Market Overview
Looking at the strength of the dollar move yesterday, you would have thought that Treasury yields had gone on a tear higher in the wake of the Fed. They have not. The dollar has gained on a shift in market sentiment and reduced risk appetite that has been brought about over fears of a ballooning Italian budget causing problems for the Eurozone.
The dollar actually gained very little from the FOMC rate hike. The yield curve has continued to flatten following the FOMC rate hike. Two year Treasury yields are as they were at 2.83% just prior to the decision, whilst ten year yields are around 3 basis points lower. It is a move born out of Eurozone yield spreads (between German and Italian debt) widening. The dollar gained into the afternoon yesterday after robust economic data (backward looking GDP and transport heavy durable goods numbers). Which leads to a question of whether a near term dollar breakout is sustainable. Tariff concerns continue to bubble under and reaction of the dollar here will be key in the days and weeks to come.
Today the focus turns to inflation for both the Eurozone and US and it will be interesting to see whether the upside surprise in German inflation yesterday was a symptom of what ECB’s Draghi was recently referring to as “relatively vigorous” underlying inflation.
Wall Street closed slightly higher yesterday to snap a run of losses, with the S&P 500 +0.3% at 2914 whilst futures are also a shade higher. In Asia there were decent gains, with the Nikkei +1.4% (helped again by ongoing yen weakness) whilst the Shanghai B was also up +0.6%. European markets are looking mixed in early moves.
In forex, there is little real direction, but the dollar. In commodities, there is also a degree of support for gold too, whilst oil continues its consolidation of recent days.
There is a focus on key inflation data today, however, the first release to watch is the final reading of Q2 UK GDP at 09:30 BST which is expected to be confirmed at +0.4% for the quarter. Sterling traders will also keep an eye out for the Q2 UK Current Account deficit which is expected to deteriorate to -£19.4nm (from -£17.7bn in Q1).
Initially there is the release of Eurozone flash inflation at 10:00 BST. After German inflation surprised to the upside yesterday there is a clear upside risk to the consensus expectation of +2.0% on headline and +1.0% on core. Then into the afternoon, the Fed’s preferred inflation measure, the core Personal Consumption Expenditure is announced at 13:30 BST. Consensus is looking for a monthly +0.1% growth with the year on year core PCE at +2.0%. The final reading of Michigan Sentiment is at 15:00 BST and is expected to see no change from the prelim at 100.8.
Chart of the Day – AUD/USD
The September Aussie rally has struggled in recent sessions as the resistance of the eight month downtrend has limited the recovery. The market has been consolidating over much of the past week but saw a key breakdown with a decisive negative candle yesterday. This comes after the pair failed at the overhead resistance of $0.7310 again in the wake of the FOMC decision but has now subsequently closed below what has been consistent pivot support at $0.7235. There is a renewed sense of the long term downtrend, with the deterioration in the momentum indicators as the RSI begins to build traction below 50 and Stochastics confirm a sell signal. Renewing the downtrend means that rallies are now a chance to sell, with the pivot at $0.7235 and the downtrend (today at $0.7275) now a sell zone. It would take a breakout above $0.7310 to decisively improve the outlook now.
The euro did not seem to react to the Fed meeting on Wednesday, it was more a case of being hit by the Italian budget concerns. This resulted in almost 100 pips of downside on the session but also an end to the recovery uptrend of the past couple of weeks. This means that instead of making steady improvements the chart is now a deteriorating outlook as the momentum indicators swing lower. The Stochastics and MACD lines look most concerning at this stage, whilst if the RSI fell below 45 it would mark a six week low and suggest the key support at $1.1500 would come under threat. Currently we see on the hourly chart the market having broken the next pivot support at $1.1650 which is a negative development. A breach of $1.1615 would then open the key support around $1.1500. As happened yesterday with the $1.1720 pivot (which is now resistance), a failure to break back above $1.1650 will pile on the pressure today. The near term outlook is now a sell into strength whilst $1.1720 remains intact.
A decisive negative candle complete yesterday which lost 85 pips on the session, has now brought into clear focus the prospect of a near term breakdown and deterioration in the outlook again. The support of the low from last week at $1.3055 all but formed a pivot with the old reaction high of $1.3045 but now this support is under pressure. A closing break below this support would complete a small top pattern but also significantly change the near term outlook. Already we see the momentum indicators on the brink of calling a breakdown, with the MACD lines about to cross lower and the Stochastics also in decline. A move that takes both Stochastics and RSI below 50 would be negative now. The hourly chart shows a head and shoulders top formation would complete below $1.3055 and would imply around 240 pips of correction to bring the key higher low at $1.2800 back into play. It is important to point out that this top has not completed yet, but resistance comes in the range $1.3100/$1.3150 now and a failure of any rally here would add to pressure. It would need a move above $1.3215 to reinvigorate the bulls.
Early yesterday morning it looked as though the yen was beginning to pull back on some of its losses, however a big intraday turnaround formed a decisive bullish engulfing candlestick and Dollar/Yen has burst through resistance at 113.15. This has quickly opened 113.75 as the next resistance but the November high of 114.70 is also back in view. Momentum remains strongly configured with RSI still a shade below 70 (bull rallies of March and July went into the low 70s) whilst the MACD and Stochastics remain strongly configured. The market has continued to push higher this morning, but intraday corrections are a chance to buy. There is now a band of support 112.50/113.15 as a buffer to use as a buying opportunity, but the market seems set on pushing higher for now.
Gold
After weeks of trading sideways the outlook for gold has suddenly taken a turn for the worse. Posting a negative candle in the wake of the Fed, the selling pressure accelerated yesterday and closed below not only $1187 support, but a shade below the key higher low of $1183. Although the support of the higher low has not yet fully been broken, the deterioration in the momentum indicators coming through is an increasing concern now. The bear cross on the MACD lines is probably the most stark deterioration but the Stochastics have swung lower whilst the RSI is also back under 40. A decisive closing breach of $1183 today opens $1160 as the key low. The concern is also that unless the market reacts decisively positively, any intraday rebounds will struggle at overhead supply of $1187/$1191. It would need a move above $1204 to now improve the outlook.
WTI Oil
The reaction after Wednesday’s negative candle seemed to be fairly positive initially, however the bulls lost traction as the session progressed yesterday and resulted in a rather nervous looking candlestick, despite the gain on the day. The positives are that the market continues to hang on to the support of the breakout band $70.45/$71.65 but the bulls are struggling to push forward and are yet to break decisively free. Despite this, there is still a positive configuration on momentum indicators which suggests weakness is a chance to buy. This will remain the case whilst the support at $70.00 is intact, with the uptrend support providing a basis of support at $69.60 today. After a disappointing few sessions, the bulls need an injection of impetus again. The hourly chart shows momentum is still configured positively an intraday weakness should be another chance to buy. Losing support at $71.50 would be a concern though as it would open $70.00 again. The resistance is building at $72.75 and needs to be broken.
The bulls have reacted to support the market after three solid negative candles earlier this week. Near term corrections remain a chance to buy on the Dow and a positive close has now left a potential area of support in at 26,350. This comes as the momentum indicators remain positively configured to suggest corrections simply help to renew upside potential within the uptrend channel once more. However, yesterday’s candlestick was not as positive as it might have been and the bulls still need more conviction after a bit of a spluttering rebound so far. After the swing lower in the wake of the Fed, it would be a positive signal for the bulls to now push back above the 26,606 lower reaction high. This would break the sequence of lower daily highs from earlier this week and put the bulls back on the right path.
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