The U.S. Dollar extended its advance on Wednesday following stronger-than-expected ADP non-farm employment figures. Private sector employment increased by 324,000 jobs in July compared to forecasts of 189,000 only. This positive surprise is confirming the recent strength seen in the U.S. labor market. However, the market sentiment has turned negative as stocks suffered from a heavy selloff after Fitch downgraded the U.S. long-term rating grade from AAA to AA+. It is important to note that this is the first downgrade for the U.S. since 2011.
Daily Market Report
Looking at the market reaction, all major indexes closed lower in a risk-off environment. The Dow lost 0.98%, the S&P500 declined 1.38% while the Nasdaq composite registered its worst day since February as the index dropped 2.17%. The stock market rally was already extended after reaching overbought levels which pushed investors to start taking some profits off the table. As of today, the focus will be on the Bank of England monetary policy meeting in which the central bank is expected to raise interest rates by 25bps from 5.00% to 5.25% to combat higher inflation in the UK. Moreover, traders await a series of services PMI figures from the Eurozone while in the U.S., unemployment claims are due to rise from 221K to 226K. In the meantime, factory orders are likely to increase from 0.3% to 2.0%.
From a technical standpoint, the Dow Jones remains in an uptrend as the daily chart is still showing a series of higher highs and higher lows. Yesterday’s drop is corrective due to profit taking and we might see a retest of the 35200-34950 support zone before the bullish trend resume. On the other side, if the index holds above yesterday’s low, the index is expected to retest the 35700 high, while a break above it can lead to another rally toward the next resistance level which stands at 35875.
In the FX Market, the USDJPY currency pair managed to stabilize near a key resistance located at the 143.50 level. The trend has turned positive following the breakout above the 142.00 handle earlier this week, therefore, prices are expected to trade sideways before continuing higher. In the near term, a break above the 143.50 barrier should clear the path toward the next resistance level located at 144.25. On the flip side, 142.30-141.90 is considered as the key support zone for this pair and if prices continue to hold above it, the downside potential is likely to stay limited.
Moreover, EURUSD’s short-term trend has turned negative, and prices are expected to face more selling pressure while staying below the 1.1050 level which can lead to a retest of the 1.0865-1.0830 support zone in the coming days. However, when looking at the higher time frames, we can see that the main trend is still pointing to the upside as prices continue to trade above the rising trendline drawn from November 21st low as per the chart below.
In the commodity market, gold extended its downside correction as sellers are testing a key support located at the 1935 level. The short-term trend has turned negative, and the bearish momentum is likely to persist while the yellow metal keeps trading below the 1970 resistance. As of today, a break below the 1935 support can lead to a continuation lower in the direction 19225, on the flip side, if this support holds, a move back higher toward the 1955 barrier.
To conclude, despite the bearish momentum, gold is trading at a critical support zone from where we might see increased demand. Therefore, we will be waiting to see how the market will behave around the current levels before determining the next possible direction.