Market Overview
The dollar has been under pressure following the Fed and recent data disappointments, however this move seemed to turn a corner again yesterday as a solid ADP Employment change and ISM Non-manufacturing held for a dollar rally. This move is being maintained today and the dollar strength is impacting across the forex majors and precious metals. However the market will be turning attention to the Bank of England rate decision at 1200BST, a decision that is likely to drive further sharp moves and volatility on sterling. The general rule in the past few years is that the Bank of England do nothing and we move on. However, all that is about to change today with what the market sees as an almost nailed on rate cut of 25 basis points (the first cut since 2009). However the real question is will there be anything else to go with the cut? It is “Super Thursday” and that means a press conference for the Quarterly Inflation Report. This is where we get the chance to see the impact that Brexit is having on growth and inflation expectations. Will this drive a need for QE on top of a rate cut to spur growth? Will this be the first of a series of easing measures? Expect a lot of volatility around sterling and also the FTSE 100 (which would be supported by dovish monetary policy and any sterling weakness).
The S&P 500 rebounded a touch yesterday with a jump of +0.3%, whilst Asian markets were mixed to mildly higher overnight (Nikkei +1.0%). The European markets are mildly higher in the early moves, with the DAX outperforming. In forex markets the mild dollar strength is pulling the euro, sterling and the yen marginally weaker, however the Aussie dollar is holding up well today after Australian retail sales beat analyst estimates. Gold and silver are also carrying on from yesterday’s corrective move and are again lower by around half a percent. After the market took the positives out of the EIA oil inventories report yesterday (the drawdown in gasoline was more than expected), the oil price is all but flat.
Traders will be watching for the Bank of England monetary policy decision at 1200BST and then US weekly jobless claims at 1330BST expected to stay around last week’s number, at 265,000. US Factory Orders are at 1500BST and are again expected to decline on the month by -1.8%.
Chart of the Day – NZD/USD
Is that another near term top in the Kiwi? On a day of US dollar rebound against the forex majors, the Kiwi was a significant underperformer. This has manifested itself in a sharp bear candle on the daily chart which has not only more than retraced a strong bull candle from Tuesday but also threatens now to turn the latest near term rally on its heels and usher back in bear control. The concern would be that the move has seen the RSI back away from the RSI around 60, whilst also exhibiting a pattern that could be argued as a series of lower highs and a loss off the impetus. Furthermore, the MACD lines are losing momentum having barely turned higher, whilst the Stochastics will now be watched for a potential crossover which could confirm the bulls relinquishing control again. The past few weeks have been characterised by consistent bull and bear moves that tend to last between one and two weeks before reversing. There is a mild uptrend channel over the past year, but this latest corrective candle could now signal another corrective period. The hourly chart shows $0.7160 support having been breached which completes a small top pattern and around 70 to 100 pips of initial downside. The hourly RSI has deteriorated to a 2 week low yesterday, whilst the hourly MACD lines also confirm this. There is a near term band of resistance $0.7160/$0.7200 which could be seen as a chance to sell now. There is a band of near term support at $0.7060/$0.7080 which could easily be tested in the coming days.
The dollar strengthening against the euro has turned the rally on its head again. The strong bearish candle which cut 75 pips from the price has entirely retraced Wednesday’s breakout candle and has already questioned the bull control just as it was getting going. The move has also had an impact on momentum, with the RSI failing at 60 (similar to the two rallies of June), whilst the Stochastics have also crossed lower again to give an apparent sell signal. The decline yesterday also breached the initial support at $1.1150 which was a reaction low on the hourly chart. Furthermore, the hourly momentum is now in a far more corrective configuration. The long term pivots at $1.1050 and $1.1100 will now come back into play. There is also a minor pivot level around $1.1190 which is now acting as resistance. Watch out for 1200BST and the Bank of England monetary policy as there could be a knock on impact on the euro and this could raise volatility around that time.
Wednesday’s rally hit the buffers a touch yesterday with a 30 pip correction which has formed resistance at $1.3370. However the market was fairly subdued and this has continued into today’s early moves. Traders will be thinking about positioning ahead of the Bank of England monetary policy decision at 1200BST which will surely drive direction for the days and possibly weeks to come. The technicals have improved in the past couple of days with the Stochastics picking up however the RSI unwinding to 50 could be seen as a move to renew downside potential, with the MACD lines still under neutral. The hourly chart shows support around $1.3270/$1.3300 but this could be blown out of the water if the Bank of England move decisively to loosen monetary policy today. A rate cut of 25 bps is expected and is likely to hit sterling, but there could be a series of easing measures either announced or discussed which could also further impact. Expect volatility around the announcement. Key resistance is $1.3480/$1.3535 and could be tested if the Bank of England baulk at the prospect of easing. However the lows are more likely to come under threat, with $1.3160 the near term pivot and the low at $1.3060 in range.
The selling pressure on Dollar/Yen (which has been a combination of yen strength and dollar weakness) took a break yesterday with the rebound on the dollar. This has helped to form support at 100.65 and the bulls are again happy to bid up the pair again today. However in the context of the recent decline, the move is only very minor and the strategy of selling Dollar/Yen into strength remains valid with momentum indicators remaining bearishly configured. However in front of Non-farm Payrolls the momentum is beginning to build in a rally. The hourly chart shows the hourly RSI at a 5 day high, whilst the initial pivot at 101.45 is being tested. An upside breach would then re-open the resistance at 101.95/102.85 which would likely be seen as an area of overhead supply where a selling opportunity could arise. I still expect a retest of the crucial 100 level at some stage.
Is the latest rally showing signs of running out of steam again? The run higher from $1312 in the past week and a half has started to turn lower under the key resistance at $1374.90, leaving a potential lower high at $1367.30. The concern comes with yesterday’s corrective candle (allied to the rebound for the dollar) which has continued again today. If today’s candle is also a closing move lower then a crossover sell signal on the Stochastics may have been completed (the latest three in each of the last three months proved to be decisive in calling a correction). The hourly chart shows that the initial support around $1346 currently remains intact and whilst this is the case then the corrective move will have little real substance. There could also be some volatility around the announcement of the Bank of England monetary policy, especially if the MPC engages significant further easing. The exact reaction could be difficult to ascertain as there could be some dollar strength (negative for gold), but also a major central bank easing monetary policy is positive for gold. There is now near term resistance at $1359.25, whilst the support at $1330 is key.
WTI Oil
The mixed EIA inventories report drove a choppy reaction from WTI which ultimately resolved with a rebound. The surprise inventory build (of 1.4m barrels versus an expected draw of 1.3m barrels) was overweighed by the draw on gasoline stocks (of 3.3m barrels when a draw of only 0.3m barrels was expected). This has driven a near term recovery on WTI, however the outlook for oil remains weak technically weak. The question is whether the bulls can put together anything more than a few hours of gains without the sellers returning. The resistance in a recovery move looks fairly strong near term around $41.88 which was both the reaction high from Monday and also the 38.2% Fibonacci retracement of the big $26.05/$51.67 bull recovery. The daily momentum indicators on WTI remain bearishly configured and the extent at which the market is strongly trending lower would suggest there is no reason to think that the RSI should be bottoming around 30. Stochastics and MACD lines remain negative (even though the Stochastics have picked up a touch with yesterday’s move) and rallies will be seen as a chance to sell. Expect the sellers to return once more to test $39.20 and the way towards $38.85 (50% Fib) and $37.60 (mid-April low and next real support) could be seen.
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