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Market Wrap
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The pound is weakening against the yen as the Bank of England face the UK Parliament in the Monetary Policy Report meeting this afternoon. We had identified the daily low from Wednesday 11th of May as a potential level of resistance and that this morning’s break higher than Fridays high was possibly a fake out. So far, this analysis is holding true, and the next level of interest will be Thursdays low and the daily 200-period EMA. The Bank of England Governor said that in the face of inflation the bank is very uncomfortable and in a difficult place. This is the central banks biggest test in 25 years of independence. The cause of inflation has been firmly placed at the rising cost of energy, with the BoE calculating 80% of inflation is due to energy and tradable goods issues.
The forex heatmap has flipped from being red in the lower left corner to red through the middle as the Swiss franc joins the pound with outflows. The US dollar is holding up well even after the NY Fed manufacturing data came in a lot worse than expected. This could all flip over the course of the next 48 hours as we have several FOMC members including the Fed Chair speaking. Today’s comments came from Williams who reiterated that the number one issue was inflation and that it’s running far too high and persistently so.
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Traders looking at the US dollar index daily chart may be seeing the falling MACD and RSI negative divergence to price, which could set up a shorting opportunity for them. Personally, I would need to see a break of the 5th of May swing low before considering taking a short. We may get that after the US retail sales data tomorrow and like I said before, after the FOMC have spoken. The other geopolitical uncertainties are arising from Sweden and Finland who are sending Foreign Ministers to Turkey to address objections about them joining NATO. Russia has already announced there will be severe consequences if these countries join the alliance.
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The S&P500 is back below the 4000 level and edging towards Thursdays high, which I am expecting to act as support. I won’t be aiming to initiate a long here, but it could become the basis of the next upswing, which leads to bullish market structure and allows the bulls to re-enter. The double top around 4300 is the key target for me, with plenty of liquidity above them from the most recent FOMC meeting.
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The USDJPY has been correlated to the US 2-year yields recently and but is holding up quite well withing this daily inside range as the short-term yields drop away from their recent highs. The 2-year is the yield that the Fed’s monetary policy influences the greatest, so if the FOMC come out with a more hawkish stance this week, the 2-year yield is likely to rise again and drag the USDJPY higher. The daily chart is also showing the currency pair is in a very strong and well-established uptrend with the 200-period EMA over 1000 pips below.
