Market Overview
Financial markets have begun a key week of economic data and central bank decisions with a cautious tone today. In the coming days there will be some key risk events with a series of major central banks announcing monetary policy, including the Fed, the Bank of Japan and a potential historic rate hike from the Bank of England. However there will also be key PMIs and of course Non-farm Payrolls.
Perhaps it is understandable that traders appear reticent to take a view. Forex markets are showing little direction, however into the close on Friday the suggestion was that Treasury yields were just coming slightly lower and this helped to drag the dollar back slightly. This is a reflection of the other key event of the week, Donald Trump’s expected announcement of the next Fed chair. Suggestions that Trump is favouring Jerome (Jay) Powell means that the continuity candidate could win the race over the more hawkish John Taylor. This is a near term factor impacting negatively on yields and this move is just continuing slightly in the early moves today.
Wall Street closed positively on Friday, again driven by earnings, with the S&P 500 +0.8% at 2581, whilst Asian markets could not carry this through to today, with the Nikkei almost dead flat just 3 ticks higher. European markets are trading flat to slightly lower in early moves.
In forex, there is a slight amount of dollar weakness against the euro and sterling. The big mover once more is weakness on the New Zealand dollar which continues its recent decline.
For commodities, gold is slightly lower, down $3, whilst oil is pushing on ever higher, with Brent Crude now above $60.
The European session economic data is limited to Spanish GDP at 09:00 GMT which expected to drop to +1.7% (from 1.8% last month) and Spanish Q3 GDP which is expected to show a flash reading of +0.8% (down slightly from a final reading of +0.9% in Q2). However, the main focus for markets on the data front will be on the US core Personal Consumption Expenditure at 12:30 GMT. The Fed’s preferred inflation data is expected to be +0.2% for the month and therefore pick up slightly to +1.4% YoY.
Chart of the Day – EUR/JPY
The ebbing and flowing of the outlook on Euro/Yen in recent weeks has been fascinating. Which way will the consolidation between 131.70/134.50 break? The euro has come under considerable strain in the past couple of sessions meaning that the market has unwound from the highs all the way back to the lows again. The strength of the bear candles suggests that momentum is now with the sellers and there is considerable risk of a break of the 131.70 support now. Looking at the momentum indicators this concern is exacerbated. The RSI has not been below 48 since late August, but this changed on Friday, whilst the MACD lines have crossed back lower and perhaps more importantly the Stochastics have given a bear cross sell signal. This points towards a downside break which would on a closing basis imply 280 pips of downside. The hourly chart shows increasing pressure of negative momentum. There is initial resistance 132.35/132.95 as the market consolidates around the range lows. Is a downside break looming?
A second daily close below $1.1660 confirmed the big top pattern and the corrective outlook now for the euro. Initial downside target is $1.1440 with around 400 pips potential downside in the coming weeks if the bears really take hold. The negatively configured momentum indicators also reflect this with the Stochastics and MACD lines falling decisively now and the RSI at its lowest level in 2017. The market has found a touch of support in the early moves today as the new week has begun but the outlook is now to sell into strength. The hourly chart shows a market just looking to unwind stretched oversold conditions and that the $1.1660 old support is now a source of overhead supply. There is key resistance now between $1.1660/$1.1730, but the hourly chart shows initial resistance $1.1625/$1.1645. Friday’s low at $1.1575 is initially supportive and beyond that $1.1490.
Throughout much of October the market has been stuck in a relatively choppy sideways consolidation between $1.3025/$1.3335. The momentum indicators suggest there is a very slight negative bias but that is likely to reflect the fact that the market is closer towards the lows of the range. Friday’s low did breach the initial support at $1.3085 but the support seems to have come in again early today. The hourly chart has ticked higher this morning but the configuration of the technical indictors is very uncertain. A move above a near term pivot $1.3150/$1.3160 would help to improve the outlook for a push towards another pivot at $1.3230 again. Continue to play the range with extreme levels on hourly momentum seen as a chance to trade reversals.
As Dollar/Yen has approached the key July high of 114.50 the market has begun to look far more uncertain. The reversal candle on Friday reflects a slight nervousness amongst the bulls that has been hinted at a couple of times now in the past few sessions. Having come up just shy of the resistance, turning back from 114.45 and closing at the low of the session is a concern that the bulls are now not sure to push on, at least in this bull run. The recent two week uptrend is being pressured this morning and the momentum indicators are showing a little tiredness. The hourly chart shows the market just rolling over and the bulls have lost their edge now. However, the support at 113.25 will be the key near term trigger as a breach would begin a more corrective phase now. There is minor resistance building around 114.00 and a lower high around there would also begin to show the strain. There is significant resistance 114.50/115.60 from the earlier months of 2017 which the bulls need to breach. There may need to be another corrective move first before they can do it.
The corrective force that has been dragging gold backwards in the past couple of weeks is still in play, leaving lower highs and lower lows as the price edges ever lower towards a test of the support band $1251/$1260. However there are also signs that the bulls are ready to fight as another positive candle was posted on Friday. It seems there is a sequence of bull and bear candles being posted now, meaning that today’s candle should again be negative. This is all shown on the hourly chart with a consistent run of momentum recoveries that turn over around levels where the bears can resume control. The hourly RSI is failing around 60 and hourly MACD lines crossing lower just above neutral. This bear cross on the hourly MACD lines has just happened again and should help to drag the price lower again. The strategy continues to be selling into strength with initial resistance at $1270/$1275 and then at $1284 and $1291. Continue to expect pressure on $125/$1260 but the reaction to that support will be key for the outlook over the medium term.
WTI Oil
A decisive upside breakout has been seen on WTI that has broken the market above the key April 2017 high of $53.75 to open the resistance between $54.95/$55.25 from earlier in the year. The bulls have taken the market by the scruff of the neck once more and are pushing on. The momentum indicators come with bullish configuration and upside potential, with the RSI rising into the high 60s and MACD lines beginning to find upside traction again. Look to use any weakness as a chance to buy with a good band of near term support between $52.35/$52.85 now a near term “buy zone” for any intraday unwind that begins to form support again. The hourly chart shows 40/50 is an area where the bulls like to resume control.
The Dow continued the consolidation of recent sessions into the close on Friday. Although there have been two positive closes now in a row, there are signs that the bull run has stalled a touch in the past few days. It will be interesting to see if this is a pause for breath within the bull trend or something more considerable. The support at 23,251 will be the key to the near term outlook now. It is interesting to see that the momentum sell signals of the S&P 500 have not yet materialised on the daily chart for the Dow, however there is a concern that is building on the hourly chart. The hourly RSI is tracking lower along with the Stochastics and MACD lines which are also suggesting that the bulls may be looking a little tired. The reaction at the all-time high of 23,485 will be interesting as a continuation of the divergences on hourly momentum could lead to a more cautious outlook forming.
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