Oil trades above $66/barrel and puts further pressure on prices. Investors find refuge in commodities and stocks for fear of higher inflation in the coming months.
The price action in the trading week so far has been fairly typical of an NFP week – tight ranges, false breakouts and uncertainty. During such periods it is important to focus on the bigger picture and look beyond Friday’s NFP release, especially when trading the US dollar. Another strategy that many traders use during the NFP week is to focus on cross pairs (i.e., currency pairs that do not have the US dollar in their components) to diversify away from the dollar.
The stock market in the United States remains bullish. Yesterday, the main indices reacted to news that China aircraft entered Taiwanese space, pushing the DJIA down by a couple of hundred points below 34,000. It eventually proved to be a false breakout, as investors used the opportunity and bought in the dip.
In Europe, the main indices opened the day in the green. The Spanish index is up 1.5%, FTSE is just shy of the 7,000 level, and the Dax has strong support at the 15,000 level.
Commodities remain well fuelled, led by the WTI crude oil price that is up by over 1% on the day so far. The price of oil climbed above $66/barrel, putting further pressure on prices. Silver and gold remain popular as investors find refuge in the commodity market as a hedge against inflation.
The EU economic forecasts and the ISM Services are the main economic releases of the day. The EU area confirmed the double dip recession as it marked the second consecutive quarter of economic contraction. As for ISM Services, the market participants expect a figure of 64.2, but the risk is skewed to the upside as the US economy reopens.
Markets to Watch
DJIA, AUD/USD, EUR/JPY – markets in focus today.
The false bearish breakout in the DJIA is visible as the previous daily candlestick resembles a hammer pattern. The difference is that a regular hammer forms at the end of a bearish trend, which is not the case here. Instead, the market pulled a false breakout at the end of a pennant formation, and the current price action suggests further upside possible.
The dollar, however, trades with a bid tone, despite the bullish stock market. Here is the AUD/USD daily price action, that shows that in the last months, the market moved very little. The pattern resembles a head and shoulders formation, and the risk is skewed to the downside. A move below the potential neckline puts further pressure on the price action.
A rising wedge forms on the EUR/JPY daily timeframe and the focus shifts to the lower trendline. A break there suggests more weakness toward the 130 round level.
Winners and Losers
US equities and oil outperformed this week, while the euro shows signs of weakness.