Market worries for a possible US default persist

The USD edged higher against its counterparts yesterday, yet the overall sideways motion of the Dollar index seems to be maintained with fundamentals still revolving around the possibility of the US defaulting or not. It should be noted that the deadlock in the negotiations for the rise of the US debt ceiling was not lifted yesterday in the meeting between the US White House and Republican-led US lawmakers, despite both agreeing that default is not an option. On the other hand, though we have to note that US Treasury Secretary Yellen warned once again that “time is running out”. We expect the issue to drag on and should market worries intensify, we may see the issue weighing on the market sentiment, probably victimizing riskier assets first, such as equities. On the monetary front, we note that we had a number of Fed policymakers yesterday making statements and more or less all of them tended to lean on the hawkish side, with some forecasting that rates are to remain at high levels and no rate cuts are on the horizon, while other stated that they would feel comfortable with more rate hikes. Overall, the hawkish intentions seem to remain present and may provide some support for the Greenback on a monetary level, while at the same time may enhance a cautious sentiment in the markets, which in turn may weaken US stock markets.

On a technical level, we note that USD continued to be on the rise against the JPY yesterday as USD/JPY aims for the 137.55 (R1) resistance line. We tend to maintain our bullish outlook for the pair as long as the upward trendline incepted since the 11 of May, remains intact. Also note that the RSI indicator below our 4-hour chart remains near the reading of 70, supporting the notion of a bullish sentiment in the market for the pair, yet may also imply that the pair is nearing overbought levels and may be ripe for a correction lower. Should the bulls maintain control as expected, we may see USD/JPY breaking the 137.55 (R1) resistance line and aim for the 140.65 (R2) resistance line. Should the pair correct lower and the bears take over, we may see the pair reversing course, breaking the prementioned upward trendline, in a first sign that the upward motion was interrupted, break also 135.15 (S1) support line, which in turn may pave the way for the 132.85 (S2) support hurdle. Yesterday, we note that the common currency may have weakened a bit as Germany’s ZEW indicators for May implied that investors grew more pessimistic for Germany’s outlook, while also the conditions on the ground for the largest economy in the Eurozone seem to be deteriorating. On the other hand, UK’s March employment data sent out slightly mixed signals while Canada’s CPI rates showed inflationary pressures accelerating on a headline level yet easing at a core level. Also, we note that Japan’s GDP rate accelerated beyond market expectations, supporting macroeconomically JPY. Furthermore, we would highlight the acceleration of Australia’s Wage Price index for Q1, which tended to imply that the Australian employment market may continue feeding inflationary pressures ahead of the release of Australia’s employment data for April tomorrow.

Against the USD, AUD dropped yesterday and is currently testing the 0.6640 (S1) support line. We expect the pair to continue dropping given that the RSI indicator is near the reading of 30, implying a rather bearish sentiment. Should the selling interest persist and the pair’s price action breaks the 0.6640 (S1) support line we would switch our bias for a sideways motion in favour of a bearish outlook and set the 0.6575 (S2) support level as the next possible target for the bears. For a bullish outlook, we would require the pair to reverse direction, rise and break the 0.6700 (R1) resistance line in search of higher grounds.

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During today’s European session, we note the release of Eurozone’s final HICP rate for April, while ECB board member Elderson, ECB board member Panetta and BoE Governor Andrew Bailey are scheduled to speak. In the American session, we get the number of US building permits and housing starts for April, while oil traders may be more interested in the release of weekly EIA crude oil inventories figure and also note that ECB Vice President De Guindos speaks.