Despite record highs in the Nasdaq over the past few days, the move higher has been increasingly divergent from the Russell 2000 and Dow both of which are still significantly below their May highs, while the S&P500 only just about managed to get within a whisker of its previous peaks, so the decline that we saw yesterday shouldn’t really have been a surprise. These divergences suggest US markets look overstretched, and the strength of the US dollar could well be a factor in this, as earnings take a hit from the gain in the US dollar over the last 12 months. This year alone the US dollar is up over 8% against a basket of currencies, while also weighing on commodity prices. Last night’s earnings announcement from Apple reinforced concerns about US dollar strength with a 21% decline in China sales, while European sales also disappointed, while the company warned it faced a “difficult foreign exchange environment”, as it downgraded its Q4 guidance. We’ve heard a number of different explanations over the last few days with respect to the decline in the gold price, one of which was concern over the prospect of a US rate rise. Let’s put to one side the fact that since the beginning of the year gold prices have been slowly sinking lower in a clearly definable trend, much like a lot of other commodity prices. If we look at the trajectory of natural gas, crude oil, copper, iron ore and silver prices since the beginning of the year we can clearly see that commodity prices have been on the slide for some time, hindered by too much supply, slowing demand, a stronger US dollar and a weak inflationary outlook. Monday’s sharp fall in gold had all the hallmarks of a technical sell-off triggered by a series of stop losses, and for all the speculation of a rate hike in September after Janet Yellen’s comments last week, the prospect of a move on rates is no more likely than it was a month ago. Even after yesterday’s downward revisions to the Federal Reserve’s industrial production numbers, the prospect of two or more rate rises between now and the end of the year, seems rather at odds to some of the data we’ve been getting out of the US economy in recent weeks, as yesterday’s revisions reinforce concerns about US manufacturing. Wages growth still seems lacklustre, while retail sales data last week of -0.3%, meant we only saw a net gain of 0.7% for Q2, slightly better than Q1’s net 0.2%, but certainly nowhere close to what could be called a robust rebound. Furthermore the slide in commodity prices in general over the last few months points to an inflation outlook which is benign at best, particularly given that central banks around the world are still in rate cutting mode, suggesting that a rate rise in September is anything but a done deal. On the subject of rate rise speculation we’ve heard similar noises from the Bank of England in recent days, with the prospect of a break down in consensus as soon as next month despite the slide back to zero inflation seen in June. It would be a surprise to see a break from the consensus with the release of the July minutes but as we head into August we could start to see some splits, with some members of the MPC, like the Fed FOMC, almost itching to pull the trigger on a rate move, as wages start to turn higher. We also have the small matter of the second parliamentary vote in Greece for the next set of reforms or prior actions so that talks can begin on the next bailout package, which it is hoped will be concluded by 6th August, and disburse the funds by the 17th. Good luck with that, I’m sure it will be as successful as the previous two bailouts. EURUSD – the failure to push below 1.0815 has prompted a sharp rebound back through 1.0900 which could well extend towards 1.1050, and even 1.1230. The next support comes in at 1.0750, trend line support from the lows this year at 1.0460. GBPUSD – the pound continues to look a little soggy but has so far managed to stay above the 1.5530 level. Only a move below here argues for a move towards the 200 day MA at 1.5420. There is currently decent resistance at the highs last week at 1.5675, which needs to break to retarget the 1.5820 level. EURGBP – we appear to have found a short term base at 0.6930, just above the November 2007 lows, after yesterday’s rebound back through the 0.7000 level. This rebound could extend towards the 0.7120 level in the medium term. USDJPY – the failure to move beyond the 124.50 level and subsequent key day reversal suggests we could well head back towards the 123.30 initially, on the way to a retest of 122.50. Only a move through the 124.50 level, argues for a return to the 125.85 highs. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.