Morning Note: Trade Truce, CPI Data Put Fed and Markets in Spotlight

Trade truce for now

China and the US have ended their two-day gathering, where a form of a trade truce has been reached. Here is what has been agreed:

• China had pledged to speed up shipments of rare earths to the US, which are needed for the US defense and auto industries.
• The US will relax some of its export controls that are directed to China. It is unclear, but this could be some sort of an ease on US semiconductors, which are exported to China. One of the beneficiary companies might be Nvidia (NASDAQ: NVDA).

We call this “temporary ceasefire”, as many concerns remain. The two sides could still easily attack each other with accusations on matters such as the Chinese trade surplus with the US.

The market reaction has been somewhat of a positive one, however, investors understand that we could be getting a negative headline, which might send shockwaves across various markets. And, most likely, the attack may once again be initiated by the US, as the country continues to create market conditions, encouraging US major companies to bring their production lines back into the US. For the US administration this might look like a quick fix, however, there are way too many obstacles, such as costs and labor force.

DJIA technical outlook

The technical picture of the Dow Jones Industrial Average shows that the price is stuck near the 42850 zone on our cash index. This area might also be seen as the “neckline” of a possible inverted head-and-shoulders pattern, which began forming around the beginning of March. For now, we take a cautiously bullish approach, but we wait for a break of the “neckline” before getting comfortable with the upside scenario.

A break of that 42850 territory might spark excitement in the eyes of the bulls. More of them could join in and drag the price towards the psychological 44000 area, marked near the highest point of March.

To shift our attention to some lower areas, a drop below all our EMAs on our daily chart would be needed. This could be somewhere near the 41800 zone, a break of which might set the stage for a move to the 41165 obstacle, or even the 40650 level, marked near the lows of May 2nd and 6th.

US CPIs (12:30 GMT) are expected to tick up a bit

The US inflation is on a lot of traders and investors focus today, as this could be an important data set, which could shift the tone of the Federal Reserve next week. The interest rate decision would remain as the current projection stands; however, further policy decisions may be affected.

• The current expectation is for the headline and core YoY numbers to show up higher than previous. The headline one is forecasted to rise from +2.3% to +2.5% and the core from +2.8% to +2.9%.
• The May inflation report could show if there were any implications on the consumer from the ongoing trade wars, as some retailers could have ramped up the prices in order to safeguard themselves from the future economic shocks.
• That said, let’s not forget that slight increase in inflation could be seen as a positive, as it indicates economic growth. An actual reading, which is in line with the current expectations might keep the positive momentum in the US indices.
• If the actual figures show up as expected, market participants are now trying to figure out if this could be the beginning of an uptrend in the future CPI readings.

USDCHF technical outlook

Overall, USDCHF continues to trade below a medium-term downside resistance line taken from the highest point of February. As long as the rate stays below that line, we will stay bearish, at least with the near-term outlook.

Even if we see some positivity, driven by the potentially higher CPIs, the positive momentum could fade away, if the pair struggles to overcome the previously discussed downside line. If so, the bears might jump back into action, taking advantage of the higher rate. USDCHF may then drift back down towards the 0.8156 hurdle, or even the 0.8038 level, marked by the current lowest point of this year.

Alternatively, a break of that downside line might change the direction of the current trend, signaling further advances. That’s when we will start aiming for areas near the 0.8476 obstacle, or the 0.8673 level, marked by the high of 7th of April.

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