Market morning update: US dollar, Straits Times Index, GBP/USD

Market Recap

Holidays in the US and UK brought about a relatively quiet start to the new trading week, while US equity futures this morning pointed to modest gains as an attempt to follow through with its rally last week. Some resistance to the US debt deal has surfaced from a handful of Republican lawmakers overnight but broad expectations seem well-anchored for an eventual resolution.

The US one-year and five-year credit default swaps (CDS) continued to narrow, as a reflection of market pricing for lower risks of a government default. For now, the extension of deadline to 5 June (from previous 1 June) seems to provide more runway for a compromise to be made among policymakers, but that also raised the chances that negotiations may potentially extend into the weekend.

On the economic calendar, the US consumer confidence data to be released later tonight may provide a temporary distraction to the US debt ceiling situation. With the current market theme seemingly on “bad news for the economy is bad news on Wall Street”, resilience in consumer confidence may be on the lookout to support further relief.

A hawkish repricing in rate expectations and progress over the US debt ceiling talks have lifted the US Dollar above its key 103.12 level of resistance, moving past the upper edge of the Ichimoku cloud on the daily chart. The dollar is now sitting firmly above its 100-day moving average (MA), with its sight potentially set on the 105.00 level next. Any move above the 105.00 level may be on the lookout to confirm a double-bottom pattern in place since the start of the year, which could provide some validation for a renewed bull run for the dollar.

Asia Open

Asian stocks look set for a mixed open, with Nikkei -0.30%, ASX +0.06% and KOSPI +0.97% at the time of writing. Chinese equities continue to underperform yesterday, with the lack of positive catalysts potentially diverting some investors’ attention to the US. The official manufacturing purchasing managers’ index (PMI) may be on watch to provide some reassurances, although expectations are still largely leaning towards a subdued growth picture (49.4 expected versus previous 49.2).

Closer to home, the Straits Times Index seems to be trading on a bearish flag formation, with a recent retest of the 38.2% retracement level met with a bearish engulfing daily candle yesterday. A look at the recent SGX fund flow data revealed muted net institutional inflows last week (+S$29mn), which pales in comparison to the series of net outflows since February this year (net -S$2.08 billion since 13 February).

Sharp paring of exposure to the financial sector is a main contributing factor, with the local banks forming a series of lower highs and lower lows since February this year as a reflection of a downward trend. The projection of the bearish flag could leave the 3,040 level on watch for a retest over the medium term, where a series of lows in 2021 stands.

On the watchlist: GBP/USD trading on a descending channel pattern on its four-hour chart

A stronger US dollar on the back of a renewed hawkish repricing in Federal Reserve’s (Fed) rate expectations has translated to a drift lower in GBP/USD, with a descending channel pattern presented on its four-hour chart. A series of resistance may need to be overcome in order to provide greater conviction of renewed upside for the pair, particularly with the upper channel trendline and Ichimoku cloud resistance at the 1.240 level. The relative strength index (RSI) (four-hour) has struggled to move above the key 50 level for now, with intermittent bounces in the pair proving to be short-lived. Further downside may leave the lower channel trendline at the 1.227 level on watch as potential near-term support.

Monday: US markets closed for Memorial Day, DAX -0.20%, UK closed for Spring Bank holiday