Market Overview
Safe haven flows have improved overnight as news of another missile launch by North Korea has filtered through. This has meant that gold and the yen have strengthened. However both markets saw some decisive downside moves yesterday and in effect these rallies today simply look to be unwinding some recent weakness. Gold has broken decisively below $1240 and USD/JPY decisively above 112.20. The market reaction to geopolitical tensions may be elevated slightly with the US on public holiday for Independence Day today, however once the moves begin to settle the market is likely to view the rebounds on the safe haven plays such as gold and the yen as another chance to sell.
The sharp increase in Treasury yields of the past few sessions has started to pull the dollar higher and drove yesterday’s key moves on the yen and gold. Often with US public holidays there could be some thin trading which could lead to some more unusually erratic moves, however expect these moves to be short lived.
Wall Street closed higher yesterday, however an intraday dip into the close (the S&P 500 closed around the traded low of the day only +0.2% higher at 2429) added to the North Korean tensions are driving equities back lower again today. Asian markets were broadly weaker (Nikkei -0.1%) whilst European markets are also lower in early moves.
In Forex there is little real move across the majors with the US on public holiday. However there is weakness on the Aussie after the Reserve Bank of Australia monetary policy disappointed some in the market looking for a more hawkish tilt. The RBA did not change tack on inflation or the Aussie, whilst it continues to look at the squeeze on real wages being an issue. With the safe haven plays benefiting today, in commodities the gold price has rallied around $5, whilst oil is mildly weaker.
With the US on public holiday for Independence Day there is a light economic calendar today. The UK Construction PMI at 09:30 BST is expected to dip back slightly to 55.2 (from 56.0 last month which was a 17 month high). However with construction accounting for around 6% of the UK economy, this is likely to have a limited impact on sterling today.
Chart of the Day – NZD/USD
The strong run higher on the Kiwi that has been seen over the past seven weeks could be coming to an end. Yesterday’s strong bearish candle has broken the support of the uptrend through the run higher, a move that seems to be confirming by further downside today. This move has come as the momentum indicators have been losing their upside impetus. The RSI has started to drop back below 60, whilst the MACD lines have plateaued and now started to cross lower.
The focus will now be on the first support within the old uptrend at $0.7250. A breach would be the first significant support broken throughout the seven weeks and would suggest that at least the old trend could be confirmed as broken. Currently there is no real sign of a significant top pattern and therefore we need to be careful from suggesting significant downside targets. However in the least, it looks as though the market has peaked for now. Below $0.7250 would imply 95 pips of correction towards $0.7155 and that would mean a test of the key support band $0.7170/$0.7195. Whether this turns into a decline remains to be seen. The bears would begin to grasp control if the support at $0.7195 were to be breached.
The hourly chart shows that the momentum is now deteriorating with the hourly RSI and MACD lines more correctively configured now. Selling into strength could increasingly become a strategy, especially if a rally formed a lower high under resistance at $0.7300/$0.7310.
A near term corrective move on the euro has started to take shape against the dollar. Tw consecutive negative candles have not been posted since early June and comes as the market just begins to pull lower from $1.1445. However, this still looks to be merely an unwinding move that is likely to help renew upside potential.
The breakout above $1.1295 will now be seen as a key source of demand and will act as support. Subsequently this correction will be seen as a chance to buy. In the meantime though the near term dip is unwinding momentum, with the RSI back towards 60 and the MACD lines just flattening a touch. The last few corrections on EUR/USD have seen the RI bottoming around 50/60 before the buyers return. The hourly chart shows the small top pattern that implies $1.1325 whilst there is the strong support around $1.1290. The neckline at $1.1385 is initial resistance.
Cable remains rangebound as yesterday’s corrective negative candle starts to unwind the strong run higher of the past couple of weeks. The resistance of the key May high at $1.3047 has been bolstered by the recent rally high of $1.3030 and now the market is shaping up for a mild corrective phase as the bulls just take a step back. Momentum remains positively configured within the range but a pullback into the belly of the range could easily now be seen with the RSI and Stochastics rolling over.
The $1.2775 pivot remains a key attraction within what is now a broad range of $1.2600/$1.3050. This near term corrective outlook is reflected on the hourly chart which formed a small top pattern below $1.2945 which implies around 85 pips of correction (towards $1.2860). Although there is a degree of consolidation today, a move below the near term support at $1.2920 would continue the correction. There is initial resistance around $1.2950/$1.2960.
USD/JPY
A strong and decisive bull candle has once more driven the market to continue the recovery that has been building over the past few weeks. During that time, periods of consolidation have been bought into and once more a strong bull candle has followed a run of indecisive candles. The move has also broken a six month downtrend which is a key development. The move also confirms the decisive break above the 112.20 resistance of the key pivot range 111.60/112.20, which opens up a move back towards a test of the key May high at 114.35 in due course. The Fibonacci retracements of the 100.07/118.65 September 2016 to December 2016 rally have been consistently tested as target areas an consolidation points.
Moving decisively away from the 38.2% Fib at 111.55 has now opened the 23.6% Fib at 114.27 which coincides closely with the 114.35 high, and increases the likelihood of this being tested now. So, near term corrections are a chance to buy, with the overnight drop back being a case in point. There is initial support of recent old breakouts between 112.45/112.90 which should provide a buffer and buy zone now. Yesterday’s high at 113.47 is the resistance.
A huge downside break of $1240 was seen yesterday as the floor of support gave way. This has opened the way for a test of the next key pivot level around $1216. With the downtrend of what is now a four week correction continuing to cap the intraday recoveries at lower levels and comes in today at $1245.
Momentum indicators are negatively configured with the RSI in the mid-30s, MACD lines falling and Stochastics camped in bear territory, so any rallies will be seen as a chance to sell. In the wake of a strong bear candle there will often be an initial reaction higher in the next session, something that is being seen early today. However all the buyers of the $1240/$1261 range now become a source of overhead supply and any rebound that gets close will be seen as a chance to sell.
The move yesterday also broke a shallow uptrend that had been linking all the key lows throughout this year, but the underside of this uptrend now becomes a basis of resistance (currently around $1231). The hourly chart shows little overhead resistance until around $1235/$1240 as a small rebound has set in, but it is unlikely to get far before the sellers return. Below the May low at $1213.80 is the March low at $1195 an the January low of $1180.
WTI Oil
An impressively strong candle on WTI has continued the run higher for oil. Aside from a doji candle last Thursday, the strength of the recovery in oil has been impressive and the daily candles have been extremely positive for the bulls. The market is now back to test the key resistance of the range $46.70/$47.00, the upper limit of which is an old key pivot. It is also interesting to see that $47.03 is the 50% Fibonacci retracement of the $52.00/$42.05 May to June sell-off.
The reaction of the market to these levels today could be key to the continuation of the rally. Early moves show a consolidation so the market is clearly considering its next move. The momentum in the recovery is very strong with the RSI and Stochastics rising strongly, however both continue to show further upside potential. The hourly chart reflects the bullish outlook with the hourly RSI repeatedly showing the buyers are happy to return around 50 as the momentum unwinds to quickly renew bullish intent. There is an uptrend that comes in around $46.20, whilst initial support is yesterday’s reaction low at $45.92.
The bulls bounced back again yesterday, although it was interesting to see that the Dow (just 30 stocks) rallied much harder than the far broader S&P 500 (500 stocks), suggesting perhaps a less decisive move than first seems. The move on the Dow to another new all-time high, hitting 21,562 before coming off, could now sustain the move into the close, however maintains what looks to be a range play formation of the last few weeks. There is a range now between 21,197/21,562.
The momentum indicators are positively configured but also reflect this recent range. This is also shown on the hourly chart which has just rolled over again on momentum as the market dropped back slightly into the close.
Wall Street is shut today for Independence Day public holiday.
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