection ratios: 1.618% ($1.2613) and 1.272% ($1.2601). Should a short-term correction materialise, resistance-turned-support warrants attention between $1.2538 and $1.2549. So, with the higher timeframes indicating that buyers could still be at the wheel and H1 action exhibits scope to test $1.26, dip-buyers may be drawn to the noted H1 support should the area make its way into the picture in early trading this week, targeting $1.26, followed by daily resistance from $1.2638.

Commodities

WTI Oil Trendline Resistance Breach?

The price of oil ended the week considerably off worst levels though down -1.7%, marking a second consecutive bearish week.

From the weekly timeframe, I see price action rotated lower ahead of resistance at $85.20 and cast light back on familiar support at $65.30. Technically, I see no indication of a trend reversal to the upside in this market right now, despite the higher high moulded in mid-April at $83.49. Remember that the trend has also been south since topping in early March (2022) at $129.42. What is also interesting is that the Relative Strength Index (RSI) is testing the upper boundary of a failed pennant pattern, taken from the high 50.17, which may provide indicator support and underpin any bullish activity.

From the daily timeframe, the $72.64-$74.37 decision point zone entered the fray on Wednesday; despite a run-of-the-mill reply Thursday, Friday scaled 2.5% higher from here and closed above the 50-day simple moving average at $76.05 (alongside the RSI closing in on the underside of the 50.00 centreline). Below the decision point has support calling for attention at $69.26, while follow-through buying this week could see a rally towards resistance at $82.45— fixed nearby the 200-day simple moving average at $81.92.

On the H1 timeframe, price wrapped up Friday on the doorstep of trendline resistance taken from the high of $83.08. A break of this descending line unbolts the door to resistance at $77.61, which converges closely with a 38.2% Fibonacci retracement ratio at $77.58 and a 50.0% retracement ratio nearby at $77.72.

On account of the above analysis, knowing that daily price made its way above the 50-day SMA on Friday and the weekly RSI is testing pattern support, breaking through H1 trendline resistance is possible in early trading this week with subsequent short-term buying seen towards H1 resistance around $77.61.

Equities

S&P 500 Nearing Particularly Interesting Resistance

The S&P 500 added +0.9% following a sharp U-turn in the second half of the week.

The monthly chart is clear; we have been trending northbound since bottoming in early 2009 at around 666.79. We also recently printed a trough (or higher low) at 3,491 in October 2022 after correcting from all-time highs of 4,818 earlier in 2022. Consequently, given the recent near-20% recovery, this remains a long-term buyers’ market. You may also acknowledge that the Relative Strength Index (RSI) has bottomed from long-term support between 40.00 and 50.00 (common in strong uptrends).

The weekly timeframe reveals the unit recoiled from trendline resistance-turned-support taken from the high of 4,818 in mid-March and recently directed price to within striking distance of familiar resistance drawn from 4,177. With the lack of bearish interest at this point and last week’s close at session highs, along with the monthly scale firmly directed to the upside, it would not surprise me to see the index overthrow resistance at 4,177 this week to run for the 4,325 peak (16 August [2022]). For those who follow the RSI indicator, you will note that the value overran the upper edge of an ascending triangle at 53.72, placing the indicator in positive territory (positive momentum).

Adding to the bullish narrative, the daily timeframe stripped offers around descending resistance drawn from the high 4,325. Aside from resistance at 4,199, there’s little stopping the index from testing the 4,325 top mentioned on the weekly chart.

As a result, weekly resistance from 4,177 is particularly vulnerable this week. However, daily resistance at 4,199 may prove troublesome (in fact, a whipsaw north of weekly resistance into the said daily resistance [a move potentially enticing selling] could be seen). Should the resistances fail to deliver much of a ceiling, breakout buyers will likely command attention, technically drawing this market towards 4,325.

Cryptocurrencies

ETH/USD Eyeing Higher Prices

ETH/USD eked out a marginal gain last week, adding 2.0% and reclaiming a portion of the previous week’s 12.0% drop.

Technically, price action on the daily timeframe is working between support at $1,848 and channel resistance taken from the high of $1,680. Note that the upper side of this channel was recently breached, but, for me, given that price re-entered the channel space after coming within a whisker of testing resistance at $2,146, the ascending resistance remains of note. Outside of the aforementioned levels, support is visible at $1,713, while higher up on the curve, I am still watching the mentioned resistance at $2,146. Overall, the trend is higher on the daily chart, and the recent dip into $1,845 support is an area where dip-buyers could emerge. Additionally, I see the Relative Strength Index (RSI) value attempting to reclaim space above the 50.00 centreline after hitting a low of 44.80 last week.

A closer look at price action on the H1 timeframe reveals buyers and sellers squaring off around the $1,900 region, back and forth since 27 April. Local support and resistance also reside close by at $1,866 and $1,946, respectively. Another resistance to be aware of is set just north of the $1,963 26 April high at $1,965.

Going forward, having noted daily support in play at $1,848 within a market trending north, H1 support between $1,866 and $1,900 will likely deliver enough of a floor for buyers to perhaps take aim at engulfing H1 resistances at $1,946 and $1,965.

Charts: TradingView

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