Disorientation: Market Volatility Remains

Market volatility remains on a high and is likely to do so until the conclusion of the FOMC meeting next Wednesday, when investors and traders alike will be hoping for some clarifications as to the course of action the Federal Reserve intends to implement with regard to QE and interest rates. The USD continued with its slump despite the better-than-expected retail sales and jobless claims, which only led to a general short-lived rebound for the dollar versus the majors. The DXY this morning was marginally lower since yesterday morning but the index is at a 4-month low, having lost close to 5% since Bernanke mentioned on May 22nd that the Fed could start scaling down the $85 billion asset purchases should the labour market shows sustained improvements, sparking concerns the equity markets will lose some of their steam.

Today sees the release of pricing data in the Eurozone and the U.S. The Eurozone is expected to show 0.1% MoM inflation for May, having experienced 0.1% deflation in April. The revised YoY figure for May will likely not change relative to the preliminary one as is usually the case. The estimated 1.4% increase YoY increase in prices will be a substantial improvement from the 1.2% inflation figure reported in April. These signs of recovery in the Eurozone could be further populated with a halt in the decreasing number of people employed in the final two quarters of 2012. Unfortunately the employment change figures come without a forecast.

Similar to yesterday, emphasis will be on the U.S. due to the stream of data reported today. The MoM U.S. Producer Price Index for May is expected to show an end to deflationary pressures witnessed the previous 2 months, albeit with the narrowest of margins. Nonetheless, the 0.1% increase in producer prices will be a major improvement from the 5-month record decrease of 0.7% reported in April. The YoY figure is due to end the 2-month spell of disinflation as prices are estimated to show an increase of 1.4%, more than doubling the 0.6% inflation figure released in April. Despite these increases in the headline figures, the PPIs excluding the volatile prices of food and energy are set to remain steady, with the YoY figure due to come in at 1.7%. The preliminary consumer sentiment index for June reported by the U. of Michigan is also expected to remain steady at its 6-year high of 84.5, despite the recent downturn in the markets. The current account deficit for Q1 is forecasted to remain virtually stable at $109.7B, with the previous quarter’s reading showing net outflows of $110.4B. With investor emphasis being lately on current account deficits, albeit particularly of developing countries, the figure may receive more attention than usual. Finally, industrial production and capacity utilisation are both due to show improvements, with the former recovering somewhat from the 0.5% contraction seen in April by expanding 0.2%. Capacity utilisation is due to show the narrowest of improvements relative to April, by increasing by 0.1% to 77.9%.

The Market

EUR/USD
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• EUR/USD continued to gain on the volatility as the disparity between the member state economies gives investors an array of investment opportunities that cater for a wide spectrum of risk appetites.

• EUR/USD found resistance just below 1.3400, with the pair retracing this morning having reached a typical Stochastics resistance level with the RSI also in oversold territory. Significant support comes at 1.3340, the 61.8% retracement level of the February – March plunge, with further Fibonacci support at 1.3320 and trendline support at 1.3300. Resistance comes at 1.3370, just below 1.3395 and 1.3425.

USD/JPY
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• USD/JPY rebounded following the positive U.S. data, but experienced a sharp down move following the release of the BoJ minutes, which showed concerns on the increased volatility in Japanese government bond yields, concerns which the BoJ failed to address in its previous policy meetings.

• USD/JPY has continued with its technical trading, finding resistance and support at key levels. Support today is seen at 94.9, 94.40, the 38.2% retracement level of the Abe rally, and 93.75. Resistance comes at 95.30, 95.90 and 96.40.

GBP/USD
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• In the U.K. the Conference Board will be releasing the leading indicators for May, with the previous three months seeing a 0.4% improvement in overall economic activity. In light of the successively improving prospects in the U.K., a further improvement is possible, though there are no official estimates to forecast this.

• The breakout from the strong resistance at 1.5690 found weak resistance at 1.5730. Strong resistance beyond this level is found at 1.5780, which sees two overlapping, significant, Fibonacci levels. Strong trendline, Fibo and 200-day MA support comes at 1.5690 with further support at 1.5650 and 1.5610, the 50% retracement level of the plunge at the start of the year.

Gold

• Gold continued trading in a consolidating fashion, coiling in a possible pennant formation, despite the dollar’s sustained weakening.

• Once again $1387 is likely to act as an initial weak resistance with further resistance below $1400. Support comes at $1378 with possible trendline support at $1370.

Oil

• WTI managed to rebound from the early losses experienced following the World Bank’s report, which revised downwards the global growth outlook. Crude benefited initially by the positive U.S. data, extending its gains as USD retraced in the later trading hours.

• Strong, well- tested trendline resistance came at $96.95. A breakout may see price head to $97.75, which sees a reversal level as well as the 61.8% retracement level of the steep decline from March to June in 2012. Trendline support comes at $96.25, with coinciding Fibo levels around $95.60 and further support at $94.50.

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