Market Overview
Despite one eye being kept on the FOMC tonight, Japan has again been in focus ahead of the European session, with suggestions that Prime Minister Shinzo Abe could be about to announce a stimulus program as much as 27 trillion yen (c. $255bn). This figure is bigger than the 10 to 20 trillion yen that had been expected and could be announced today.
The yen has sold off on the news, whilst Japanese equities have also been boosted. However, most other markets are looking towards this evening’s announcement from the Federal Reserve with the FOMC monetary policy. There is no expectation of any rate hike so soon after Brexit (the Fed Funds futures still suggest that December is a possible month), but traders will be watching the wording in the statement for any clues of timing. Although economic data has been average, the impact of Brexit is still an issue and this could play a role in the Fed statement.
With the Fed and the Bank of Japan announcing in the next couple of days, financial markets have moved into consolidation mode, with little direction on key markets such as the euro, cable and gold. Wall Street has also consolidated, with the S&P 500 closing +0.1% higher last night. Asian markets have been mixed (although the Nikkei was +1.7% higher). European markets are mildly higher in early moves.
In forex, the yen weakness is the big mover, helping dollar/yen sharply higher, whilst the Aussie and kiwi are also slightly weaker. However, with the euro holding its own there is a limit to the dollar strength ahead of the Fed. With the slight dollar strength commodities are all off a touch, with gold and oil both weaker.
Traders will be looking towards the first reading of UK Q2 GDP at 0930BST, which is expected to be +0.5% (up from the +0.4% last quarter), with the impact of Brexit only a few days right at the end of the quarter, so barely likely to feature. There is also the US Durable Goods Orders at 1330BST which are expected to be +0.3% for month on month core reading. Pending home sales are at 1500BST and are expected to improve by 1.9% on the month. However, the big moves of the day could come with the FOMC statement, which is released at 1900BST.
Chart of the Day – EUR/GBP
Is sterling on the brink of another key move against the euro? After a corrective move in early July, euro/sterling has now effectively posted three doji candles in the past four sessions, and this reflects the uncertainty with the recent trend. Weak sterling pulls EUR/GBP higher, and the market is increasingly testing the overhead resistance as the correction of the past three weeks has run out of steam.
The resistance around £0.8425 capped the gains last week and again capped an initial test yesterday. However, the momentum indicators are suggesting that there could be another resumption of the upside. The Stochastics have crossed higher, whilst the RSI has stopped its retreat in the mid-50s. A corrective downtrend was broken yesterday and there is a sense that an upside break is close.
Look for not only an intraday push above £0.8425 but also a closing breach to really confirm the bulls are regaining control. If this is seen then it would open initial resistance at £0.8470 but then the recent highs at £0.8625. There is support now at £0.8300, which is protecting £0.8247.
EUR/USD
With a rally once more sold into, the corrective move remains on track. Yesterday’s candle posted a 4 pip loss, but having traded higher for much of the session this would have been rather dispiriting for the bulls. Trading consistently below $1.1050 and a third consecutive close below $1.1000 is negative and the momentum indicators retain their bearish configuration.
However, the FOMC statement is this evening and it is likely that the market will bide time until getting more of a steer from the Fed. The hourly chart does show the near-term downtrend channel has been broken and initial resistance is now at $1.1030. However, until there is a confirmed breach of $1.1058 there is little suggestion that the bulls will have too much traction. Support at $1.0950 protects $1.0909, which I continue to expect to be tested.
GBP/USD
With daily ranges of just 70 pips and 80 pips in the past couple of sessions, the volatility continues to settle on sterling. However, this could be coming with apprehension of the FOMC tonight which could drive some further near-term direction. Moving into the meeting the pressure remains on the support around $1.3060, with a resistance in place at $1.3290 from last Thursday posting a potentially lower high.
The momentum indicators have stalled in their recovery to reflect the lack of impetus in a recovery now. I favour a decisive breach of the support around $1.3060, which would complete a near-term breakdown and then suggest a retest of the 31-year low at $1.2796. However, the market is now just consolidating in front of the Fed, with the hourly chart showing little real direction.
The resistance built up around $1.3160 remains a near-term barrier to gains for intraday moves today. Any hawkish hints from the Fed would put the pressure on, but even if the market moved on a dovish steer I would still take rallies as a chance to sell.
USD/JPY
As we get ever closer to the Bank of Japan monetary policy announcement (on Friday morning), the market is flying around on press reports in Japan on the potential composition of easing. From yesterday’s fear of disappointment, the mood is again improved today with a beefed up programme of asset purchases.
The yen has duly sold off and dollar/yen bounced. The techncials though still remain in the downtrend channel despite the current 80 pip rally this morning. The medium-term momentum indicators rolling over with a confirmed sell signal on the Stochastics suggests that rallies are a chance to sell, and I still see this move as just that.
An early spike to 106.53 has already been pared again and means that the resistance at 106.70 is increasingly important. It also just shows how jittery the market is going to be and that the reaction to Friday’s announcement will be significant.
There is intraday support between 104.60/104.95 and a key low from yesterday at 104.00. The wild ride that is dollar/yen will only be made more volatile by the Fed tonight, and the next few days could be somewhat hectic.
Gold
The past few days has just been an exercise in gold settling its volatility, as the price has now been effectively trading in a $25 band between $1310/$1335 for the past seven completed sessions. This is all coming ahead of the two significant risk events (the Fed and the BoJ) which could define the direction of gold in the coming days and possibly weeks.
The corrective outlook has been waning for the past few days now, with the downside momentum gradually slowing in a correction. The RSI is settling around 50 and the MACD lines are flattening just above neutral. The Stochastics do though still fall away, and this is reflecting the mild corrective bias that is still present.
The hourly chart shows that there is a minor resistance around $1225 today, but the main level at $1335 is now key as a decisive break above would re-engage the bulls. I still view a retreat to $1306 as an opportunity for longer-term buyers to start to re-enter too, and any hawkish lean from the Fed could give that opportunity.
WTI Crude Oil
With a fourth consecutive bearish candle, the selling pressure on oil continues as the market has made a decisive closing breach of the old key May low at $43.03. The recent downside move is also now breaking through the bottom of the 6-week downtrend channel, which suggests that the move is also accelerating. The momentum indicators retain a bearish configuration and any rallies should be seen as a chance to sell.
The old supports now become the basis of resistance, with $43.03 up towards the initial resistance within the trend channel at $43.70 making a band of resistance that should be eyed for a rally between $43.00/$43.70. The breakdown below $43.03 has tested a minor support around $42.40 from April that has held so far, but if this is breached then there is little real support until $37.60. Before this though traders will also be eyeing the 38.2% Fibonacci retracement of the 2016 rally from $26.05/$51.67 at $41.88.
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