Weak Bank Earnings Sends Wall Street Lower
Weaker than expected bank earnings sent indices lower on Friday. Wells Fargo was one of the biggest contributors to the declines, shedding -7.8%. And Wells Fargo, Citigroup and JP Morgan Chase also sold off, despite their earnings beating expectations. The S&P 500 (US500) and Nasdaq 100 (USTEC) declined -0.7% and the Dow Jones Industrial (US30) shed -0.6%. However, it was the small-cap index Russell 2000 which led the sell-off at -1.5% by Friday’s close.
The sell-off also resulted in the USD index trading higher and closing to a 1-month high. Now trading above its 20-day average, the correction high does not appear to be complete. Although traders should be aware that the 50-day average just above Friday’s high at 91.00.
AUD/USD and NZD/USD appear to be topping out, although NZD/USD appears structurally weaker, having closed to 12-day low and trades beneath its 20-day average. AUD/USD is holding above its 20-day average, although a break beneath 0.7667 signals a deeper correction.
The stronger dollar and risk-off tone weighed on precious metals, with silver (XAG/USD) and gold (XAU/USD) falling -3.1% and -1.1% respectively. Currently trading around 1827, gold may find support around its 200-day average at 1818.22. WTI (WTI) and Brent (BRENT) also fell under the pressure to close -2.3% and suggests an overdue correction is underway. Although their daily trend remains structurally bullish.
Today’s Calendar Events (Times are GMT+11 Sydney)
A host of data form China puts AUD pairs and Asian indices into focus for news traders. Weaker than expected GDP and retail sales could weigh further on AUD/USD and AUD/JPY, which are arguably due a correction after their recent rallies.
USD/CHF: Breakout Pending?
USD/CHF is testing a key resistance level in early Asian trade and appears poised for a bullish breakout. Given that it shares a strong, inverted correlation with EUR/USD, and EUR/USD looks ready to extend losses in a stronger USD environment, we think the odds of a bullish breakout appear high.
Furthermore, an inverted head and shoulders pattern has formed. If successful, the pattern projects a target around 9080, although we’d expect strong resistance around 0.9000 initially which makes it a decent interim target.
- A break above the neckline (0.8920) confirms the bullish breakout from the inverted head and shoulders pattern.
- Initial target is around 0.9000 and / or the descending trendline. Whichever comes first.
- A break beneath the right shoulder (RS) invalidates the bullish bias.
EUR/GBP: Probing Key Support
EUR/GBP is probing a key support level around 0.8865, which bears have failed to conquer since May 2020. A small inverted hammer on Friday shows hesitancy for this key level to break, although if we stand back and look at the bigger picture, a larger rounding top pattern appears to be forming. So it begs the question as to whether we’ll see a minor rally from current levels before breaking key support, or simply break lower from here.
It is worth noting that on prior visits to this level, classic candlestick reversal patterns have formed (such as bullish engulfing and morning star reversals). So, this could suggest we are in for a volatile session during the European session, whichever way momentum breaks.
- The near-term bias remains bullish above 0.8865, making it a potential candidate for intraday bulls.
- If a strong bullish candle forms on the daily chart by the close, odds favour a decent bounce from current levels.
- If price break below 0.8865 support then we will switch to a bearish bias. Next major support is all the way down at 0.8628. But this is a volatile pair and could reach that level in a matter of days, if recent volatility is anything to go by.
USD/JPY: Awaiting a Burst of Volatility
Last week we highlighted the significance of the bearish trendline on USD/JPY from the March 2020 high. The bearish engulfing candle (and 2-bar reversal) saw a clear rejection at the trendline to show supply at this level, and prices are now consolidating beneath the 20-day eMA.
Given the bearish structure, the bias is for a burst of bearish volatility. Yet we should also be prepared for a bullish breakout, because if bulls to regain control it would surely trigger large stops above the trendline and produce the more volatile move.
- A break beneath Wednesday’s low assumes bearish continuation and brings the 103 handle and 102.57 low into focus.
- A break above the trendline / and or the 104.40 high confirms a trend reversal. And this scenario could prove to be the more volatile outcome.