Market Overview
The recent rise of the dollar has certainly been linked strongly to the rise of Treasury yields as yield differentials have suddenly kicked in again as a major driving force in forex major pairs. The 10-Year Treasury yield has pushed though 3.00% in the past couple of days and is now eying the key January 2014 highs of 3.04%, a breakout above which would see the yield at its highest level since July 2011.
With the 10 year Treasury yield so close to such an important level (currently around 3.02% this morning) there has been a degree of consolidation on the dollar today. Perhaps also this is to do with the upcoming European Central Bank policy meeting, but also there is Q1 US GDP to consider tomorrow.
The ECB meeting is not expected to throw any curve balls today, with Draghi likely to want to keep his options open. Draghi’s policy of “Patience, Prudence and Persistence” is expected to continue with the policy outlook showing that there will be no abrupt end to QE. He is likely to stay very tight lipped during the press conference and give very little away despite the likelihood of being probed on clues for potential timing of the end of QE(still expected to be later in 2018). He is also likely to reiterate the balanced risks in recent softening of data, whilst geopolitical tensions are factors for uncertainty. There is a caveat that Draghi follows the recent lead of the BoE’s Carney and gives a dovish steer over potentially delaying withdrawing the APP. Watch out for moves on core eurozone yields, especially the Bund yield which will be a driver of volatility on EUR/USD.
Wall Street closed mildly higher on a choppy session, with the S&P 500 +0.2% higher at 2639 and with Wall Street futures just marginally lower, Asian markets have been stable overnight (Nikkei +0.5%). European markets are mildly lower in early moves hit by ex-dividends, but trying to focus on a supportive earnings season rather than concerns over rising yields.
In forex, it is a quiet move into the European session, with a slight unwind on yesterday’s dollar gains, but with no standout performer.
In commodities, gold has also been supported by this mild dollar weakness whilst oil continues its recent fluctuation within the range built up over the past week.
The European Central Bank monetary policy will be a primary focus for European traders today, with the rates announcement at 12:45 BST. No change is expected across the rates, with the deposit rate staying at -0.4%, the main refinancing rate staying at 0.0% and the Asset Purchase Program still at €30bn per month. Mario Draghi’s press conference at 13:30 BST will also be a source of volatility during the afternoon.
Stateside, the data to watch is the Durable Goods Orders at 13:30 BST which is expected to show core ex-transport good improving by +0.5% on the month (less than the +1.0% last month). Weekly Jobless Claims at 13:30 BST are expected to remain around current levels with 230,000 (232,000 last week).
Chart of the Day – GBP/JPY
Sterling/Yen has been trending higher in recent weeks as sterling has been outperforming G10 forex. Although the move took a sharp retreat on a wave of UK data disappointments and dovish comments from BoE Governor Carney, however the move has simply unwound to renew upside. The unwinding move has bounced encouragingly from the confluence of support with the seven week uptrend, the rising 21 day moving average and breakout support band 150.60/150.90. This culminated in last week’s low at 150.65 before the bull candles have resumed once more. The momentum indicators are positively configured and the RSI used the retreat to unwind back to find a low around 50, whilst the Stochastics have also just turned higher again around 50. Near term weakness will continue to be seen as a chance to buy. The hourly chart shows near term pivot support at 151.70 is an initial buy zone, whilst a close back above 152.60 would regather momentum for a retest of the April high at 153.85.
EUR/USD
After renewed selling pressure yesterday, EUR/USD comes into the key ECB meeting today standing on the brink of a big breakdown. The support of the March low at $1.2155 has acted as the floor for the medium term trading range since mid-January but after the run of losses in the past week, this support is coming under real strain. Already, yesterday’s close of $1.2159 is the lowest close since 11th January, but on an intraday basis the support remains intact. It is only the slight rebound early today that has prevented such a break. A closing breach of $1.2155 would complete a 400 pip breakdown and open at least for $1.2090 (the next key low) but possibly then $1.1915 as the trend sentiment decisively deteriorates. The momentum indicators are gradually now pointing towards weakness, with the MACD lines falling below neutral for the first time since November whilst the RSI is below 40. Into the ECB, yesterday’s rebound high is shown on the hourly chart as a near term pivot and resistance that needs to be breached for the bulls to begin the recovery process again. The market is clearly looking at Draghi and the ECB to err on the side of caution and this is pulling a mild bear bias.
Cable is consolidating following the key break below $1.4000 on Monday. However, since that breakdown there has been a sense that the market is into wait and see mode. The last two candles have almost entirely contradicted each other and all the while, support at $1.3915 is holding but resistance at $1.4000 is also building. Within this move, momentum indicators stand on the brink, with the RSI flirting with 40 (around where the key lows of February/March kicked in) whilst the MACD lines are unwinding to neutral. The next move could be a key one. There is a negative bias on the chart following the breach of the 5 month uptrend break and the dollar strength across forex majors is still a driving force, but sterling has held up relatively well. A close below $1.3915 along with a break of $1.3885 opens $1.3710 but the bulls would be eying $1.4000 as a barrier to break now. The hourly chart shows the market testing the sell-off downtrend this morning and there is a less malign momentum forming. The next move will be interesting.
Dollar/Yen has continued to pull strongly higher in the past few sessions. Having broken out above 107.90 the market has continued to march on, through resistance at 108.30 and is now eyeing initially 109.80 but also 110.50. The strength of the momentum is impressive, with the MACD lines accelerating higher, Stochastics strong and the RSI around 70 is the first time this has been seen since July last year. Although this leaves open the possibility that the market is becoming overbought, another strong bull candle yesterday maintains the momentum for now. The early move is slightly consolidating this morning and the hourly chart shows the recent uptrend of gains is still intact. The hourly chart shows support at 108.95 whilst 108.55 is a higher low. Hourly momentum is still strongly configured and corrections are being bought into. There is still momentum in this run to the upside, however near term profit-taking is now becoming a possibility. The daily chart shows 107.90/108.30 is now a key band of support.
Gold
The bears are testing the water of a breach of support that would open the key range lows at $1300/$1310 once more. Yesterday’s intraday breach of $1321 could not be held into the close as the market rebounded from $1318.50. However the pressure is mounting as momentum indicators drift towards key levels. As yet there is no momentum indication of a decisive downside breach that would pull for an imminent test of the long term pivot band support $1300/$1310 which has been the floor of the near four month trading range. However yesterday’s intraday breach of $1321 increases the likelihood. An early rebound this morning has helped to stabilize the initial pressure, but the hourly chart shows the need to break above $1332 (which is interestingly almost bang on the centre line of the range) in order to improve the near term outlook.
WTI Oil
The market has already been anticipating the “surprise” jump in the EIA crude stocks after the API inventories a day earlier and the subsequent market reaction has not been too bad (whilst the continued prospect of the US pulling out of the accord with Iran continues to underpin the price). Subsequently the market continues to build a mini range between $67.15/$69.55. The momentum indicators may have plateaued slightly but essentialy this is still a bull consolidation. The support band of the previous breakouts between $66.65/$67.75 continue to provide a basis of support. With today’s early tick higher the bulls will be eying the resistance at $69.55 under the $70 psychological level once more. The key reaction low at $65.55 is important to the continuation of this bullish outlook.
There is an increasing sense of the Dow being in correction mode and although the market rebounded well to close higher on the day yesterday, rallies are increasingly being seen as a chance to sell. Tuesday’s huge outside day bearish engulfing candle has put significant strain on the outlook and the bulls are under pressure. The move is really beginning to drive an acceleration lower on the Stochastics. The MACD lines have also now posted a bear cross having recovered back to just below neutral, a move that is especially concerning for the bulls now. Although the market has bounced for a couple of sessions from around 23,825 the negative momentum with further downside potential suggests that mounting selling pressure will test lower levels now. The recently broken reaction lows 24,150/24,244 create an area of overhead supply now and the next key reaction low within the April recovery at 23,738 can be expected to be tested. A nascent six day downtrend comes in at 24,560 today.
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