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Caution Returns To Forex Trading

Published 05/07/2016, 09:25
Updated 09/03/2019, 13:30

Market Overview

With the US back from Independence Day national holiday an air of caution has re-entered traders’ minds with a safe haven shift back into forex trading, with equities lower and US Treasury yields also back lower. This comes with concerns over the impact of Brexit weighing once more after a series of bad news flow yesterday hit confidence. Perhaps the first time that markets sat up and really took notice of the UK’s Construction PMI with a drop to 46.0 (from an expected 50.5) shows that Brexit is already weighing and poses questions over other data releases such as the services PMI today. Ratings agency S&P also noted that both the Eurozone and the UK would be impacted by Brexit, suggesting that the UK would barely escape a fully-fledged recession. Furthermore, the political turmoil continued with Nigel Farage, leading Brexiteer quitting as his party’s leader. This has all mixed into markets taking a dim view on risk appetite today, with the US dollar outperforming against all the forex majors with the one notable exception of a stronger yen. This is a sure sign of “risk-off”. Asian markets however had a little bit of good news out of China for a change with the Caixin services PMI coming in stronger at 52.7. Despite this the Nikkei was down -0.6% with the yen strength again an issue. European markets are set to open lower in the early moves.

The strength of the dollar is dragging the euro and sterling back lower. The Reserve Bank of Australia as expected kept rates on hold at +1.75% but retaining an easing bias. The dollar strength also seems to be trumping the safe haven status of gold today as the precious metal has corrected by around $8 today, whilst silver is also sharply lower. The oil price has dropped back by over a percent too.

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Traders will be watching for the services PMIs today with the Eurozone composite PMI (Manufacturing plus Services) due at 0900BST and expected to be 52.8. The UK services PMI is at 0930BST and is expected to drop slightly to 52.7 (from 53.5 last month) but in light of the concerning Construction PMI yesterday. The US announces Factory Orders at 1500BST with an expected -0.9 (last +1.9%)

Chart of the Day – Silver

What a breakout! I discussed last week that with the strength of the momentum that silver would continue with pressure on a key breakout at $18.50 and a move towards $20. Since making the breakout silver has burst higher way above $20 with the bulls running hard. However, there might have been a sense of a blowout yesterday with the intraday retracement that closed the candle below the mid-point. The RSI hit 86 yesterday and was the most stretched since April 2011 when the bulls were in the middle of an astronomical run to the all-time high at $49.50. It is difficult to call a top when such huge upside in in flow, however the profit-takers will begin to get itchy trigger fingers and this could be close. The resistance from July 2014 is at $21.55 and marks a major peak posted another time that the RSI went above 80. Throughout this run higher there has not been a breach of higher low but the support of yesterday’s low at $19.90 has now been broken this morning. The hourly momentum indicators also need to be watched, as the hourly RSI has dropped below 50 and suggests loss of near term momentum, whilst another sign would be if the Stochastics fell below 30. A confirmed move back below a minor low at $19.66 would now re-open $18.98 which is more considerable support now. An early spike yesterday to $21.11 is the key resistance near term with $20.75 a lower high.

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Silver Daily Chart

EUR/USD

With very little move on the euro yesterday in light of it being Independence Day in the US, the outlook has changed very little. However, I still view the impetus has being lost in this rebound. Yesterday was the first day in the past 4 sessions that there has not been a higher daily high (although perhaps the US public holiday had something to do with this). Looking at the daily momentum indicators they are all very tepid in their recovery and this suggests that rallies are a chance to sell still. I view this band between $1.1100/$1.1215 as a sell zone and the early weakness today plays into this. The hourly chart shows neutrally configured momentum now and there is overhead resistance at $1.1168/$1.1188. The initial support comes in with yesterday’s low at $1.1095 which protects $1.1069 and the key near term reaction low at $1.1022.

EUR/USD Daily Chart

GBP/USD

Rallies continue to be seen as a chance to sell with the technical outlook still negative. Despite the lack of selling pressure due to the US public holiday yesterday, there has been little really to change the assessment that there will be further downside in due course. The support at $1.3202 may have held up initially but I would expect this pressure to resume and even if there is intraday gains, the overhead supply is a factor in maintaining the downside outlook. The near term pivot around $1.3360 is the initial resistance to watch, whilst Thursday’s high at $1.3495 protects the main near term resistance band $1.3535/$1.3555. Trading underneath all the hourly moving averages and with negatively configured hourly momentum I remain bearish on cable.

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GBP/USD Daily Chart

USD/JPY

All the reasons to be bearish on dollar/yen remain intact and with yesterday’s public holiday in the US showing little real movement during the session, today it seems as though the selling pressure is resuming. The rally in the wake of the initial Brexit induced downside, seems to have run out of steam just under the key overhead supply that begins around 103.60. with Friday’s bearish candle followed by another 50 pips of downside early this morning the momentum is turning increasingly bearish again. The Stochastics have turned to cross lower having renewed downside potential around neutral, with the RSI also turning lower again. The hourly chart shows the rebound of the past few days has now been decisively broken with the breach of the support band 102.15/102.30. This move has now re-opened the reaction low at 101.37 which protects the psychological 100 support and the key low at 99.08. Any intraday rebound should now be seen as a chance to sell with the previously supportive 102.30 now turning into resistance. There is subsequently a band of resistance between 102.30/102.80 to sell into.

USD/JPY Daily Chart

Gold

The strong run of the past few days seems to have briefly hit the buffers as the resistance at $1358 that was posted on Brexit day has remained intact. With the early weakness during today’s Asian session the question is whether this is a minor blip in the run higher or if it is a near term correction coming. It could be a case of seeing how the session develops as certainly a closing move below yesterday’s low at $1337 would be a corrective signal. The RSI hit 70 yesterday which can be seen as stretched, but also with Stochastics and MACD lines positively configured, this should not be too prohibitive and is actually a sign of strength. My take is that I would ideally like to buy gold around the $1306 breakout, as I am now bullish and subsequently a near term dip into support is welcome. Initial support comes in around $1335. A breakout above $1358 re-opens the 2014 high at $1391.

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Gold Daily Chart

WTI Oil

With the US closed for Independence day yesterday there was little to change the outlook. As such the month long consolidation on WTI continues after the huge volatility candles seen in the wake of Brexit began to calm down with only minor gains on Friday. This means that WTI remains rangebound above the big support at $45.83. The resistance though is beginning to form a series of lower highs within the consolidation, under the key high at $51.67 comes $50.54 and last week’s high at $50.00. The momentum indicators are far more neutrally configured with the RSI now between 40/60 and the suggestion is that until there is a move through these levels then the consolidation will surely continue. The hourly chart shows the bottom of the $48.00/$48.50 pivot band (all but) remained intact on Friday and although early weakness today is testing this support once again, if it remains intact it would maintain a positive bias within the band still and trading above the pivot means a favoured pressure on initial resistance at $49.60 and then a test of $50.00. A close below $48.00 re-opens the range lows again.

Oil Daily Chart

DISCLAIMER: This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such.

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All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.

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