Market Overview
With two huge driving influences yesterday, Wall Street closed fairly mixed on the day, with the S&P 500 broadly flat, a Twitter (NYSE:TWTR) inspired Nasdaq almost 0.5% higher and the Dow around 0.2% lower. The Advance (first reading) of US GDP jumped by 4.0% which was way above expectation, however the market was perhaps a bit nervous of what this might mean for monetary policy and there was a caution amongst traders.
The Feral Reserve however, pretty much stuck to its guns on dovish monetary policy, with an expected $10bn taper. There was little regard given to inflation, although it was moving “somewhat closer to the Committee’s longer-term objective”. However with the statement also referring to an “underutilization of labor resources” it would appear that the FOMC is concentrating on wage growth as a primary concern.
Markets have not been overly phased by the FOMC and Asian trading was fairly flat overnight, however the lack of gains on the Nikkei (which was basically flat) may be a surprise given the significantly weaker yen. European markets are trading slightly higher in the early exchanges.
After the huge move higher in the Dollar Index in the past few weeks towards its 81.3 resistance, forex trading has been a touch mixed this morning. Euro traders will be looking out for German unemployment at 08:55BST and then the Eurozone inflation data at 10:00BST which is forecast to remain flat at 0.5%.
The Loonie is trading a touch cautiously in front of the Canadian GDP data that is announced at 13:30BST and is forecast to rise slightly to 2.3% from 2.1%. US weekly jobless claims are announced at the same time and are expected to climb slightly to 300,000 from last week’s multi-year low of 284,000.
Chart of the Day – EUR/GBP
For several months, the falling 21 day moving average has been an excellent basis of resistance that the sellers have used as a gauge for their next bear leg down. The past week has seen Euro/Sterling consolidate back to and consistently find resistance at the 21 day ma (currently 0.7922). The question is whether this is again an opportunity to sell. One thing to remember is that consolidation is usually a case of a pause for breath rather than a bull signal.
The “trend is your friend” for a good reason usually. This period of consolidation is helping to unwind some of the bearish momentum indicators and is helping to renew downside potential. On the hourly intraday chart, even if there were to be a move above 0.7940 then this is still likely to be a near term technical move.
The important resistance is now at 0.7980 which was the latest reaction high within the downtrend. A breach of this resistance would begin to get the recovery bulls more interested. Until then, expect the consolidation to result in renewed downside below the recent low at 0.7866.
EUR/USD
An incredible run lower on the euro over the past four weeks has seen almost a straight line decline from the neckline of the completed double top at $1.3670 all the way back to the implied target at $1.3375. The euro remains incredibly weak with the RSI currently down at 25, and yet still there is little sign of any real recovery.
There was a minor intraday bounce off $1.3365 but the intraday hourly chart shows the momentum indicators merely unwinding an oversold position which looks to just be renewing downside potential. Watch the falling 89 hour moving average (now $1.3418) which has been the limit to many of the recent recoveries/consolidations. If the euro starts to consistently trade above the 89 day ma then perhaps this could be the signal for a near term recovery.
At some stage there will inevitably be a technical rally on the euro as it has lost over 300 pips in 3 weeks. The daily chart shows the $1.3475 neckline of the large double top as a natural initial target for any technical rally.
GBP/USD
Over the past few days I have been increasingly talking about the key role of support that the 89 day moving average (now $1.6893) has played on Cable throughout 2014 and yesterday the rate hit the support. Now, the technician in me is desperate for this to once again come in and provide a floor for the price as it has done on each of the three other major corrections this year.
The problem is that if it starts to break down then I think we could be in the process of a major change of outlook for Cable. The sell-off is now into the 12th day but is showing initially positive signs in Asian trading. Incredibly, as with EUR/USD, on the intraday hourly chart it is the 89 hour moving average (now $1.6954) which seems to be the basis of resistance for the rallies/consolidations.
Again, intraday momentum simply looks to just be unwinding from an oversold position currently. There is a resistance band $1.6930/$1.6955 which needs to be overcome and if this can be seen then the prospect of a meaningful recovery can begin. If the downtrend continues then the next support is not until $1.6844.
USD/JPY
An absolutely incredible sell-off on the yen (also see huge moves higher on Euro/Yen and Sterling/Yen) has seen Dollar/Yen jump back to (and briefly through) the top of the four month trading range. Yesterday’s move saw the rally move into an almost exponential phase of gains as the largest green (ie. positive) candle was posted since 19th March.
Interestingly, the rate settled to close out around 102.80 which has consistently acted as a major pivot level on Dollar/Yen over the past few months. Overnight there also seems to be some consolidation as Asian trading has settled. The RSI is at 68 which is the most extreme since 1st January. I have been waiting for several days for a sell signal and with the rate showing initial signs of exhaustion at the top of this trading range, perhaps one is close. Today could be a trigger for the profit-taking to finally begin. There is little real support until 102.30.
Gold
There has been little for the near term bulls to cheer about in the past few days and the rate is beginning to trade consistently below the 144 day moving average which has been acting as a longer term support. Once again therefore the price support of the recent lows is coming under threat. A close below $1290 would begin to put serious strain on what I see as the crucial pivot level at $1280 for the long term bulls to be in control.
The positive configurations that we have seen develop on the RSI and MACD lines are also under threat. This is therefore becoming an important phase for the outlook of gold which is coming under increasing pressure. If support does not begin to form soon the bears will have regained control and we will have to consider the next reaction lows at $1260 and $1240. A move back above $1312.10 would be needed to provide some respite for the selling pressure.