U.S. equity markets rallied on the first trading day of the week

24 May 2022, 02:35

Market Focus

U.S. equity markets rallied on the first trading day of the week. The Dow Jones Industrial Average rose 1.98% to close at 31880.24. The S&P 500 gained 1.86% to close at 3973.75. The Nasdaq composite climbed 1.59% to close at 11535.27. U.S. equities found momentum after witnessing one of its worst weeks in years, but it remains to be seen if this is a short term rebound or a sustained positive run. The macroeconomic environment does suggest, however, that there is still room for equities to fall. Inflation and interest rates still pose large challenges for corporations and the near term economic outlook; furthermore, geopolitical tensions between Russia and Ukraine are still unresolved while energy and commodity prices still run at extremely elevated prices.

The benchmark U.S. 10 year treasury yield currently sits at 2.844%.

The financial sector enjoyed a modest boost on Monday’s trading. JP Morgan, which rose 6.2%, said that it expects to reach key return targets sooner than expected. Citi, Wells Fargo, and Bank of America also rose more than 5% as bond yields recovered.

President Joe Biden also sent positive notes that helped improve market sentiment. Biden announced that he is considering removing some of the tariffs imposed on Chinese imports that were placed by the previous administration.

Main Pairs Movement

The Dollar Index fell sharply over the course of Monday’s trading. The DXY ended the day 0.91% down. A short term equity rally saw market participants rotating out of currencies and favoring other asset classes.

EURUSD rose 1.22% over the course of yesterday’s trading. Broad based Dollar weakness combined with a slightly hawkish tone of ECB president Lagarde buoying the euro against the dollar.

GBPUSD rose 0.77% over the course of yesterday’s trading. The lack of demand for the Greenback boosted the British Pound against the Dollar. Cable has broken through a key resistance level at 1.25.

USDCAD fell 0.55% over the course of yesterday’s trading. This pair has retraced more than 2% since it reached its peak on the 12th of May. Recovering commodity prices, specifically crude oil prices, has helped the Loonie rise against the Greenback.

Technical Analysis

EURUSD (4-Hour Chart)

The EUR/USD pair surged on Monday, extending its rebound and climbing to multi-week highs above 1.068 level amid ECB President Lagarde’s hawkish comments. The pair was surrounded by bullish momentum for the most of the day, then started to see heavy buying and touched a daily high in the European session. The pair is now trading at 1.0563, posting a 0.97% gain on a daily basis. EUR/USD stays in the positive territory amid renewed US dollar weakness, as the risk-on market mood weighed on the safe-haven greenback and pushed EUR/USD higher. Investors now turn optimistic as China prepares to reopen at the beginning of June after a two-month lockdown, which might boost the global economy. For the euro, ECB President Christine Lagarde said that the central bank is likely to be in a position to exit negative rates by the end of Q3, which would allow a rate hike to take place in July.

On the technical front, the RSI is at 74 as of writing, suggesting that the pair might witness some near-term correction before climbing higher as the RSI reached the overbought zone. As for the Bollinger Bands, the price continued to move alongside the upper band, therefore the upside traction should persist. In conclusion, we think the market will be bullish as the pair already broke above the previous resistance at 1.0614.

Resistance:  1.0730, 1.0810

Support: 1.0549, 1.0464, 1.0359

GBPUSD (4-Hour Chart)

GBP/USD advanced on Monday, extending its recent gains and reaching its highest level in more than two weeks above 1.2590 level amid the wave of US dollar weakness. The pair preserved its upside traction and built on last week’s impressive gains during Asian session, then reached a daily top in the European session. At the time of writing, Cable stays in positive territory with a 0.68% gain for the day. The easing concerns about China lockdown has exerted bearish pressure on the US dollar, dragging the safe-haven Greenback to a fresh monthly low and lending strong support to the GBP/USD pair.  Investors will look for clues about the possibility of a 75 bps rate hike in June as the markets seem to have fully priced in at least 50 bps Fed rate hike over the next two policy meetings. For the British pound, last week’s UK labour market and inflation data supported the case for further tightening from the BoE, which acted as a tailwind for the cable.

On the technical side, the RSI is at 68, suggesting that the pair might face some near-term downside correction as the RSI lost its upside strength. For the Bollinger Bands, the price failed to move out of the upper band and started to retreat, indicating that some downside traction could be expected. In conclusion, we think the market will be bearish as the pair failed to test the 1.2631 resistance. The pair could make a technical correction before rising higher as the RSI indicator is sitting near 70.

Resistance: 1.2631, 1.2761, 1.2865

Support: 1.2493, 1.2341, 1.2180

USDCAD (4-Hour Chart)

As the US dollar came under renewed selling pressure on Monday amid the positive shift witnessed in risk sentiment at the start of the week, USD/CAD extended its slide that started last Friday and struggled near its two-week low below the 1.2800 mark. The pair was surrounded by bearish momentum throughout the entire day, then remained under pressure to refresh its daily low below the 1.278 level in the early US trading session. USD/CAD is trading at 1.2795 at the time of writing, losing 0.35% on a daily basis. The hopes that loosening COVID-19 lockdowns in China could boost the global economy has driven flow away from safe-haven US dollar and undermined the USD/CAD pair. On top of that, the retreating crude oil prices failed to lend support to the commodity-linked loonie as WTI remained within recent ranges near $110 per barrel area. Oil traders will remain focused on the Covid-19 lockdown situation in China, which might provide fresh impetus for the black gold.

On the technical side, the RSI indicator is at 40, suggesting that the downside is more favoured as the RSI stays below the midline. For the Bollinger Bands, the price crossed below the moving average and dropped towards the lower band, therefore the downside traction should persist. In conclusion, we think the market will be bearish as the pair is testing the 1.2788 support. A four-hour close below that level could open the door for additional losses and lead the pair towards the next support level at 1.2725.

Resistance: 1.2890, 1.2966, 1.3046

Support: 1.2788, 1.2725, 1.2684