Intermarket convergence bunds oil USD EUR

The latest technical picture in intermarket dynamics suggests the USD is not yet ready to regain the positive momentum of the recent months, but the stabilisation path for oil, euro, bond yieds and commodities will remain sketchy at best.

US crude oil

US crude’s 2-month rally was dealt its biggest blow this week on a combination of long awaited upside data surprise (US housing starts /building), end-of-month selling in the June front oil and reported rise in pumped oil by the US and Saudi Arabia. But the five-day rally found bottom above the key $57 floor (previous resistance turned support) and now faces intermediate resistance at the $61.50 trendline. We expect prolonged upside towards $65.80 until fresh clarity emerges from the Saudi Arabia and the next OPEC production report.

USD index

The first weekly advance following the longest uninterrupted selloff since Nov-Dec 2013 takes the form of a sharp weekly reversal candle, whose fate has yet to be determined by late Friday’s speech from Fed Chair Yellen. Wednesday’s release of the minutes from the April 28-29 Federal Reserve decision highlighted its data dependence guidance and qualified each subsequent meeting as potentially live event for rate liftoff, while practically removing June off the table . We expect the 96.00 shoulder resistance to hold off any reactionary bounce from Friday’s CPI and Yellen’s speech before maintaining consolidation near 94.00. Look out from USDJPY to act as the swing mover once the Bank of Japan is set to modify its economic assessment.

10-yr bund

USD fell across the board after the Fed noted a June rate hike was not likely. USD optimists will want to see a more protracted return to data upside in the US, namely, Friday’s April inflation release and Fed Chair Yellen’s speech on Friday. Yellen’s assessment with regards to recent data disappointments and yield tightening will be crucial.GBP extends recovery above $1.5600 stronger than expected April retail sales follow a hawkish minutes from the May Bank of England decision. Sales increased 1.2%, the biggest rise since April 2011, well above expectations for a 0.4% rise. The report dampens concerns that consumers were delaying purchases due to expectations that prices will remain low, following the release of the first contraction in inflation since 1960.

German bund yield

Bund yields’ four-week rally stalled at the 50-DMA, while bulls cling on to the 0.61 support — 200-DMA. The converging yields rally across the G-10 world remains dominated by the US in absolute terms, but the more important German-US spread dynamic exposes a slow, yet gradual improvement in favour of the euro. With Eurozone inflation reversing from a lower trough than in the US, it faces fewer upside challenges, especially from a currency-inflation pass-through perspective, courtesy of the euro’s 20% decline over the past 12 months against the USD. As long as the 0.53% floor is maintained, then the next destination is seen at 0.98%. Watch out for the June 2^nd release of Eurozone’s flash CPI.

EURUSD

With the immediate Greek bailout deadline looming into the end of next month, euro bulls breath a sign of relief, shifting focus towards the quality of US data and tomorrow’s key update from Yellen. The evolving inverse head-&-shoulder formation, confirming the $1.1050-60 support is a confluence with the April trendline support. In order for the validity of the H&S formation to stand, a successful support must translate in to an extension towards 1.20. We are ready to accommodate for $1.15 before reviewing 1.18. Watch Friday’s key double-header release of the May IFO and Draghi’s speech at 9:00 BST.