Market Insight for the Week Ending 7 July

Last week saw the monthly CPI indicator rise 5.6% in the twelve months to May, down from 6.8% in April and comfortably south of market forecasts of 6.1%. This, coupled with robust employment data and China’s economic recovery hanging in the balance, has seen markets price a 63% probability that the RBA will hold this week (at the time of writing).

Over in the US this week, ISM manufacturing and services PMIs will steal some of the spotlight. The latter has remained in contractionary territory for several consecutive months, with Monday’s release at 3:00 pm GMT+1 unlikely to be any different as the forecast range is set between a high of 48.3 and a low of 46.7. Regarding the ISM services PMI, scheduled for Thursday at 3 pm GMT+1, the indicator remains expansionary, just. May’s release printed 50.3, down from April’s print of 51.9. Median expectations heading into June’s print, however, call for 51.0. Note that the previous three months have ranged between 52.0 and 50.0.

FOMC meeting minutes are also out on Wednesday at 7:00 pm GMT+1.

US labour data will garner the most attention this week. Markets welcome ADP non-farm employment change and JOLTS job openings (Job Openings and Labour Turnover Survey) data a day before Friday’s headline non-farm payroll’s release for June at 1:30 pm GMT+1. The median consensus is for 225,000 new payrolls to have been added to the economy in June, down from the bumper month in May (339,000). Unemployment is expected to remain unchanged at 3.7% (note that we have ranged between 3.4% and 3.7% since April 2022), with average hourly earnings for the month also set to match the previous month’s value at 0.3%.

A strong jobs report for June would likely increase the odds of a rate hike this month. You may remember that the Federal Open Market Committee (FOMC) left the Federal Funds target rate unchanged at 5.00%-5.25% on 14 June, following ten successive rate hikes. The key observation, though, is that despite a pause being observed, this was a hawkish hold. According to the FOMC’s dot plot for May, Fed officials foresee two additional rate increases by the end of 2023, projecting a median rate at 5.6% versus 5.1% in March (to a target range of 5.50%-5.75%). Markets, nevertheless, are currently pricing an 80% probability of a 25bp hike at the next meeting on 26 July, followed by a potential pause and subsequent cuts heading into 2024.

Technical View: Markets to Watch for the Week Ahead

Currencies

GBP/USD to Seek Higher Ground?

Sterling finished the week largely unmoved against its US counterpart.

Technically, out of the weekly timeframe, GBP/USD recently faded a key resistance level from $1.2767, following the break of trendline resistance taken from the high of $1.4250 earlier in June. It should not surprise to have seen the unit reject the said horizontal resistance given the number of longer-term buy-stops likely filled north of the aforementioned trendline.

The question going forward, however, is whether there is sufficient selling pressure to contain breakout buyers, particularly as the currency pair has been entrenched within an uptrend since September 2022. A retest of the breached trendline may be seen this week, and assuming buyers remain in the driving seat, as suggested by the longer-term trend, $1.2767 might eventually be cleared, and the door opened for resistance at $1.3042.

Meanwhile, on the daily chart, we have seen the GBP pullback to within a stone’s throw of support at $1.2584 (and the nearby 50-day simple moving average at $1.2547). Considering Friday’s rebound just north of the noted support level, this emphasises bullish intent and implies that a retest of the weekly trendline may not occur this week. Instead, we might observe price action attempt to overthrow the weekly resistance level mentioned above at $1.2767 to eventually approach daily resistance from $1.3001, closely followed by weekly resistance at $1.3042, also highlighted above.

Lower on the curve, the H1 timeframe reveals price cleared offers around trendline resistance on Friday (drawn from the high of $1.2841) and whipsawed above the $1.27 handle. The trendline resistance-turned-support level could be enough to deliver short-term support to this market in early trading this week and draw in buying, in line with the bigger picture suggesting a nudge higher could be seen. Should support emerge, the $1.2755 region (blue oval) is vulnerable and unlikely to welcome much selling; cleaner resistance (upside target) resides around $1.2785, sheltered under $1.28.