Market Overview
In the run up to yesterday’s Federal Reserve Open Market Committee meeting, there was a feeling that perhaps markets had gone too far in pricing for a dovish FOMC. Nothing of the sort. In the event, the Fed went way more dovish than the market had expected, with a remarkably dovish climb down, a move which has hit the dollar hard.
Back in September they were projecting for three hikes in 2019, then in December (the last time they hiked) this was shaved back to two. However, in 2019 there has been a significant dovish turnaround, and now the dot plots are anticipating no hikes at all this year.
The FOMC is data dependent now and although there is one more hike possible in 2020 and 2021, it is very difficult to see a situation where the Fed can turn 180 degrees again. With 12 of the 17 committee dots opting for zero hikes in 2019, this will surely end the tightening cycle. Fed funds futures are pricing for between 40% and 50% probability of a rate cut now by the end of 2019 (depending upon the provider). Add in a downward revision to growth forecasts and the balance sheet reduction ending in September (sooner than the consensus) and this added up to a very dovish meeting.
Yields have plummeted, whilst the yield curve flattening (2s/10s spread back at 13bps and a three month low) has been exacerbated. The dollar has been hit across the majors, whilst precious metals (gold and silver) have pushed through crucial pivot levels. Equities initially reacted higher, but with yields falling so much, the S&P 500 gave up all those gains.
A dovish Fed should be bullish equities, but the dramatic dovish twist questions whether this is a fearful Fed. That is a different issue that equity bulls now need to grapple.
Wall Street fell into the close with the S&P 500 -0.3% at 2824 whilst US futures are another -0.2% lower today. Asian markets have been tentatively positive, with the Shanghai Composite +0.5%, but Japan was closed for a public holiday). In Europe there is a cautious look to markets with FTSE futures +0.1% but DAX futures -0.2%.
On forex majors, the dollar remains corrective across the board, with the Aussie performing very well after Australian unemployment fell to 4.9% (5.0% exp, 5.0% last) amid labour market tightening. Sterling needs to be watched today as the EU-27 give an update on the prospects of an extension to Article 50 in the Brexit process.
In commodities the continued dollar weakness translates to gold and silver stronger, whilst oil also continues to climb after the surprise fall in EIA inventories.
Aside from the EU decision on whether to extend Article 50 there is a heavy economic calendar to impact across markets today. Central banks are again in focus with the Swiss National Bank monetary policy at 08:30 GMT (no change -0.75% exp).
UK tier one releases continue with the UK Retail Sales (ex-fuel) at 09:30 GMT which are expected to show sales fell by -0.4% in February (after a rise of +1.2% in January) which would take the year on year reading down to +3.3% (from +4.1% in January).
The Bank of England monetary policy decision at 12:00 GMT comes at a time of significant uncertainty over the direction of Brexit and the MP is expected to unanimously (0-0-9) hold rates at +0.75%.
US weekly jobless claims are at 12:30 GMT and are expected to remain around recent levels with 226,000 (229,000 last week) and the Philly Fed Manufacturing is expected to improve back into positive territory at +4.6 (after unexpectedly turning negative last month at -4.1).
Chart of the Day – Silver
Silver has been struggling up against a key medium term pivot at $15.46 (just as gold has been recently with the underside of its long term pivot at $1310). This is a pivot that if breached on a closing basis would change the outlook once more to a more positive stance. Yesterday’s session was somewhat mixed until the dovish FOMC decision which gave silver a boost to form a positive candle on the session with an intraday move above $15.46. Although the market just failed in a closing breakout the bulls are pushing on today. Baring a significant intraday failure now, this looks to be the break they have been looking for. Already there is an acceleration higher coming in the wake of a bull kiss on Stochastics, whilst MACD lines are also crossing higher and RSI is back above its pivot at 50. If these signals are all confirmed on a closing basis today then this is an across the board positive breakout. There is a medium term support band between the $14.90 breakout and $15.14 old January low which is now a medium term buy zone, but the bulls will be looking to build higher now. A closing breakout above $15.46 would be a two week closing high but also open the upside back towards $16.00/$16.20 highs again. Initial support is at last week’s low at $15.09 with the March low at $14.96 being key now.
The euro was already holding up well yesterday in advance of the Fed announcement, but EUR/USD really took off on the dovish surprise. A move through $1.1420 means a breach of the February high and an end to the run of lower highs. Although the move was not quite held into the close, there has also been a breach of a long six month downtrend too. This has been confirmed with RSI moving quickly above 60 (where previous bear rallies had failed in the low to id 50s. The Stochastics are running hot and the MACD lines accelerating higher. A close above $1.1420 which has been a medium term pivot previously would improve the outlook too. Closing clear would open od range highs around $1.1500 again. The hourly chart shows a market a touch stretched and this could lead to a degree of unwind, but there is support initially around $1.1410 but more considerable around $1.1360. Once the dust settles, this looks to be a far improved chart of the euro now.
Amidst the dollar negative dovish surprises of the FOMC, we still see Brexit uncertainties acting as a drag on sterling. Whilst Cable traded off its lows yesterday there was still a negative candle to consider. Momentum indicators have lost their impetus and although there is still an uptrend in place along with medium term positive configuration on sterling, we are once more into mild negative drift mode again. Resistance is building at lower levels, and it is interesting to see the 50 pip increments again playing out. With resistance at $1.3300 over the past few sessions, $1.3250 was yesterday’s post FOMC high. A pivot around $1.3200 is worth watching as support and a breach opens $1.3150 again. Brexit is once more key today on an announcement of how the EU-27 play the request for an extension to Article 50. More volatility ahead.
Consolidation has turned into correction. The failure for the dollar bulls to grasp control has turned sour in the wake of the dovish FOMC. A sharp negative daily candle (a bearish engulfing candlestick) has taken Dollar/Yen to a three week low an broken a five week uptrend. The size of the selling pressure after a period of consolidation also means that momentum indicators have all taken a dip and deteriorated sharply, with RSI below 50 at a 7 week low, a bear cross on MACD and Stochastics accelerating lower. There is a test this morning of the key higher reaction low at 110.35 which would be a considerable shift in outlook if broken. The 110.00 key breakout neckline support then comes into view, so trading with a 109 handle would be a significant negative signal now. The previous support band 110.75/111.00 is now an area of overhead supply and resistance initially.
Gold
Gold has broken out again. The positive candle with a close above $1310 means that the bulls are releasing the shackles that have been restricting the recovery for the past week. The market has been unable to breakout decisively above the $1310 long term pivot but there has been a trend higher in the past two weeks which is now inside the $1300/$1310 pivot band. Momentum indicators suggest this is a move through a key crossroads, with the RSI back into the high 50s, whilst the MACD lines are bull crossing higher and Stochastics are accelerating higher following their bull kiss. The reaction low at $1292.50 is a higher low, whilst $1300 has once more become a basis of support in recent days too. The move this morning above $1316 (an old pivot) has opened $1327/$1333.
WTI Oil
A surprise significant drop in the EIA weekly crude stocks has provided the boost for oil. After a brief consolidation, the 50% Fibonacci retracement seems to be doing little to stop the rally on the way towards the breakout target at $61.50, whilst the next resistance is the old key June 2018 low at $63.60. The momentum continues to run strong, with eight days since a negative candle having been posted, whilst the RSI is up at 70 and the strongest now since September 2018. The Stochastics remain strongly configured, with the MACD lines also now edging higher. Intraday weakness is a chance to buy, with yesterday’s low at $58.40 adding to the breakout support band $57.50/$58.00.
A very interesting session on the Dow has left traders with a lot of questions once more. Initially reacting higher to the Fed, but then unwound all those gains into the close. This leaves the Down with two daily negative candlesticks and the market once more trading around the 76.4% Fibonacci retracement at 25,715. Coming with a turn lower on momentum indicators, this move will need to be watched now otherwise it could very quickly e back around the March low at 25,208 again. The hourly chart shows this to be an unwind of some overstretched momentum and for now, as long as the support and 25,650/26,670 remains intact, could be eyed as an opportunity. On a near term basis, losing 25,520 opens the 25,208 low again. Initial resistance at 25,930 protects 26,110.
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