Market Overview
After the concern that swept through the markets last week an element of calm has been restored. The Volatility S&P 500 has unwound back towards 15 from above 17, whilst the US Dollar Index has consolidated too. Wall Street indices have resumed their positive path with gains of around 0.7% on the S&P 500.
Overnight though the Chinese services PMI as recorded by HSBC fell to a 9 year low at 50.0and way down from the 53.1 recorded last month. This surprisingly weak data did not help the Asian markets which saw mild losses as a result. The European markets have followed the lead of Wall Street but it will be interesting to see if markets are weighed down by China as the session develops.
The dollar is just under a negligible degree of pressure early in forex trading today, although there is very little to overly go on. The Dollar Index once again is trading around the 81.3 pivot level and it will be interesting to see if this level acts as support for the pullback now. The Reserve Bank of Australia kept rates at 2.5% as expected, with the Aussie dollar only slightly higher against the greenback today.
The main focus for traders in the European session will be the UK services PMI. The service sector is around three quarters of the UK economy and the data is important for sterling. The expectation is for a slight gain to 58.0 from 57.7 when the data is announced at 09:30BST which would again be a strong number. There is also the ISM Non-manufacturing PMI this afternoon at 15:00BST with an expectation also of a slight gain to 56.5 from 56.0.
Chart of the Day – EUR/JPY
The Euro has come to its first hurdle in its apparent recovery. The rally is now stalling at the old support, turned new resistance, at 138. The troule is that if momentum indicators are anything to go by then this could well be the limit. The RSI has simply unwound to 50 which has been the limit of previous recoveries, whilst the Stochastics and MACD are also suggesting that this move has been merely a technical rally.
The intraday hourly chart now holds the key to whether this phase has just been a dead cat bounce. Yesterday’s low came almost to the pip at the support around 137.35 and if this level is breached today then it would suggest that the recovery has run out of steam and is likely to once more begin the downside move. The bulls will be hoping to regain control and push above 137.90 and 138.00.
EUR/USD
If the Euro is on the recovery track (at least near term anyway) then it is taking a bit of a breather. Yesterday’s session saw a mildly negative candle but with little real conviction and this mood has filtered into the Asian session. Holding above support at $1.3400 is the first real test of the recovery and so far it is managing to do it. This is allowing intraday stretched momentum unwind, but with the hourly MACD and RSI indicators now ready to push on, a failure to do so today may result in a lack of confidence in the rally and a loss of support.
Subsequently, Friday’s high at $1.3445 is a key near term level to breach and if this can be achieved then the recovery will be back on. There are mixed signals from the hourly moving averages and the euro is basically now in a 40 pip range where a break either way should be decisive. Intraday technicals are bordering on the positive still, whilst on the daily chart there is still the RSI buy signal and improving Stochastics. With the 12 day downtrend broken on the daily chart the outlook for the near term at least is improving.
GBP/USD
One of the big factors that should be adhered to in technical analysis is to wait for confirmation. The strong candlestick pattern from yesterday suggests a recovery is threatening. However a three week downtrend remains intact and after 12 days out of 13 being negative, Cable was due a bounce. The big question is whether it is the beginning of a recovery.
The overnight price action has remained supportive, but for now the momentum indicators largely remain negative (although there has been a crossover buy signal on the RSI, I would prefer to wait for confirmation as this is the only real buy signal given on the technical studies so far). The intraday hourly chart shows improved momentum indicators, but Cable needs to rally through the resistance at $1.6900 to suggest the bulls are able to sustain a push higher. There is minor support at $1.6850 but the lows around $1.6810 are the key support now.
USD/JPY
Dollar/Yen is now in consolidation mode having taken the froth off the top of the rally. The bulls will point to support now around 102.30 which is holding during this drift lower. It now looks as though this support is the key to whether Dollar/Yen will be able to break out from this 4 month range between 101 and 102.30.
The Asian session is pointing towards yen strength today, the attempt to breakout again seems to be floundering with the RSI peaking at a closing basis at 69. Therefore if the support at 102.30 starts to break down the likelihood is that once again there will be a drift back towards the pivot level around 102.00. It would need a close above (probably even a two day close) 102.80 to suggest the range is being broken.
Gold
I spoke recently about the sequence of lower highs over the past few weeks and the fact that the gold rally needed to push on to prevent another bounce being sold into. The momentum has never really been able to get going as the RSI, MACD and Stochastics indicators all drift lower towards negative configuration. Gold is now into its fourth session of trading below the 144 day moving average which suggests a deteriorating outlook. The falling 21 day moving average has capped the rallies over the past couple of weeks and that is now at $1305.70.
The overhead pressure is mounting and I am now of the increasing expectation that the key support at $1280 will come under further test. The bulls are hanging on by their fingertips and as the European session gets underway there are signs of some buying pressure. The intraday chart shows immediate resistance at $1295 and then at $1300 however it would need a breach of $1312.10 before the outlook begins to improve once again.