Market Overview
How successfully Donald Trump and the Republicans can get the tax reform plan through Congress will be crucial for the sustainability of the recent dollar strength. The market will move on the updates of its progress, with Treasury yields and the dollar falling yesterday as Trump’s economic advisor Gary Cohn suggested that not all middle class people would see their taxes fall. This is something that the Democrats are sure to pick up on. However this move could be a brief slip in the dollar recovery as today we are beginning to see Treasury yields pick up again with the dollar has begun to find support.
The focus is on inflation. The Fed’s preferred inflation measure, the core Personal Consumption Expenditure (core PCE) is not expected to pick up (again). It will be an interesting gauge to see if markets can look past the subdued inflation numbers and focus on expectations of the Trump tax plan. The continuation of the dollar rally could depend upon it. US inflation is not the only major announcement today. Already overnight Japan released its own core inflation numbers with Japan core CPI coming in at +0.7% (+0.7% exp, +0.5% last). Furthermore, the eurozone flash September inflation is also this morning and it will be interesting to see if any traction can be found there. If the German data yesterday is any harbinger, then do not expect too many surprises.
Wall Street closed higher with the S&P 500 +0.1% at 2510, whilst Asian markets were mixed overnight (Nikkei -0.1%) but European indices are following Wall Street with mild gains in early moves.
In forex, we see the dollar regaining some of its lost ground from yesterday, outperforming across the board, although the euro is gaining some ground ahead of eurozone inflation. Gold is also resuming its move lower, whilst oil is looking to find support after yesterday’s correction.
On the final trading day of the quarter focus will be on final readings for UK growth and current account, whilst key measures of inflation for the eurozone and US will also be eyed.
The final reading for UK Q2 GDP is at 09:30 BST and is expected to once more be re-affirmed at +0.3% QoQ and +1.7% YoY. UK Current Account deficit for Q2 is also announced at 09:30 BST and the expectation is for a mild improvement to -£15.8bn (better than the -£16.9bn in Q1).
The flash reading of eurozone inflation for September is at 10:00 BST with consensus expecting headline CPI to pick up for a second month in a row to +1.6% (from +1.5% last month) although core CPI is expected to stick at +1.2% for a third successive month.
The Fed’s preferred measure of inflation, the core Personal Consumption Expenditure is at 13:30 BST and is expected to show little traction in inflation with +0.2% for the month, with the year on year reading staying once more steady at +1.4%.
The final Michigan Sentiment for September is at 15:00 BST and is expected to stay at 95.3.
Chart of the Day – EUR/JPY
The correction on EUR/JPY from last week’s high at 134.40 gives an interesting opportunity for the bulls. The question is whether this is a retreat within the uptrend, or the beginning of a more sizable correction. Given the support coming in this week, almost to the pip at the old key range breakout at 131.70, the expectation is that this is a chance to buy. The key uptrend that has been in place since April is supportive today at 131.65 whilst the 21 day moving average is also lending support at 131.85. This means that there is a confluence of technical supports underpinning the rebound from this week’s low at 131.70. The daily momentum indicators suggest the bulls are ready to resume control with the RSI settling in the mid-50s and the Stochastics again looking to turn up around above 50. The candlesticks are also beginning to build more positively in the last couple of sessions, with today’s early gains also reflective of this. With the hourly chart showing momentum indicators becoming more positively configured again, this all suggests that the bulls are returning to the driving seat again. Expect a move back towards a test of 134.40 in due course, with initial resistance at 133.20.
There was a slight bump in the road for the strengthening dollar yesterday but the rebound on EUR/USD looks for now to be a pullback to the neckline of the near term top pattern. The pattern completed on a move below the old support at $1.1820 and this is now a source of overhead supply as the pair rebounds. This neckline resistance is now a basis of a selling opportunity. There is a band of resistance $1.1820/$1.1860 this is a sell zone now. Momentum indicators are correctively configured with the RSI still around multi-month lows, MACD lines falling towards neutral and the Stochastics below 20. The hourly chart shows near term momentum has unwound with this little rally from yesterday and already the market is looking to roll over again. Wednesday’s low at $1.1715 is supportive but expect it to be retested in due course. The market still seems to be on course for a test of the key August low at $1.1660. Key resistance in the $1.2000/$1.2030 band.
The sterling rally came yesterday on constructive comments from Michel Barnier that the Brexit negotiations were finally seeing some progress. It will be interesting to see how the sterling bulls react today as the near term technical outlook is corrective within a bullish medium term market. The corrective outlook comes on the break below $1.3450 which implied around 200 pips of downside. This old support at $1.3450 now becomes a basis of new resistance and it was interesting to see the rebound failing around that level overnight. The momentum indicators continue to suggest there is corrective pressure with the Stochastics and MACD lines in decline, however the support of yesterday’s low at $1.3340 will become increasingly important if the market holds up today. I still see a corrective drift back towards the support of the key August high at $1.3265 and another medium term key higher low in the range $1.3050/$1.3250. The hourly chart shows the market having unwound some oversold momentum and with the hourly RSI failing around the 60 mark it seems that the sellers now have renewed downside potential. A move above $1.3515 would question the corrective forces.
This is another pair where the credentials of the dollar bulls were questioned yesterday. A strong negative candle has pulled USD/JPY back below the 112.70 breakout again. However, it will be the reaction of the bulls to this minor setback that will be interesting today. Initial signs are positive as the market has rebounded well as we move into the European session. Daily momentum indicators remain positively configured despite the drop yesterday, with the RSI still above 60, MACD lines still rising and Stochastics settled above 80. The hourly chart also show that there has been little significant damage done to the run higher, and if anything the move provides another chance to buy. The hourly RSI picking up around 30/35 again, whilst the MACD lines crossing back higher is a positive sign. The bulls will be looking for a close back above 112.70 now and then another look at the rebound high at 113.25. Another higher low above 111.45 would be considered further development within the uptrend.
With the corrective momentum in full swing the market will continue to see rallies as a chance to sell. Yesterday’s rebound from $1277.30 seems to be the latest opportunity. The old support of last week’s low around $1288 is now a basis of overhead supply near term and I would now expect to see the next lower high in the range $1288/$1300. Momentum indicators are negatively configured now with the MACD lines falling increasingly below neutral, the RSI between 40/50 and the Stochastics settled below 20. This all points towards selling into strength. It is interesting to see the hourly chart confirming this , being negatively configured on momentum with the hourly RSI failing at 60 and hourly MACD lines looking set to turn back lower around neutral. Expect a retest of yesterday’s low at $1277.30 before potentially further testing of support levels from August at $1274 and $1267. A decisive close above $1310 is now needed to turn the outlook positive.
WTI Oil
The bulls are now seeing their first real test of control in over two weeks. A bearish engulfing candle (bear key one day reversal) formed yesterday as the market first moved to a new multi-month high before selling off into the close. This move now suggests a potential shift in outlook that will be tested in today’s session. However, the trend is your friend on WTI and this has been pulling the market higher in the past four weeks. The recent uptrend comes in to support at $50.90 today which is above the key breakout at $50.50 and despite the near term disappointment of yesterday’s reversal from $52.85, corrections continue to be seen as a chance to buy. The hourly chart shows momentum indicators have retreated to the limit of their positive configurations and the support around $50.50 will be key to this. Below $49.25 re-opens the downside.
Once more we see the bulls in control as the market looks to move for a push into new high ground. The corrective slip of earlier in the week seems to be giving way once more to a more positive sentiment as intraday corrections are now being bought into. On a near term basis the support is now building above the support of the latest key breakout at 22,179. This means that the bulls are now looking to leave higher lows, with Monday’s low at 22,219 and subsequently Wednesday’s higher low at 22,255. Daily momentum indicators remain strongly configured with the RSI in the mid to high-60s and there is little reason not to think that if the bulls can breakout above the all-time high at 22,420 then the move cannot continue towards the range breakout implied target at 22,675.
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