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US dollar rises on Fed Clarida’s speech and great US ISM data

The US dollar range has been broken to the upside, but prices are still being capped by dynamic support and resistance as we wait for the jobs data on Friday. Oil is tumbling as the USA and China register more covid infections and the greenback pushed higher. Good ISM data is a positive for the US economy but ADP failing to hit expectations is a massive worry.

Market Wrap

The US ISM non-Manufacturing PMI for July beat expectations of 60.5 and came in higher than the highest guesstimate of those analysts that were surveyed. In July, the Services PMI registered a 4%-point increase coming in at 64.1. This is the highest reading since the inception of the Services PMI in 2008 and indicates the services sector has grown for 14 consecutive months.

The final Business Activity Index printed 59.9 in July, though that was above the expectations and previous reading. The release noted that inflationary pressures in the US have eased but still remained "historically strong."

The ADP national employment report showed the number of jobs in the US private sector rose by 330,000 in July, coming in almost half of what was expected and really disappointing the markets.

Commenting on the data, ADP chief economist Nela Richardson said that "the labor market recovery continues to exhibit uneven progress, but progress nonetheless." Richardson added that "bottlenecks in hiring continue to hold back stronger gains, particularly in light of new COVID-19 concerns tied to viral variants."

Fed Clarida who has a vote within the FOMC said today after the ADP number that he can certainly see the Fed announcing tapering later this year and would support announcing a moderation in asset purchases in 2021. He then went on to parrot Fed Chair Powell saying the economy has made progress toward goals since setting a substantial further progress bar for tapering of asset purchases. His personal view is core inflation hits 3% this year, and that he would consider it much more than a moderate overshoot of the Fed's goal.

The US EIA weekly crude stocks came in higher than expectations with a build rather than a draw, which would be seen as dovish for the WTI contract. There was however a larger draw than expected on gasoline, indicating driving season is here as expected which is seasonally good news. The oil chart is now at a 10-day low and is clearly extending losses looking to test the recent daily swing low and perhaps the daily-200 ema. The rising infections of the Delta variant of the COVID-19 in America and China are going to weigh on demand and put pressure on energy prices. However, the drop in oil is being pushed harder by the rise in the US dollar which in the following chart shows that the daily-20 ema is capping the greenback.

The better-than-expected PMI data today was the catalyst for a higher US dollar along with the Hawkish tones from Fed’s Clarida. These daily ema’s are trapping the price action so far and a close above or below either the 20 or 50-daily ema would be my next directional signal. If the US dollar goes higher, $92.50-$92.80 looks like the resistance that could halt further rises. If we close lower than the 50 ema, $90 is back on the cards. Friday’s NFP is likely to be the deciding factor.

I wrote a piece today on the power of the Initial Balance range breakout and I am happy to say that the target was met, which if nothing else gives me some hope that higher prices are still possible. The fact that we’re still within a larger range makes me more cautious ahead of the next set of Tier-1 data as a big disappointment could reveal this trading range to be a distribution pattern, with some targets below which would include 14,500 to 14,000.

Tomorrow is a big day for the British pound as we receive the latest monetary policy decisions from the Bank of England.

A reading of 64% bearish on the ActivTrader sentiment indicator makes me think that cable rises tomorrow if only to squeeze these traders out of their short positions. If the BoE is not as Hawkish as the market is expecting, we could see a longer-term lower price correction for GBPUSD but a lot depends on the price action of the US dollar too.