Wall Street Rebounds, Pound the Main Gainer Among FX Majors

EU shares traded in the red yesterday, but Wall Street saw all three of its major indices gaining ground, with the positive appetite rolling into the Asian session today. This may be due to Target Corp saying that it will offer deeper discounts to clear inventory. The pound was the main gainer among the FX majors, but Given that we cannot see a clear and concrete catalyst behind the rebound, we would guess that this was some sort of short covering.

Equities Erase Early Losses and Gain More, GBP Enjoys Strong Rebound

The US dollar traded mixed against the other major currencies on Tuesday and during the Asian session Wednesday. It gained versus CHF, JPY, NZD, and AUD in that order, while it underperformed against GBP and CAD. The greenback was found virtually unchanged against EUR.

The weakness in the safe havens yen and franc, and the weakness in the risk-linked Aussie and Kiwi, paint a blurry picture with regards to the broader market sentiment. That said, given that the yen and franc lost the most, and that the Canadian dollar was the second gainer in line, we believe that appetite may have improved at some point.

Indeed, although EU shares traded in the red, perhaps as investors become more cautious ahead of tomorrow’s ECB gathering, Wall Street saw all three of its major indices gaining ground, with the positive appetite rolling into the Asian session today. Initially, Wall Street slid after Target Corp cut its quarterly profit margin forecast. However, the firm also said that it will offer deeper discounts to clear inventory, which may have raised some speculation that if other large retailers follow suit, this could mean easing consumer prices soon.

For now though, US investors may be sitting on the edge of their seats in anticipation of the US inflation data due out on Friday. Recently there has been some speculation that the Fed may take a break from rising interest rates after summer, but several Fed officials poured cold water to that belief. Having said that though, a miss in Friday’s data could revive speculation of a pause, and if not a pause, a slowdown, in the Fed’s hike path. Something like that could continue to benefit equities as it would mean lower borrowing costs for firms for longer. On the other hand, an upside surprise could signal that inflation has not peaked yet, and that more aggressive action is needed by the Fed. This will be positive for the US dollar and negative for the stock market.

Now, back to the FX sphere, the pound was the main gainer yesterday, recovering earlier losses triggered by political uncertainty. It fell to a near three-week low against the dollar, a day after British PM Boris Johnson survived a confidence vote, but which left him politically weakened. Given that we cannot see a clear and concrete catalyst behind the subsequent rebound, we would guess that this was some sort of short covering. With the BoE expected to continue hiking interest rates, but at a slower pace than the Fed, due to increased recession fears, we believe that Cable could turn back down at some point soon.

DJIA — Technical Outlook

The Dow Jones Industrial Average traded higher after it hit support at 32615. However, in the somewhat bigger picture, the price remains within the sideways range marked by that support and the 33320 zone. Overall, that range is above the prior downside resistance line drawn from the high of April 21st, and thus, we would see more chances for the index to exit that consolidation pattern to the upside.

A break above 33320, and even better above 33490, the high of May 30th, could carry advances towards the 34120 or 34320 zones, marked by the highs of May 4th and the inside swing low of April 19th, respectively. If the bulls are not willing to stop there, then we may see them pushing towards the high of April 22nd, at 34800.

On the downside, we would like to see a dip below 32615 before we start examining whether the bears have gained full control. This will confirm a forthcoming lower low on the 4-hour chart and may initially target the 32290 barrier, marked by the inside swing high of May 25th. If that barrier does not hold either, then we may see extensions towards the low of that day, at around 31720, or the low of May 24th, near 31315.

GBP/USD — Technical Outlook

GBP/USD slid during the early morning yesterday but hit support within the important (for us) zone of 1.2410/70 and then it rebounded strongly. However, the rate is still trading below the downside resistance line taken from the high of March 23rd, and thus, we see decent chances for the bears to take full control again at some point.

A clear and decisive break below 1.2410 could confirm that and may initially target the 1.2325. If the bears are strong enough to break that hurdle also, then we may see them marching even lower, perhaps towards the next key support zone, at around 1.2165, which stopped the pair from falling lower on May 12th and 13th.

On the upside, we would like to see a clear break above 1.2775 before we start examining the case of larger advances. This could also signal the break above the downside line taken from the high of March 23rd, and may signal advances towards the 1.2975 area, which acted as a key support between April 8th and 19th. If that zone doesn’t hold, then we may see extensions towards the peak of April 14th, at around 1.3150.

As for Today’s Events

During the EU trading, we have the UK construction PMI for May, which is expected to have slid fractionally, to 58.0 from 58.2, and the final print of Eurozone’s GDP for Q1, which is expected to just confirm its preceding estimates.

Tonight, during the Asian session Thursday, China’s trade balance for May is coming out, with the surplus expected to have increased to USD 58.00bn from 51.12bn. This could be positive for the broader market sentiment, especially amid relaxing COVID-related restrictions in the world’s second largest economy, and especially if Chinese inflation eases on Friday.

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