Market Update by Solidecn.com

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Important Technical Setup on Gold


Gold is once again trading near its lowest levels in a month, but bulls are seeking hope in the recent rebound that occurred on Friday and was preceded by a small doji candlestick. Gold recovered from initial declines on Friday and gained significantly by the end of the day as US jobs data came in mixed and EURUSD rebounded.

Friday's candlestick could potentially mark a local low and also the right shoulder of an inverse head and shoulders pattern. Today, we are witnessing a pullback in gold, which puts the fate of the right shoulder at stake.

As seen in recent months, there is a significant correlation between gold and EURUSD. Having said that, rebound in EURUSD could be the best scenario for gold bulls. In theory, it may happen this Thursday when US CPI data for July is released at 1:30 pm BST. Market expects headline US CPI inflation to accelerate from 3.0 to 3.3% YoY, with a monthly increase of 0.2% MoM.




Neckline of the inverse head and shoulders pattern on GOLD can be found in the $1,980 area. Should we see price rise and break above this hurdle, it could pave the way for a larger upward move with a textbook range of the breakout from the pattern being $2,066 per ounce.

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Chart of the Day - Wheat

In terms of market-moving news, this past weekend has been very calm with neither politicians, nor central bankers delivering any significant comments. However, recent developments in the Russia-Ukraine war are pushing wheat as well as crude prices higher at the beginning of this week.

Russia has intensified shelling of Ukrainian ports after withdrawing from the Black Sea grain export agreement. Also, attacks of Ukrainian maritime drones on Russian Navy vessels have become more frequent recently. It was reported that apart from Russian Navy warships, a Russian oil tanker was also targeted this past weekend. This has led to a small jump in oil prices at the beginning of new week's trade as investors fear that it may limit Russia's ability to export its crude via Black Sea. However, it also means that return to the Black Sea grain export deal may be harder as hostilities at sea are picking up. As a result, we are observing an over-3% jump in wheat prices today.




Taking a look at WHEAT at D1 interval, we can see that the commodity has recently made another failed attempt at breaking above the 765 cents per bushel resistance zone. Price pulled back later on and declines were once again halted at the 625 cents per bushel support zone. Price is trying to bounce off this area today. A near-term resistance zone to watch can be found ranging around 665 cents per bushel, marked with previous price reactions as well as 50-session moving average (green line). However, if bulls fail to maintain control over the market and the price breaks below the aforementioned 625 support, a deeper drop may be looming. This is because the zone marks the neckline of a double top pattern. A break below the neckline would confirm the pattern and may trigger a drop with a textbook target range of 475 cents per bushel.

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Chart of the Day - USDCAD


USDCAD is one of the pairs to watch in the early afternoon as the first Friday of a new month has come and therefore it is time for release of jobs data from the United States and Canada. Of course, report from the United States will be watched more closely than Canadian one but the fact that both will be released at the same time (1:30 pm BST) means that USDCAD is likely to become very volatile around that hour.

The US report is expected to show a 200k increase in non-farm payrolls, slightly lower than the 209k reported in June. Unemployment rate is seen staying at 3.6% while annual wage growth is seen slowing from 4.4 to 4.2% YoY. Fed Chair Powell stressed that the September decision will be data-dependent and there are 4 key US macro reports ahead of the September 20, 2023 meeting - 2 jobs reports and 2 CPI reports. NFP report for July is the first one of the four and will be watched closely. A higher-than-expected jobs gain and a smaller drop in wage growth would likely boost hawkish bets in the markets and may trigger gains on the USD market as well as declines on equities.

The Canadian report is not expected to have as much gravity as the Bank of Canada is largely seen as having already finished its rate hike cycle. Nevertheless, release is likely to trigger some short-term CAD-volatility.




Taking a look at USDCAD chart at D1 interval, we can see that the pair has experienced strong gains recently, driven by strengthening of US dollar (USDIDX - light blue overlay). However, advance was halted after the pair reached resistance zone ranging above 50% retracement of the downward move launched at the turn of May and June 2023 (1.3370 area). This is a price zone that had halted advance in early-July as well. A strong US report combined with weaker Canadian data could trigger a break above the aforementioned 1.3370 area. In such a scenario, the next resistance to watch can be found ranging above 61.8% retracement (1.3440). On the other hand, should we see CAD gain against USD - drop in USDCAD - the support level to watch can be found at 38.2% retracement (1.3300 area).

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Chart of the Day - EURUSD

The dollar continues to appreciate after yesterday's strong labor market data and the latest dovish comments from the ECB president, Lagarde. Yesterday's ADP report showed employment growth of 324,000, compared to significantly lower expectations of 190,000. If the good ADP data are confirmed by Friday's NFP reading, it may encourage the Fed to continue raising interest rates at the September FOMC meeting. The discrepancy between NFP and ADP was quite large last month, but growth above 200,000 NFP would still give a very high chance of a Fed hike in September. Analysts' estimates assume a publication at the level of 200,000. Currently, the market is pricing an 82% chance of no hike at the next September meeting of the Fed. However, these estimates could still change significantly if subsequent data continue to show a strong labor market and rebounding inflation.




This last, more hawkish sentiment favors the appreciation of the dollar, which, after reaching a medium-term peak at the level of 1.12640, continues to correct downward. Historically, the announcement of the end of the interest rate hike cycle almost always coincided with a weakening of the dollar, regardless of the macroeconomic situation. Recent comments from Jerome Powell indicate that the Fed would like to see sustained low inflation and a weakening labor market. For this reason, recent strong NFP publications raise questions about a pause or end to the hikes. A continuation of the strengthening of the dollar could cause the EURUSD pair to retest the level of 1.0855.

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USD Gains after another Solid ADP Data

ADP jobs report for July was released at 1:15 pm BST today. Report was expected to show a 190k jobs increase - a significant deterioration from almost half a million reported for June (+497k). However, an actual report showed a much higher employment gain of 324k! This was another strong ADP reading and we have observed a hawkish reaction on the markets - USD gained, GOLD dropped and US index futures ticked lower. This should not come as a surprise as another strong report from US jobs market boosts odds of a Fed rate hike at September meeting. ADP data released today was the final hint ahead of official NFP report scheduled for Friday, 1:30 pm BST.



EURUSD deepened drop following release of solid ADP data. EURUSD painted a fresh daily low near 1.0960 mark. However, part of the move lower was already erased.

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Chart of the Day - Gold

Fitch downgrading US credit rating from AAA to AA+ is the big news in the markets today. However, the market's reaction has been fairly muted given how significant this news can be. It should be noted that Fitch is the second major ratings agency to downgrade US credit from top-tier rating - S&P did so back in 2011 and has not upgraded it back since. Should the third major ratings agency - Moody's - follow suit and also downgrade US credit from AAA grade, this could have serious implications on US bonds. Some funds are obliged to hold only AAA grade bonds and once neither of three major agencies has such a rating on US credit, those funds may be obliged to sell their Treasury holdings, potentially triggering a slump in the TNOTE market.

However, the rationale behind Fitch downgrade is disputed. Fitch said that repeating debt ceiling disagreements over the past 20 years, last-minute solutions to debt ceiling problems, rising general government deficit as well as issues with US governance are the reasons behind the move. US officials rejected the rationale behind the decision saying that downgrade from Fitch is baseless and bizarre.

Announcement from Fitch yesterday after close of the Wall Street session triggered some volatile market moves. US equity futures launched overnight trading with an around 0.4% bearish price gap. There were also some notable safe haven flows into USD, JPY and gold. However, a bulk of those moves have been reversed already.



Taking a look at GOLD chart at D1 interval, we can see that a potential major reversal pattern is building up. GOLD pulled back to the $1,940-1,950 price zone, where previous price reactions as well as the 50-session moving average (green line) can be found, but bearish momentum began to slow. Should we see a rebound off this area, the right should of a potential inverse head and shoulder pattern would surface. In such a scenario, neckline of the pattern at $1,980 will be on watch as a break above could trigger an almost $90 jump, which would push GOLD close to all-time highs.

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AUDUSD

RBA decided to keep rates unchanged at the second meeting in a row, pressuring AUD

AUDUSD is trading 0.7% lower, slightly more than an hour after RBA policy announcement. Reserve Bank of Australia has decided to hold rates unchanged for the second meeting in a row. Expectations ahead of the meeting were split - economists saw a chance for a 25 bp rate hike while money markets priced in an over-60% of rates staying unchanged. Statement was Fed-like with hints that further tightening is not off the table but will be data-dependent. A lower-than-expected CPI print for Q2 2023 likely gave RBA comfort to keep rates unchanged today.



Market participants seem split on what comes next. Some say that the RBA will deliver one more rate hike this year. However, money markets are rather conservative with pricing - peak is currently seen at around 4.25% in December, down from yesterday's pricing of 4.35% peak at the turn of 2023 and 2024. NAB and ANZ signal that one more hike may come what would support AUD. However, other see AUDUSD dropping to as low as 0.6400 should global slowdown triggered by US recession materializes.

Market pricing for rate hikes at future RBA meetings is low but at the same time it should be noted that market does not expect cuts until the end of 2024 either.




AUDUSD is dropping significantly today, although it still trades relatively far above local lows from the previous week. The pair is trading sideways in a wedge pattern.

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Chart of the Day - US500

The S&P 500 (US500) recently reached a critical resistance level at 4631, raising questions about the market's next moves. Last week, the Federal Reserve implemented a widely anticipated 25 bps interest rate hike, and market participants closely monitored Fed Chair Powell's press conference for hints about future policy decisions. However, Powell offered no clear signals, emphasizing the Fed's reliance on data for future choices. Economic data following the FOMC meeting pointed to a soft landing scenario, with US Jobless Claims surpassing expectations, but the US PCE and Employment Cost Index falling short of forecasts.

In the upcoming week, several economic data releases will play a crucial role in shaping market sentiment. These include the ISM Manufacturing PMI, US Job Openings, US ADP data, US Jobless Claims, ISM Services PMI, and the highly anticipated US NFP report. The market's focus on the soft-landing narrative suggests that positive data may push the market higher, while disappointing data could trigger downward movements. Despite some short-term caution, the S&P 500's overall trend remains bullish. However in the short-term a pullback or consolidation phase is expected before any potential further highs. Ultimately, the ongoing rally may lead the index to new all-time highs, with a healthy consolidation period in the weeks and months ahead.



Examining the daily timeframe, the S&P 500 encountered resistance at 4631, leading to a pullback as sellers took the opportunity to secure profits. Potential support levels for a pullback could be at 4550 and 4500. The index's price is currently trading near the upper boundary of an ascending channel (indicated by the blue line) that has been respected since February 2023. The next crucial resistance level to watch for is around 4700-4730 points.

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Chart of the day EURJPY

EURJPY is one of the currency pairs that is experiencing elevated volatility today. Bank of Japan meeting is a prime reason behind JPY-volatility while slew of data releases from Europe as well as speeches from ECB members is ensuring EUR-volatility.

Bank of Japan decided to keep interest rates and other monetary policy settings unchanged at a meeting today. There were some expectations that BoJ may announce changes to yield curve control and it did… to some extent. BoJ said that bandwidth around target yield will remain unchanged at +-0.5% but it will allow greater flexibility, meaning that yields may be allowed to deviate as much as 1% from the target. While not a clear and explicit change to yield curve control parameters, the move is seen as paving that way for dropping YCC altogether in the future

Moving on to EUR-side, there were some interesting comments offered by ECB members this morning. Stournaras said that if a hike is delivered at the September meeting it will be the last one and rates will stay at the peak for a few months. Similar comments were voiced by Vasle who said that the September meeting may bring a hike or a pause in the cycle. Apart from ECB speeches, a number of macro reports from Europe was released today, including an unexpected pick-up in Spanish inflation in July. There is one more key piece of data from Europe scheduled for release today - German CPI report at 1:00 pm BST.





Taking a look at EURJPY chart at D1 interval, we can see that the pair is realizing an important technical pattern - double top. Pair broke below the neckline of the pattern in the 153.50 area, paving the way for a deeper drop. Textbook range of the downside breakout from the pattern suggests a possibility of EURJPY dropping to as low as 149.00. However, it should be noted that today's BoJ decision triggered massive volatility with the pair trading 1% higher at one point earlier today and 1% lower at another. Currently the pair is little changed on the day and the shape of today's daily candlestick shows that there is a lot of indecisiveness on the market.