Market Insight for the Week Ending 19 May

The week ahead should be somewhat quieter regarding economic data.

From the US, with the latest inflation data in the rear-view mirror—which saw headline annual inflation dip below 5.0% to 4.9% in the twelve months to April—the first regional Federal Reserve Survey for May is on the radar Monday at 1:30 pm GMT+1. We also have US retail sales, weekly jobless claims numbers, housing data, and the US debt limit talks to focus on this week, as well as consumer price inflation from Canada. Across the Atlantic, German ZEW sentiment data will be released on Tuesday, together with UK jobs data.

Additional data points of interest will likely be Japan’s PPI data, industrial production and retail sales from China, the Reserve Bank of Australia’s (RBA) meeting minutes and Aussie jobs data.

Monday 15 May

New York Empire State Manufacturing Index for May at 1:30 pm GMT+1

The consensus heading into the event is for a lower-than-previous reading of 8.0 in May, following April’s 10.8 print.

Tuesday 16 May

UK Claimant Count Change for April at 7:00 am GMT+1

The change in people claiming unemployment benefits in the UK is expected to be down -15,000 in April from 28.2k in March.

Canada Annual Inflation Rate for April at 1:30 pm GMT+1

Following June’s 8.1% peak (2022) and continued softening in consumer prices (aside from matching months in September and October), economists estimate inflation to ease again to 3.9% in April.

US Retail Sales for April at 1:30 pm GMT+1

The YoY measure forecasts a lower-than-previous reading of 1.4% in the twelve months to April, down from 2.9% in March. MoM data, however, forecasts a higher-than-previous reading of 0.7%, up from -0.6% in March.

Thursday 18 May

Employment Data for Australia for April at 2:30 am GMT+1

Employment change is anticipated to have decreased to 25,000 in April, following 53,000 in March. The unemployment rate is expected to remain unchanged at 3.5%.

US Initial Jobless Claims for the Week Ending 13 May at 1:30 pm GMT+1

Following the previous week’s 264,000 reading, expectations forecast a minor decrease of 4,000 new claims in the recent week to 260,000.

US Debt Limit

The US debt ceiling debate will also be on top of most traders’ minds over the next few weeks, which is essentially a cap on government borrowing that Congress sets. It is well known that the US government spends more money than it brings in: it runs a deficit. Consequently, it must borrow to cover its obligations, and the government can only borrow a certain amount, and if more funds are required, then Congress must approve that. Since its inception in 1917, the debt ceiling has increased 78 times since 1960. To add some context here, the US government reached its borrowing limit on 19 January (US$31.4 trillion), and US debt recently reached new highs: an eye-popping US$31.7 trillion (as of writing).

If Congress fails to increase the debt ceiling, the US—the largest economy in the world—could essentially default on its debt obligations, albeit this would only likely be temporary. Not only would this affect US government bonds—think US Treasuries—but the wider effect would cause delays in things like social security payments, Medicare and the military, as well as trigger substantial job losses. White House officials warned that a brief default could trigger more than 500,000 job losses.

And if a default does come to fruition, considerable volatility is expected throughout the financial markets. Janet Yellen, the Treasury Secretary, said that ‘financial and economic chaos would ensue’ if Congress does indeed fail to lift the debt ceiling. US government yields would rally, and stocks would take a sizeable hit, as would the US dollar (which has been southbound for 7 months [weighed by the prospect of the US Federal Reserve hitting the pause button on interest rates]), with commodities perhaps spiking higher. Should a default materialise, the absence of funds would also have the Treasury prioritise spending to meet interest payments.

Party leaders—the Democrats and Republicans—will continue to debate raising the debt ceiling as the deadline for default looms: 1 June, the so-called X-date. US President Biden wants to raise the debt ceiling, though Republicans have called for spending cuts, and thus the debate remains a major talking point over the next few weeks.

Technical Markets to Watch for the Week Ahead

Currencies:

Sell-on-Rally Scenario for the Dollar?

According to the US Dollar Index, the US dollar gained 1.4% last week and settled at session tops. Additional outperformance, however, is questionable. The primary trend remains to the downside, yet the recent push has lifted daily prices to fresh highs, a move gesturing early signs of a trend reversal. With that being said, though, there is scope to pursue deeper water on the monthly timeframe until support from 99.67, and daily flow concluded the week welcoming resistance around 102.50ish (made up of the 50-day simple moving average, a 38.2% Fibonacci retracement ratio at 102.76 and a 100% projection at 102.65 [AB=CD bearish structure]). Consequently, this could deliver a potential sell-on-rally scenario for sellers to work with this week.

Alternatively, continuation buying could unfold, lifting the Dollar Index beyond the aforementioned daily resistance, and placing the technical spotlight on daily resistance from 103.85, followed by a daily decision point at 105.35-105.15. Supporting a move higher over the coming weeks, aside from early signs of a trend reversal on the daily scale, is the Relative Strength Index (RSI) crossing above its 50.00 centreline (positive momentum) on the daily chart, with the monthly chart’s indicator still toying with the possibility of testing the 50.00 centreline as support (aligns closely with indicator trendline resistance-turned-support taken from the high 82.87).

So, daily resistance will be a key base to monitor this week at around 102.50. Rejection opens the door for a possible sell-on-rally setup; rupturing resistance, nevertheless, paves the way for breakout buying, targeting daily resistance at 103.85.

GBP/USD: Active Higher Timeframe Resistance

It may seem like a repeat of last week’s analysis, though I assure you it is not. Sterling concluded the week -1.5% lower against the US dollar.

Following an eye-popping eight consecutive weeks of upside for GBP/USD, buyers passed the baton to sellers in recent trading after crossing swords with weekly trendline resistance drawn from the high of $1.4250. Erasing nearly two weeks’ worth of gains, continuation selling could see the unit target as far south as weekly support from $1.1851.

Aiding weekly resistance, a horizontal resistance area made a show last week on the daily chart between $1.2767 and $1.2638, consisting of weekly and daily resistance levels. This has thrown light back on daily support coming in at $1.2272 and also pulled the Relative Strength Index (RSI) slightly south of the 50.00 centreline (emphasising negative momentum and turning attention to indicator support from 37.78).

I also noted that further downside was likely for the currency pair in recent analysis (italics):

Shorter term, buyers and sellers are squaring off around the $1.25 handle, as of writing. Overhead, resistance warrants attention at $1.2552, followed by $1.2586, while stepping under $1.25 casts light towards support from $1.2453. Ultimately, the technical direction is favoured to the downside, meaning a break of $1.25 could be in the offing, a move perhaps opening the door for short-term breakout sellers towards H1 support from $1.2453.

As evident from the H1 chart, we dominantly veered beneath $1.25 and closed the week out beneath H1 support at $1.2453. In view of the technical resistance recently entering the fight on the bigger picture, and H1 support ceding ground, further selling is likely on the cards for the currency pair this week, targeting H1 support at $1.2436 and perhaps the $1.24 region.

Commodities:

Daily Timeframe

Gold (XAU/USD):

The price of spot gold in $ terms has recently pulled back from YTD peaks at $2,067, a whisker south of the all-time highs for the precious metal at $2,075. Should we break the $1,999 low (5 May) this week, this exposes support at $1,982, which aligns with a 100% projection at $1,983 (equivalent AB=CD support). Though overthrowing this barrier opens the door to support at $1,949, a level accompanied by trendline support drawn from the low $1,616 and a 1.618% Fibonacci projection at $1,944 (marking out a potential alternate AB=CD support level).

Consequently, a break of $1,999 this week unearths a potential bearish setting (albeit against the overall trend) to at least $1,982 support, a move which will likely be fuelled on the back of short-term stops beneath $1,999 and breakout sellers. However, as said, the direction of this market remains firmly to the upside, therefore support at $1,982 and $1,949 will likely remain key levels for dip-buyers this week if tested to eventually take on higher levels and confront the all-time high of $2,075.

Silver (XAG/USD):

As seen from the daily chart of spot silver against the US dollar, XAG/USD recently broke out to the downside after forcefully breaking south of a neckline ($24.51) of a double-top pattern formed around resistance at $25.85. Downside support can be seen in the form of a trendline resistance-turned-support taken from the high of $30.14, closely followed by the double-top pattern’s profit objective at $22.89.

Therefore, as we head into a fresh week of trading, price action favours short-term selling towards the noted daily support levels around the $23.22ish region. However, longer-term buyers could make a comeback should the aforementioned supports make a show, in line with the current uptrend (active since September 2022).

Equities:

S&P 500 Poised to Breakout Higher?

There’s not much to add in terms of the monthly chart for the S&P 500 that was not communicated in recent analysis. The trend remains firmly to the upside and has done since breaking out of a 13-year range in 2013. The upside bias is supported by the Relative Strength Index (RSI) rebounding from indicator support between 40.00 and 50.00. The correction from all-time highs of 4,818 (January 2022) saw the index pencil in a trough of around 3,491 in October 2022, which has encouraged long-term dip-buying.

The weekly timeframe also conveys a bullish narrative since overthrowing trendline resistance taken from the high of 4,818. Following a subsequent retest of the descending line to form support, price action recently shook hands with resistance at 4,177. Given the trend direction and lack of bearish intent seen here in recent weeks, together with the RSI retesting the upper boundary of an indicator ascending triangle pattern around 54.00ish, 4,177 is potentially vulnerable. A break of here could indicate follow-through buying towards resistance at 4,325 (16 August high).

Across the page on the daily timeframe, since the beginning of April, I see early signs of a potential diamond top pattern drawn from 4,163 and 4,069. While this is recognised as a high-probability reversal pattern among chartists, it will be a while until we see it come to fruition, if at all (we need at least two subsequent tests to emerge at the descending/ascending lines drawn from 4,186 and 4,048). Directly above the pattern’s structure, resistance calls for attention at 4,199, and support might form off the nearby 50-day simple moving average at 4,057.

Although there is a chance of the daily chart’s diamond top pattern completing and price breaking out lower (given weekly resistance at 4,177), the uptrend and absence of bearish activity at the said weekly resistance potentially swings the technical pendulum in favour of pushing higher. This may eventually take on not only weekly resistance but also daily resistance at 4,199, too.

As a result, breakout buyers will likely watch the said resistances closely over the coming days/weeks to take advantage of any push (close) higher. Alternatively, completing the daily chart’s diamond top pattern and a breakout lower could trigger a bearish scenario.

Cryptocurrencies:

BTC/USD Approaching Key Weekly Support

It was a dismal week for Bitcoin, down 7.3% versus the US dollar. As depicted on the weekly timeframe, price action ended the week within close proximity of weekly support from $25,381 after failing to find much grip above weekly resistance at $28,844. The recent correction (down move) is forming within the early stages of an uptrend. Therefore, dip-buyers could show from $25,381 this week if tested (the trend has been higher since price broke to fresh highs in mid-March).

Drilling down to the daily timeframe, anyone who trades harmonic patterns will acknowledge that the daily price closed in on a 100% projection at $25,984 (AB=CD bullish structure), which aligns with a 1.272% Fibonacci extension at $26,095. Positioned close by weekly support mentioned above at $25,381, this harmonic support base attracted dip-buyers on Friday. Harmonic traders are now potentially eyeing the 38.2% and 61.8% Fibonacci retracement ratios at $27,810 and $29,037, respectively (taken from legs A-D). The Relative Strength Index (RSI), on the other hand, reveals space to push south of its 50.00 centreline until we reach oversold territory (30.00).

Over on the H1 timeframe, I see short-term flow tested channel support extended from the low $27,279, which merged with the $26,000 level and also the daily harmonic support mentioned above. As a result, higher prices will likely unfold with the unit testing higher timeframe support, potentially overthrowing $27,000 and channel resistance taken from the high $29,850 to test H1 resistance at $27,287.

Charts: TradingView

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