The overnight trading session was dominated by a decent risk-off sentiment after the North Korean President Kim Jong-un said to be firmly determined to test an ICBM that could hit the US within this year.
The North Korean missile threat boosted the appetite in safe haven assets. Capital flew into the yen and gold. Nikkei and Topix edged lower on stronger yen in the morning session then recovered losses on dissipating worries; Hang Seng and Shanghai's Composite hesitated before buyers took over smoothly.
The UK stocks first benefited from gains in mining stocks (+0.85%). The softening pound tilted the playing field in favour of a positive landscape across the FTSE 100 sectors.
Healthcare stocks (-0.80%) remained on the back foot.
The UK services PMI came in slightly below the consensus and prevented the pound from extending losses below the 1.29 mark. There has been some relief as growth in the UK services, which stand for the 80% of the British economic activity, has not declined as much as the manufacturers’ in June.
The critical support to June 20-29 rise in GBP/USD stands at 1.2860 (major 38.2% retracement). The most popular resistance is eyed at 1.3045 (major 38.2% retracement on post-Brexit sell-off), if broken, will push the pound into the mid-term bullish consolidation zone against the greenback for the first time since the June 23r referendum.
US dollar mixed pre-Fed minutes, US yields slightly lower
The FOMC minutes will be the major macroeconomic highlight as the US returns from the Independence Day break. In its June meeting, the FOMC raised the interest rates by 25 basis points and hinted at one more rate hike in 2017 and three more hikes in the course of next year. These expectations are factored in the current market prices. What is not accurately priced in is the size and the timing of the Fed’s balance sheet normalisation plans. Lack of details regarding the Fed’s balance sheet policy could further weigh on the US yields and the dollar.
Extent of gold recovery depends on FOMC minutes
Gold recovered to $1,229 on the back of safe haven demand and slightly softer US yields. The 200-day moving average $1,233 is the next natural target for the gold-bulls. The Federal Reserve (Fed) June meeting minutes should provide a clearer direction in the short-run. In the absence of a hawkish FOMC read, gold could secure a stronger recovery toward the $1’248 (major 38.2% retracement on June-July decline).
Aussie supported by economic data
Growth in Chinese services cooled down in June. However, manufacturers surprisingly expanded their activity during the same month.
Australian mining stocks (+0.92%) diverged positively in Sydney, as their biggest client gave signs of expansion following a softer performance a month earlier.
In Australia, the AiG performance of services index printed a solid 54.8, versus 51.5 in June. The AUD/USD rebounded from 0.7590. The Aussie is still interesting for carry traders although today’s risk-off mood could limit the appetite for extending the AUD/USD’s gains to fresh high levels in the continuation of May-June uptrend.
USD/JPY extends gains to 113.59
Japanese services performed slightly better than expected in June, but the contraction in manufacturing pulled the composite index down to 52.9 from 53.4. As such, the yen depreciation didn’t translate into enhanced activity in June.
The Bank of Japan (BoJ) doves keep the hold of the market. The BoJ stated that the output gap improved to 0.79% in the first quarter for 2017, yet remained at the highest levels since June 2008. Hence, the mid-term sentiment remains bearish for the yen.
The pullbacks in USD/JPY meet dip-buyers, who have been building their long positions targeting the 115.00 mark in the continuation of the June rebound. Support to the June positive trend is eyed at 112.65 (200-day moving average), 112.45 (minor 23.6% retracement) and 111.75 (major 38.2% retrace). Call options should give a hand above 112.25 at today’s expiry.