The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
If there was any doubt that we are fully entrenched in a broad-based dovish outlook for Central Banks around the globe as trade disputes intensify and inflation is nowhere to be found, the official commencement of the RBA easing cycle is yet further evidence of such well-telegraphed thesis. Moreover, judging by the violent selloff in the DXY, the market is clearly growing convinced of the premise that the Federal Reserve might be the next Central Bank to bite the bullet. Remember, sellers in risky assets are still exerting complete control in fixed income and equity valuations, which makes the recent pullback in the Japanese Yen an attractive proposition upon one’s strategy agreeing. The hammering of the US Dollar has, by default, led to the Euro capitalizing the most, while the performance of the Sterling continues to underwhelm. The Aussie, meanwhile, has managed to navigate the RBA rate cut with a firm stance, as there were no signs of a dovish cut, with the Central Bank hinging its next call on rates to labor conditions.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
- The Reserve Bank of Australia, as widely expected, lowered its interest rate by 25 bp to 1.25% from 1.50%. The key question in today’s event was whether or not the Central Bank will portray a dovish enough stance to justify the nearly 75bp of cuts priced in the next 12 months. In other words, will the RBA produce a neutral cut that may cause a relief rally in the AUD or a dovish cut, implying a July cut follow up.
- Judging by the immediate reaction in the AUD post cut, there was no explicit mention of any further rate cuts even if the statement does not imply the easing cycle is over either, far from it, noting that “the Board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.” One can compare May vs June statements, courtesy of Anthony Barton from MNI News.
- Australia’s retail sales for April came at -0.1% m/m vs 0.2% expected, which is yet again another marked disappointment and reinforces the notion that the RBA is not done cutting rates as lower consumer spending is directly related to housing’s disposable income (jobs).
- In the crypto space, while unrelated to the behavior of currency markets, we’ve seen aggressive sell-side flows retuing into the BTC market, which has collapsed sub $8k.
- The market is still trying to figure out if the threats by Trump to increase the tariffs on Mexican imported goods is going to come to fruition or is just a bluff. Based on the headlines via Mexican officials, they seemed undeterred, thinking the chances of tariff hikes are slim. Besides, US press notes that Republicans in Congress are seriously considering to put this decision to a vote in order to block President Trump’s planned new tariffs on Mexico.
- The US administration made a statement saying that China is misrepresenting trade talks in response to China’s white paper on trade. These type of headlines do portray the abysmal differences and hostile approach taken by both sides. It represents negative fundamental fuel to keep the risk off profile well and alive.
- According to the Australian local press, the govement is urging Britain to ban Chinese tech giant Huawei from a role in building new ultra-fast mobile networks, arguing the weste alliance of intelligence-sharing partners should have a consistent position. The risk of China retaliating economically against Australia is rising.
- There is no doubt that the market is growing increasingly dovish on the outlook for the Fed monetary policy going forward, as the performance by the DXY depicts. The Fed’s favorite yield curve (3m/10y) has deteriorated dramatically, which communicates the market is clearly anticipating a Fed in a gradual transition into lower interest rates on trade and inflation risks. The next two Fed meetings are on June 19 and July 31. While one may think is highly improbable for the Fed to cut rates in June, the market is assigning a 38% chance of a cut, while the odds of a cut in July stand at just over 50%.
- Reinforcing the idea that lower rates in the US may be coming, Fed’s member Bullard told the press that a rate cut may be warranted soon on trade and inflation risks, adding that the inversion in bond rates now also supports the case for lower interest rates.
- US May ISM manufacturing index came at 52.1 vs 53.0 expected, the lowest read since Oct 2016. The deterioration in the data comes mainly driven by renewed pessimism as the survey period coincided with the announcement of new tariffs by the Trump administration. This economic release is mounting evidence of the faltering in US growth momentum.
- In Europe, we get the CPI flash estimate y/y, expected to come at 1.4%, while the core CPI flash estimate y/y is anticipated at 1.0%. After peaking out at the 2% mark, inflationary pressures in the Euro area have been on a steady slide as the growth outlook in Europe stays stagnant.
- Fed’s Power is due to speak about the Federal Reserve’s policy strategy, tools, and communication practices at an event hosted by the Federal Reserve Bank of Chicago; the attention clearly fixated in any potential indication that lower rates in the US are coming.
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
The thematic of broad-based USD weakness in the context of an ongoing deleveraging is without the shed of a doubt the dominant profile ruling market dynamics. And even if the Yen index does not reflect a deterioration in financial conditions in the last 24h, judging by the performance of fixed income assets, equities or the VIX clinging onto the 20.00 mark, the risk-averse conditions argue for buying weakness in the currency.
It really is a bloodbath in the DXY and US yields at the moment, as the perception has rapidly permuted from a Fed with room to hold onto its neutral stance to no longer in a position to justify such thesis as the market comes to terms that a protracted trade war with China, alongside low inflation, are the prerequisites to move the needle in lower rates. The US 2-yr yield has come down below 1.9% while the benchmark Fed funds stay at 2.25%-2.5%, a clear declaration of intentions by market forces, no longer ignoring that the backdrop is very unfavorable for the Fed to allow a prolonged period of neutral policy settings. Overall, stay vigilant as the risk-off is well, alive and justified.
Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)
EUR/USD: Overstretched Bullish Run Finds Equilibrium At Hefty Prices
GBP/USD: Bullish Structure Maintained With High Acceptance
USD/JPY: Sell-Side Bias Remains Intact
AUD/USD: Bullish Stepping Formation Despite RBA Rate Cut
- Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
- Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
- POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
- Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
- Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
- Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
- Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
- Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
- Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection