Midweek trading ideas: How will US inflation data impact EUR/USD?

Hi there. This is Michael Kramer of Mott Capital. Today is Tuesday, August 25th and it's around 4:30 p.m. New York time. So, it's been a quiet week up until now. Wednesday, August 26th, we're going to see a lot of economic data start to come out. Then, of course, after the New York close, we'll be getting Nvidia's results. Uh Thursday, we'll take a breather, but then on Friday, we'll also have Kevin Warsh's big Jackson Hole speech. So, when it comes to Wednesday, August 26th, we're looking for personal income for the month of uh July as along with uh PCE. We're looking for uh PCE to show uh a month-over-month gain of 0.2% up from 0.1. Core PCE is expected to remain unchanged at 3.3%. Headline PCE month-over-month expected to rise by 0.1% up from -0.1%. Year-over-year expected to decelerate to 3.6% from 3.7%. Also, we'll be getting um on the 26th, the second round of estimates for GDP. We're looking for uh GDP to remain unchanged at 1.5%. Then, of course, on August 27th, which is Thursday, we'll be getting our initial jobless claims. And then, of course, like I mentioned on and then on Friday, uh August 28th, we'll have Kevin Warsh uh giving his uh speech at the Jackson Hole Economic Symposium uh at 10:00 a.m. Eastern time. That being said, uh we have seen uh some movements over the last week since we last spoke. We did see a very big move in the euro on Wednesday, August 19th. This was following uh uh news that the Treasury here in the US may look to increase its bond buyback program. We did see the euro rise into an overbought condition where it saw the uh FX rate rise above the upper Bollinger Band as well as the relative strength increase above 70. Um however, we have been consolidating sideways now the last couple of days. More importantly, we've also been holding above support at this 116 60 area which coincides with the highs seen at the end of May. So, as long as this area of support continues to hold, it does make a strong case for the uh euro to begin to extend its gains perhaps towards the 117 area, perhaps all the way back up towards the 117 uh 90 region, 118. If PCE were to come in hotter than expected though on Wednesday, August 26th, that could result in the euro giving back a lot of the gains we just recently saw, potentially dropping towards the 115 70 area, uh which also would coincide with the 20-day uh simple moving average, which comes in the middle of the Bollinger Band. The British pound uh also had a very big uh sharp rise on Wednesday, August 19th. We have seen it continue to grind hind higher. Uh although it has stalled the last couple of days, it did get to an overbought position like the euro, but not nearly uh in the same degree. You can see it just barely uh got it barely tested the upper Bollinger Band on two occasions, and the RSI just barely got above 70. Uh again, the pound appears to be in a pretty strong upward momentum uh trend right now. You can see the RSI continuing to trend higher. Again, not really in an overbought position. The uptrend in the pound is also very strong. You We can see that the uh British pound's been uh rising right along the 10-day exponential moving average and uh we could see it extend all the way up towards 137. Like the euro, it is susceptible to a pullback. If you were to get a higher than expected PCE number, it could send a decline in the pound below the 136 level. It could set up a return back to the 19th levels around 1913530. When we look at the Japanese yen, not much happening here. We've really been consolidating sideways now. Going back to August 10th, you can see that right now the yen is uh basically moving uh uh beyond the 20-day moving average. The 50-day moving average is way up around 161, so there's plenty of room there. You're seeing the volatility come back in with the implied with the Bollinger bands starting to compress. You can also see that the yen is trying to make an attempt uh to build some bullish momentum, although we haven't quite gotten there yet. Uh again, if we continue to see the dollar weakening as we've been seeing more recently in the euro and the pound, it potentially sets up uh more uh yen strength as well, potentially coming down to 15820, even maybe coming back down towards the lower around 15720. Uh the big level for the yen continues to be the 155 area, which we're nowhere near at this point. Uh if we were to see again a a stronger PCE reading, I think that could potentially propel the yen up towards the 160 and 1/2 to 161 area, which is where the um 50-day moving average resides. Uh Brent oil has remained fairly uh volatile. It did make a very nice move up, although it has stalled out uh at this point. Um From where we were on August 21st, we've seen it come in hard the last 2 days. Again, uh one would think with some of the broader themes going on in the world with supplies uh globally, we continue to see oil moving up. Hard to say what makes it move on a daily basis these days, but at least at this point uh it would seem that maybe we're just in a little bit of a retracement phase. You can see that if you measure from the bottom here uh on a August 5th to the peak on August 21st, we're just about in that 50% to 61% retracement zone. Uh a break below 87 and 1/2 probably does set up though a uh a a move back down towards the 50-day moving average. Um notice that we did break below the 10-day exponential and the 20-day simple moving averages, which is a little bit of a bearish short-term indicator. Uh also, if you notice the RSI has started to turn lower putting in a lower high, which also could be an indication that momentum is starting to to wane and and starting to turn more bearish. I would think if we were to see the uh price of oil dip below the 50-day moving average, that would be a real negative over the near term and it would probably mean that the oil price of oil could test 82 and maybe even test some of the lower levels we recently saw back in early July when it reached into the 70s. I would think though again that there's a lot enough things going in the world that volatility in oil is probably going to remain high and this may just turn out to be a period of uh retracement. Gold prices have uh suddenly really started to move again. This big move up on the 19th came on the same day as we saw the dollar really begin to weaken uh globally against the major currencies and you're seeing it also in the precious metals with gold prices really uh accelerating now to the upside. Uh gold finds itself not quite overbought yet. Perhaps there's some more room to reach towards 4750 or so. Just like the FX rates, a stronger uh a stronger PCE report which leads to more confidence that the Fed is going to have to hike sooner than later, likely acts as a headwind for gold only because the dollar should technically strengthen on something like that. Um, and that should lead to gold prices coming in. Otherwise, the next area of resistance for gold is around 4750, and you can see that maybe up to 4850 is another area of resistance. But, if you were to get below beyond 4850, gold could make a run towards the 5,000 to 5,100 area cuz there's just not a lot of resistance to really get in the way of it once we get past the 4850 region. The DAX has ended up stabilizing after falling below that uptrend. We haven't really seen it uh extend any further. In fact, we did see the DAX get back above the 10-day exponential moving average after trading below it for a couple of days. This is probably more of the positive development, which suggests that maybe the DAX can rise back to the trend line somewhere uh around 26,580 to 26,700 in this range would be the next area of resistance. Uh a break below 26,000 would probably open a pathway to the 50-day moving average and the support area from uh late July around 25,500. But, right now the trends look fairly favorable for the DAX if it can stay above that 10-day moving average. The FTSE has also managed to get back above the 10-day exponential moving average, which does make some sense since we have seen the FTSE tend to do better when precious metal prices are rising. We can see that it is testing this area of resistance around 10,800 to 10,875 to about 11,000. A breakout above 11,000 obviously opens the door to significantly higher prices. While, if we were to see the the FTSE really kind of stall out around this 10,900 area really unable to get through this zone of resistance like it did the last time we'd have to then beginning to watch the movements versus the 10-day exponential moving average cuz that would be our first signal that perhaps the FTSE is going to run out of steam and not be able to have the momentum needed to carry it higher. The NASDAQ has had a rough start to the week falling on Monday the 24th and then rebounding slightly on Tuesday the 25th. Again, Nvidia results on Wednesday the 27th are likely going to have a heavy hand in where in the NASDAQ goes from here. Notice that the NASDAQ got above the 20-day got above the 50-day moving average and has now come back below it. It's also come back below the the 10-day exponential moving average. It's also trading right around the 20-day simple moving average. So, we're right now at a convergence of moving averages which appear to be serving as an area of resistance at least for right now. Again, if the if the if the if the index can get above those moving averages, those moving averages then could become to could could begin to work as support, but right now we're below them and you can also see that momentum is starting to really wane. If we were to see the NASDAQ drop below 28,900 which is sort of the low we saw on the 24th, I think that probably opens a pathway to lower levels maybe even an area in this open area in here which looks like a gap back to around 28,160. If we're able to get above those moving averages again, I think you could see the NASDAQ probably retest the recent highs around 30,100. The S&P 500 also has just recently moved back below the 10-day exponential moving average. You can see it's been serving as resistance for the past couple of days a very similar look to what the DAX looked like. So again, I think it's a very similar sort of motion. Uh if you were to get really positive numbers out of Nvidia and you were to see uh the the S&P rise above the 10-day and potentially get beyond 7710, that probably leaves the S&P moving back up to 7800 pretty quickly. Uh on the flip side, if we were to see the S&P break the 7650 area, I think you're potentially talking about it going all the way back to 7575, but more importantly, uh perhaps all the way back to 7450 or so. Maybe it makes a stop at the at the 50-day moving average first, but you can clearly see there's an opening in this chart, which suggests there's a gap there that may still be waiting to get filled. Uh finally, when we take a look at the Dow, you can see also kind of converging around its moving averages. The 20-day moving average, the 10-day has been kind of weaving back and forth above and below it. You can see right now that the 10-day is sort of acting more as a magnet as opposed to support and resistance. You can just see that we've been kind of meandering around it since the 17th. Uh again, I think it's a very similar type of setup with the Dow. Now, Nvidia doesn't have nearly Nvidia is in the Dow Industrials, but it doesn't have the same type of weighting that it has in the Dow as it does compared to the S&P and the Nasdaq. So, positive results out of Nvidia may not have a very big impact on the Dow, but clearly the upside resistance level somewhere around 54,400, while a break of support at 52,750 and probably the 50-day moving average at 52,700, probably leads to a steeper decline back towards the 51,500 region. Anyway, that's all I'm going to have for this week, and we'll see you next.