DAX 30 & FTSE 100 Wedge Breaks Look Imminent, Catalyst Required

The DAX 30 runs the risk of becoming rangebound if a bearish break is posted The FTSE 100 has established a longer-term rising wedge dating back to January Stock Market Forecast for the Week Ahead: The Summer Doldrums Approach

DAX 30 & FTSE 100 WEDGE BREAKS LOOK IMMINENT, CATALYST REQUIRED

The DAX 30 and FTSE 100 have worked themselves into similar technical patterns over the last few weeks as both indices find themselves near the lower-bound of a rising wedge formation. Rising wedge patterns are generally viewed as bearish technical formations and, if the textbook example occurs, conclude by a breakout to the downside through the lower bound. Thus, the presence of such a formation on the European indices could suggest potential declines in the days ahead.

DAX 30 TECHNICAL FORECAST

While the formation is typically viewed as an ominous one, there is cause for encouragement on the DAX 30 price chart. Most notably, the DAX 30 has recently established a series of new all-time highs which could suggest an eventual wedge break may serve as healthy consolidation before the next move higher rather than a rally-breaking reversal.

A bearish breakdown would see the DAX 30 test prior resistance around the 15,400 mark and a breach through secondary support may lead to range-bound price action for the German equity index.

DAX 30 PRICE CHART: 4 – HOUR TIME FRAME (MARCH 2021 – JUNE 2021)

FTSE 100 TECHNICAL FORECAST

The FTSE 100 finds itself in a similar position, albeit over a much longer timeframe which could suggest a deeper retracement should bearishness occur. Unlike the DAX 30, the FTSE has yet to establish a new all-time high in the pattern, or in the post-pandemic era, which highlights the relative weakness of the index.

Thankfully for bulls, the FTSE 100 enjoys nearby support in the form of a Fibonacci level and the 50-day simple moving average. Both technical levels conveniently coincide with the lower-bound of the rising wedge which trades just north of 7,000. A breakdown could see the FTSE 100 seek initial support around the 6,800 mark.

FTSE 100 PRICE CHART: DAILY TIME FRAME (DECEMBER 2019 – JUNE 2021)

US Dollar Analysis: Hot Inflation and a Potential Infrastructure Bill – More Weakness Ahead?

Bipartisan group of Senators reached a preliminary agreement on an infrastructure bill The bill is considered to be “fully funded” and will not be financed by any tax increases USD weaker on the day, following strong inflation and news of a massive infrastructure bill

A bipartisan group of Senators agreed on a $1.2 trillion infrastructure package Thursday evening, paving the way for a concrete bill to hit the floors of Congressional chambers in the coming days. A group of 10 Senate Democrats and Republicans reached an agreement on Wednesday, one that is “fully funded” and will not include any tax increases. The bill is rumored to cost $1.2 trillion over 8 years, with $579 billion in new spending over the first 5 years. The agreement is a massive step forward following the collapsed talks between President Biden and GOP Senator Shelley Moore Capito. The next battle for the bipartisan group is to appease party leaders, but opposition is expected.

The news of increased fiscal spending will be applauded at the Federal Reserve, as Chairman Jerome Powell has highlighted the need for increased fiscal support to reignite the economy following the pandemic. Any sort of infrastructure bill will contain funding that will ultimately help the Fed reach its employment targets coming out of the pandemic. It is expected that the bill would put billions of dollars into workforce development and retraining programs that help labor market participants adapt to the technology of the 21st century. Not to mention, any bill would generate tens, potentially hundreds of thousands of jobs in areas such as transportation, construction, and manufacturing.

Additional fiscal spending on the scale of $1.2 trillion may have USD bears licking their lips. However, as the economy begins to reopen and jobs rebound, upward pressure on the Greenback may persist. The Dollar appears to be caught between strong economic data and a lethal combination of QE and hot inflation. Without a clear break to the upside or downside, we may continue to see a gyrating Greenback throughout the recovery.

US DOLLAR INDEX (DXY) DAILY CHART

The US Dollar Index sits in a precarious position right now, just above the psychologically significant level of 90. The Greenback has held up well against this level, despite strong economic data, inflation concerns, and an unprecedented Quantitative Easing (QE) program. As the conversation begins to turn to tapering at the Federal Reserve, markets could begin to see a stronger US Dollar once the intention to slow asset purchases is communicated. Between the 90 handle and the 0.382 Fib level at 89.708, the US Dollar has found an extremely strong support zone, only trading below this level for a brief period in early January.

Taking into account a potential taper in the coming months along with continued strong economic data, the catalysts are present for the Dollar Index to push higher even in the face of unsustainable government spending. Continuing on the current trajectory toward “substantial further progress,” as the Federal Reserve puts it, may push the Dollar Index back towards the 0.5 Fib level at 95.545 or even toward pre-COVID levels near 100. The debate surrounding the recovery and this potential infrastructure bill revolves around one question – has American exceptionalism been priced in? Given the Greenback’s resilience in 2021, holding above 90.00, another potential $1.2 trillion in fiscal spending may not provide as large a shock to the system as some might think.

Australian Dollar Forecast: AUD/USD Rises as Post-CPI Bond Yield Drop Drags US Dollar

S&P 500 sees a new record-high close following a better-than-expected CPI print Asia-Pacific markets likely to see upbeat trading given lack of market volatility

AUD/USD climbs above trendline resistance with a bullish SMA crossover in the works

FRIDAY’S ASIA-PACIFIC OUTLOOK

Friday’s Asia-Pacific session looks on track for a higher open following an upbeat Wall Street trading session. Inflation in the United States rose above analysts’ expectations for May. The headline Consumer Price Index (CPI) crossed the wires at 0.6% , the highest print in more than ten years. On a year-over-year (YoY) basis, CPI rose 5.0% versus an expected 4.7%. The S&P 500 closed at a fresh record high.

However, markets have been hyper focused on central bank policy. That said, core inflation – a measure that strips out volatile items such as food and energy – crossed the wires at 3.8%, beating the forecasted 3.4% figure, according to the DailyFX Economic calendar. Treasury yields rose in the immediate aftermath, but rate traders moved back into government bonds, pushing the 10-year yield to the lowest mark since early March.

That said, earlier this week, Australia’s consumer inflation expectations rose to 4.4% from 3.5% the prior month. The data represents a broader theme across markets as consumers face rising prices, driven by rising prices at the factory gate. Major building materials, including copper, iron ore, and lumber, have all seen significant gains through the pandemic. The risk-sensitive Australian Dollar climbed overnight after the sharp turnaround in Treasury yields dragged the US Dollar.

The European Central Bank’s (ECB) released its June policy decision last night, with the European central bank publishing a new round of Staff Economic Projections. However, EUR/USD was largely unfazed on the news. The lack of reaction to the ECB meeting and the US inflation figures is surprising, but traders may feel comfortable with the amount of risk exposure at current levels. It may also be that markets are now more confident in the Fed’s transitory outlook on inflationary pressures in the economy.

AUD/USD DAILY CHART

AUD/USD rose above its 38.2% Fibonacci level overnight, jumping from the 50-day Simple Moving Average (SMA). Price appears to have made a decisive break above trendline resistance, an area that has been pressuring the currency pair through this week. A bullish crossover above the 20-day SMA from the rising 50-day SMA appears to be on the cards in the coming days. Moreover, MACD looks to be gearing up to move above its signal line, a bullish sign.

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