AUD/USD climbs sheepishly from its lows, bear flag on ASX 200

A surprise announcement by French President Emmanuel Macron to hold a snap election following a heavy defeat in the European Parliamentary elections shook the euro on Monday. It is not often we see euro pairs dominate volatility at the very beginning of the trading week, but the announcement was enough to see euro pairs gap down, sending EUR/GBP down to a near 2-year low, EUR/USD to a 5-week low, and helping the US dollar index extend its post-NFP rally.

The US dollar index enjoyed its best day in five weeks on Friday following job growth figures and softer earnings data in the NFP report. A prominent bullish outside day formed with a high-to-low range of 1.5%, and the weekly chart closed with a bullish hammer. Odds of a September Fed cut have fallen to 45% ahead of a key CPI report on Wednesday, released just hours ahead of the FOMC meeting where traders will want clues for the September meeting. Overnight, 1-year consumer inflation expectations fell to 3.2% (3.3% prior), and the Conference Board Employment Trends Index rose to 111.44 (prior downgraded to 110.48 from 111.25).

With such big events looming over the next 48 hours, we could find price action to be both fickle and timid. Yet, as the Fed may not be in a position to deliver such a dovish meeting, it leaves potential for further USD strength, especially if CPI comes in hot in the hours prior to the Fed’s interest rate decision.

Trading volumes should be replenished today with China and Australia back at their desks after a long weekend.

WTI crude oil rose 3% on Monday on increased air travel and fuel demand expectations, after Bloomberg reported that 10.5 million flights are scheduled for Q3. Crude oil has risen 8% over the past four days, and resistance was met around $78. With the $80 handle nearby, I remain hesitant to expect the current bullish trajectory to simply continue while the US dollar is also rising.

Economic events (times in AEST)

• 11:30 – Australian business confidence (NAB)
• 16:00 – UK earnings, claimant count, unemployment, employment change
• 16:00 – Japan’s machine tool orders
• 20:00 – US small business optimism (NFIB)
• 21:00 – OPEC monthly report
• 21:00 – ECB Lane speaks
• 03:00 – US 10-year note auction

AUD/USD technical analysis:

A bearish engulfing week formed on AUD/USD, primarily due to Friday's post-NFP selloff. However, support was found at the 100 and 200-day EMAs, alongside a bullish divergence on the RSI (2) daily chart. We've since seen AUD/USD drift higher on Monday despite a stronger USD, as it tracked oil, gold, and silver prices higher. Yet, I doubt this is the 'real move' and suspect it could be setting up for its next leg lower.

The 1-hour chart shows potential for a dead-cat bounce, with prices stalling around the weekly and monthly pivot point, and the RSI (2) on the brink of reaching overbought territory. As always, common sense should be applied. APAC traders are returning to their desks after the long weekend, which could lead to some noise around current levels. Patience may be a virtue as we assess the tone after the open and either seek shorts around current resistance levels or wait to see if a higher low appears around the 50% or 61.8% retracement levels.

ASX 200 at a glance:

• The ASC 200 cash market rose for a third day ahead of the long weekend, with 10 of its 11 sectors rising (led by consumer discretionary and materials)
• A bullish engulfing week also formed with low lower tail and a very small upper tail
• However, subsequent price action on the SPI 200 futures market has fallen -1% since Friday’s high so a gap lower is expected at today’s cash market open

ASX 200 futures technical analysis (SPI 200):

The daily chart shows that the futures market has puled back for a second day from Friday’s peak, although it is trying to hold above the 10-day EMA. RSI (2) was overbought on Friday and still has room to move down to oversold.

The 1-hour chart shows a potential bear flag in the making, with the 38.2% Fibonacci ratio and prior swing lows providing resistance. Assuming prices do not rip higher, bears may seek shorts below 7830 with 7780 and 7760 in focus for a potential downside target.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge