As financial conditions remain loose with central banks keeping monetary policy expansive, upside in global bond yields remain capped and thus provides a supportive outlook for precious metals. Last week, we looked at the importance of falling real yields providing a bullish outlook for gold prices. With this in mind, silver prices have also been underpinned, while there is a potential for outperformance in silver, which is highlighted in the gold/silver ratio (Figure 1), given that this precious metal performs better during a recovery phase.
Silver prices have seen a breakout to reach 1-month highs, rising to $18.40. However, key resistance in the form of the descending trendline from the September 2019 peak has capped upside for now. While the outlook remains supportive for silver prices, a breach above trendline resistance is needed for confirmation, which in turn could see a return to the pre-COVID 2020 peak before the 2019 highs.
USD/JPY continues to recoup lost ground after collapsing 3% from the June high (109.85) before reacting to the psychologically imposing 106-handle.
Initial development in the RSI late last week suggested price would continue to breakdown, but the steep reversal prior to oversold readings could see USD/JPY work its way back to the 200-day moving average (108.21).
Having said that, the momentum indicator has diverged from price and its fellow technical oscillator, hinting at an underlying degree of bearishness in USD/JPY, which could see the exchange rate reverse at the February downtrend as its done on two previous occasions.
Reaction around the 200-MA (108.21) could provide a key tell for future direction, with the inability to clear the sentiment-driving moving average possibly signalling a reversal of the 5-day rally.
While we still retain a bearish bias on the Pound, we do not rule out the possibility of a short squeeze, which in turn could offer better levels for fading, as upside will likely remain capped in light of the uncertainties over trade with the EU, alongside the US, who are currently mulling tariffs on UK goods.
Momentum signals remain broadly weak for the Pound, while the muted price action in recent sessions hints at GBP/USD coiling for a breakout. As it stands, the Pound is anchored around the 50DMA situated at 1.2415. A firm break below 1.2400 raises the risk of a test of the mid-June lows at 1.2330-40. On the upside, gains may be capped at 1.2480-1.2500, which roughly coincides with the 100DMA.
The psychologically imposing 12,000-handle is providing a temporary level of support for the German benchmark index as price consolidates within a Symmetrical Triangle pattern.
With resistance at the 78.6% Fibonacci (12,572) proving impenetrable in the last two weeks of trade, the path of least resistance remains to the downside, with support at the 61.8% Fibonacci (11,586) acting as the last line of defence.
The momentum indicator tentatively reinforces the bearishness seen in recent price action as it nudges into negative territory for the first time since mid-May, whilst the RSI hovers above the neutral reading of 50.
A break through triangle support could trigger a surge of selling pressure, with a key region of interest falling at the 50-day moving average (11,461) and April high (11,340).
The New Zealand Dollar plunged 0.8% after the RBNZ said it remains “prepared to provide additional stimulus as necessary”. Keeping the official cash rate (OCR) steady at 0.25%, the committee maintained “the balance of economic risks remains to the downside”.
As the central bank “continues to prepare for the use of additional monetary policy tools”, uncertainty remains as to “whether the monetary stimulus delivered to date is sufficient to meet its mandate”.
Highlighting the “further pressure on export earnings” due to the recent “appreciation of New Zealand’s exchange rate” suggests the RBNZ may be considering future currency intervention, in combination with an expansion of the $60 billion Large Scale Asset Purchase (LSAP) programme, to continue to support the economic recovery.
Looking forward, the central bank “will outline the outlook for the LSAP programme” and “our readiness to deploy alternative monetary policy tools in our August statement”, with the implementation of yield curve control and negative interest rates remaining viable possibilities.