Market Overview
A strong session on Wall Street saw an intraday all time high on the Dow Jones Industrial Average as markets rebounded in positive fashion with the improved risk sentiment. This was fuelled by Citigroup (NYSE:C) results and the assertion by Mario Draghi (ECB President) tat quantitative easing was on the table and that rumours of him stepping down were false.
Asian markets were also positive overnight, with the Nikkei 225 also helped higher by the weaker USD/JPY. This comes after the Bank of Japan key monetary policy on hold by slightly cut its expectation for growth by 0.1%. European trading is mixed to slightly lower in early trading, which could also see further volatility today as a whole raft of market moving events hit the wires.
In forex trading, the US Dollar is making ground against most major pairs, with investors looking forward to the testimony of Janet Yellen today to the Senate Banking Committee. This begins her two day appearance before committees of the two houses of Congress.
This is the first time tat the market will have heard from the Fed President since the strong Non-farm Payrolls data a couple of weeks ago which suggested that there would be a strong rebound for growth in Q2. Extra interest will be paid to what she has to say on inflation which has pushed back to the 2% target the Fed has as part of its duel mandate.
The slight dollar strength we are seeing today could be a reflection that Yellen may come out with a stance than moves slightly away from her archetypal dovish position.
In other announcements, Cable traders will be watching for the UK CPI data due at 09:30BST, with an expectation that the year-on-year figure will increase slightly to 1.6% from 1.5%, something that would theoretically add support for sterling.
There is also the German ZEW Economic Sentiment at 10:00BST which is expected to fall slightly to 28.2 from 29.8. Furthermore, we have US retail sales which are announced at 13:30BST which are expected to improve from 0.3% to 0.6% month-on-month.
Chart of the Day – Silver
Throughout the recent consolidation range, silver had a slightly more of bullish technical look to it than gold did. And when the selling pressure kicked in yesterday which dragged the price back into the range, silver held on to the support nicely. The support band on silver is $20.66/$20.79, above which the price is now looking to consolidate.
Again, as with gold, there has been a significant deterioration in the momentum indicators now which have taken on a corrective outlook. An added pressure to the downside is that there is also arguably an “Evening star doji” candlestick formation which is also corrective. So once again now the support band of the consolidation range is key to the near to medium term prospects. If this can hold, then the bulls can start to build again.
However a failure of $20.66 would mean that there is little support until $20, around 3% lower.
EUR/USD
As we move towards possibly the most volatile day of this week that is laden with macro economic news, the euro remains supported above the key band $1.3574/$1.3585. There is a degree of calm (potentially before the storm) that has developed, with the rate once again finding resistance yesterday under the $1.3640 barrier. This level marks the beginning of a band of resistance that is holding the euro back from a recovery, with $1.3670 (the neckline from the large double top) and $1.3700 (the early July key high).
Momentum indicators are still on the bearish side of neutral with especially the RSI and MACD lines looking as though they have simply unwound from a bearish position to renew downside potential. For now we wait for the next move but with a heavy day of data with US retail sales and of course Janet Yellen’s testimony the most volatile event, we may not have to wait for long.
I still see strength as a chance to sell.
GBP/USD
The drift lower may be finally underway for USD/GBP as the support at $1.7100 gave way yesterday. The decline was by no means precipitous and I still expect support to come in the $1.7060 region (support comes between $1.7000 and $1.7060). The momentum indicators have rolled over which suggests perhaps a near term continuation of the drift, but I see this as simply unwinding some of the overbought momentum that has been built up over the past few weeks.
I expect the old uptrend channel (which although was broken was still used as a guide in the late June correction) to again be used, with the basis of support therefore coming in currently at $1.7027. The intraday hourly char tis perhaps not as strong now as the daily chart with Cable trading below all the hourly moving averages which are now falling in negative sequence.
However, shorting against the longer term trend is risky and I would now be looking out now for any buy signals that come around $1.7060.
USD/JPY
With a second successive day of a higher low and positive candle, the recovery is taking hold once more. However the question is how long it will last before the downside pressure on the yen resumes. The moving averages are all falling in bearish sequence and the momentum indicators are all in negative configuration. The suggestion is then that once this mini bull phase runs its course there will be a chance to sell as all indicators are pointing towards a retest of the 101.30 closing support band.
Through the course of the past few months you have to go back to mid-April to find a bull sequence of more than four days before the sellers returned to regain control. There may therefore be another couple of days in this run before getting a chance to sell. The resistance comes in around 101.60 (which capped yesterday), then 101.80 and 102.00.
Gold
What an incredible shift of outlook yesterday. You have to go back to December 2013 for the last time gold lost so much ground in one day. The bullish upside break from the consolidation range was completely lost. The move seemed to be a touch excessive (the related gains from the Portuguese banking issue on Thursday was less than $15).
So what impact has this had on the chart? Well, the intraday breach of the support around $1306 was not encouraging, but gold managed to record a close above the support. Also today the price has remained above $1306. If this can continue then the bulls can attempt to resume the support building that had been underway prior to Banco Espirito Santo hitting the market.
The momentum indicators have clearly taken a turn for the worse after yesterday’s decline and now look corrective. I would still be mindful and be tempted to stand aside until this episode has run its course. After then, if gold continues to trade above $1306 then we can start to once again form a bull case. Until then, there is an added risk to playing gold as below $1306 there is very little real support until the $1280 area.