Market Overview
The dollar had a huge meltdown yesterday, but can the tide of dollar selling be turned, at least in the near term, as the ECB meets today?
The dollar has been under pressure since November, but the selling pressure went into overdrive yesterday after comments from US Treasury Secretary Steve Mnuchin. He said that dollar weakness was a good thing as it would help with US trade. This was a remarkable admission from a man in such a post as it is a dramatic change in stance of an office that has always (at least publicly) strived for a stronger dollar. Cue dollar meltdown. Massive moves and key levels broken across major markets, with the Dollar Index at a three year low and decisively below 90. There is little real support to stop the dollar now until 84 area on Dollar Index.
Treasury yields have consolidated and although Wall Street has not sold off, the previously strong and confident bull outlook has been shaken, with the uptick on the VIX a testament to that. Market risk sentiment tends not to react well to shock moves and this precipitous sell-off on the dollar could begin to hit sentiment. Furthermore, it means trading becomes very difficult as when markets are soaring (or falling like a stone) chasing them can be very risky too.
The ECB meeting today could be a game changer too. How does Mario Draghi react to this relative strengthening of the euro? Will there be an attempt to jawbone the euro lower? That could see markets suddenly engaging in an about turn. It does tend to take newsflow to change sentiment during these moments.
Wall Street closed mixed on a volatile session yesterday with the S&P 500 -0.1% at 2837 whilst Asian markets reacted negatively overnight (Nikkei -1.1%). European markets closed lower yesterday and are continuing lower today.
In forex trading, the dollar is weaker again across major pairs, but the selling pressure is more contained today.
In commodities, gold is holding on to a break above $1357.50, whilst oil is maintaining its momentum from late in the session from yesterday in the wake of the EIA inventories which showed crude stocks in drawdown for a tenth consecutive week.
Traders will be massively focused on the ECB meeting today, however first up is the German Ifo Business Climate which is at 09:00 GMT and is expected to tick very slightly lower to 117.1 (from 117.2 last month) but after the strong recent survey data (flash PMIs and German ZEW) there will be risk of a positive surprise.
The European Central Bank monetary policy meeting announces rates at 12:45 GMT with no changes to the main refinancing rate of 0.0% and the deposit rate of -0.4% expected. Not much is expected formally (possible changes to the forward guidance are more likely next meeting in March), but Mario Draghi’s press conference at 1330GMT could be interesting and drive volatility.
Aside from the ECB, markets will be watching Weekly Jobless Claims at 13:30 GMT which are expected to increase slightly to 236,000 from last week’s record low of 220,000. US New Home Sales are at 15:00 GMT and are expected to be 676,000 down from 733,000 last month.
Also watch out for Japan CPI at 2330GMT which is expected to remain at +0.9% on core CPI.
Chart of the Day – EUR/GBP
There are a number of eye catching moves on sterling crosses now, in light of the huge gains seen yesterday. However one of the most key moves was a closing break below £0.8740 on EUR/GBP. This has been a massive floor for the price, having held on numerous occasions since June 2017. However the huge bear candle posted yesterday has come with a big breakdown. However there is the not so small matter of the ECB monetary policy meeting today that will simply add spice to this one now. Can sterling hold the break? A two day closing breakdown below £0.8740 would be key and given the deterioration in the momentum indicators, could be a decisive move. The initial support is at £0.8650 but then further retracement towards £0.8600 and £0.8535. A consistent breach of £0.8740 would also confirm a four month range break and open for a 280 pip downside move. There is resistance now around the breakdown £0.8740 and a sell zone £0.8740/£0.8800 for a failed rally.
EUR/USD has broken sharply higher in front of the ECB meeting. Euro strength has had a part to play but predominantly it has been dollar weakness. The upside break above the resistance at $1.2320 completed a 160 pip upside target implying around $1.2480. However there is also a bull flag pattern that can also be derived on the breakout that gives an implied $1.2575. Given that the pair is already into 3 year highs and the next key resistance is not until $1.2600 area, these targets are not unrealistic. However the big caveat will be how Mario Draghi and the ECB react to this significant increase in EUR/USD (around 600 pips higher) since the last ECB meeting in December. Will Draghi attempt to talk the euro down? Expect volatility during the press conference. The hourly chart shows initial support at $1.2380 with $1.2300/$1.2320 the main breakout support.
The push higher that Cable has seen in the past couple of weeks has been incredible. Driven by sterling strength and dollar weakness the pair rallied 240 pips yesterday and the bulls continued to chase the market higher earlier today. The situation is that there is a vacuum of resistance as the market retraces the huge clear-out following Brexit. Above $1.4000, the market has moves through $1.4200/$1.4300 seemingly without even a thought. In all reality there is little resistance now until $1.4600/$1.4770 area but even then the market is pretty thin until the pre-Brexit high at $1.5020. However, the market has slipped already from today’s high at $1.4328 and the most likely scenario is that the massively stretched dollar will engage a snap back rally at some stage in the coming days which will unwind Cable back to $1.3800/$1.4000 again. The difficulty is in these situations over how far does the market go before that happens? The momentum is so strong with the RSI at 85 but clearly stretched. The hourly chart shows initial support $1.4185/$1.4260. Watch also for hourly momentum corrective signals.
The pair continues to accelerate lower and now with the initial support at 109.55 having been breached there is very little reason why the market will now not come and retest the 108.00 support area. The September low at 107.30 is also on. Momentum is extremely bearish now with the RSI now the lowest since April 2016. The hourly chart shows how a bounce was just sold into again around 109.50 before the bears have taken hold again. The concern for traders is whether to chase the market lower or to catch a falling knife. In the lack of technical support until 108.00 area it is likely to take newsflow to change the course in the near term. Look for confirmed reversal signals on the hourly chart as a snap rally could easily set in.
Gold
Allied with the dollar weakness impacting across major charts, the price of gold has rallied through $1357.50 and to a new 18 month high. The market is now into a key band of long term resistance between $1357.50/$1375. On a technical basis the outlook is now strong, with the momentum indicators all positively configured. The RSI is rising in the mid to high 70s, the MACD lines have posted a “bull kiss” and Stochastics are rising. Can this run higher continue? Looking for reversal patterns when the market is so strong is a difficult game, but as long as the market holds on to the closing breakout above $1357.50 then the outlook will be positive. There are early hints on the hourly chart that can be signals, such as the hourly RSI below 60 in conjunction with bear crosses on MACD and Stochastics. Nothing yet is there, so for now the bulls retain control. A breakout above $1375 would be a huge long term bull signal.
WTI Oil
To an extent helped by the dollar weakness but the consolidation within the six week uptrend has been seen as an opportunity to buy and the market has pushed to breakout above $64.90 resistance. This comes as momentum indicators swing higher again and take on a move positive configuration. The bull kiss on the MACD lines is a strong signal, whilst the Stochastics have also swung positively higher. The move once more continues the recovery of oil back through the massive sell-off of late 2014. To this extent there is very little real resistance, with the 50% Fibonacci retracement of $107.75/$26.05 at $66.90, whilst $69.50 was also a brief resistance left. The breakout at $64.90 now becomes a basis of support for an unwinding move, with the hourly chat showing further support back around $64.40.
Wall Street doesn’t do corrections! Whilst that is something of an exaggeration, the feeling is that nothing seems to be able to hold the bulls back for long. However, the past couple of sessions have been somewhat less bullish, with neutral candlesticks that have now brought the market back to the support of a three week uptrend. This is still likely to be a buying opportunity with momentum indicators remaining incredibly strong and there is little reason not to expect further gains on this incessant bull run. The RSI is in the mid to high 80s and MACD lines are still rising. Intraday weakness has to continue to be seen as a chance to buy. However, this run cannot last forever, and although there are no signs yet of a reversal, watch for the hourly RSI potentially dropping below 50 to suggest the bulls are wavering. Support initially at yesterday’s traded low at 26,106 was around the 3 week uptrend too (today around 26,135).
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