As the US debt default crisis has been averted, market attention now turns back to the US Federal Reserve’s rate outlook. Following a stronger-than-expected reading of the US May non-farm payroll, interest rate expectations are gaining conviction for another 25 basis-point move by the Fed in July. However, there is a growing view that rates may remain on hold for a more extended period this year. Despite promising signs of an uptick in the unemployment rate and softer wage growth, additional tightening measures may be one-off moves rather than part of an extended process.
The US dollar has resumed its upward trajectory, gaining 0.6%, accompanied by a broad-based increase in Treasury yields. Consequently, the prices of gold and silver have come under pressure. Although headlines about potential oil production cuts by Saudi Arabia in July initially boosted oil prices, optimism quickly faded during today’s session. This scenario reminds market participants of the short-lived rally experienced back in April, where downward surprises in global economic data overshadowed previous news of production cuts.
Market participants eye Fed’s rate decision as US debt default crisis fades
To witness a sustained upside in Brent crude prices, several resistance levels need to be overcome. Currently, prices are retesting the $78.60 level, where a near-term upward trendline intersects with the Ichimoku cloud resistance. Greater conviction would require a move above the $80.00 level to set the stage for a retest of its April 2023 high.
In the Asian markets, a positive opening is anticipated, with the Nikkei up by 1.30%, ASX by 1.21%, and KOSPI by 0.60% at the time of writing. These gains largely reflect a continuation of the rally seen in Wall Street at the end of last week. Notably, the Hang Seng Index recorded a 4% gain on Friday, possibly reflecting expectations of upcoming policy support following disappointing economic data thus far. However, further validation is needed, and today’s economic calendar includes the release of the Caixin services PMI data. The resilience of the economy will play a crucial role in determining if the gains can be sustained.
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For the Hang Seng Index, a bullish crossover on the moving average convergence/divergence (MACD) may provide some relief for the bulls in the near term. However, several resistance levels lie ahead. These include a downward trendline resistance that has persisted since January, as well as the key psychological level of 20,000, which coincides with the upper edge of the Ichimoku cloud on the weekly chart. Overcoming these levels is essential to build greater conviction for a sustained upside.
On the watchlist, gold prices are once again testing trendline support. Following the stronger-than-expected US non-farm payroll figures, US Treasury yields experienced a broad-based increase, indicating that interest rates could remain elevated throughout the year. As a result, gold prices have given back most of their gains from the past week. The latest data from the Commodity Futures Trading Commission (CFTC) reveals a continued unwinding of net-long positions among money managers for the third consecutive week. If Treasury yields remain supported, there is potential for further moderation from the previously bullish build-up.
Conclusion
From a technical standpoint, last week’s movement has brought gold prices back to test a key trendline support at the $1,950 level. Any further decline below the May 2023 low could signify a downward break of a significant support confluence zone, where the 100-day moving average (MA) and Ichimoku cloud reside. This breakdown could pave the way for a retest of the $1,875 level.
As the US debt default crisis recedes, the focus now turns to the Federal Reserve’s rate decision. The market’s anticipation of further interest rate moves, coupled with developments in global economic data, will continue to shape various asset classes, including currencies, commodities, and Asian markets. Investors and traders will closely monitor these key factors to make informed decisions in the weeks ahead.