Market Overview
The Federal Reserve turning dovish should be a trigger to sell the dollar, but apparently not quite so. Up against a raft of other even more dovish central banks, the economic outperformance of the US means that the US dollar continues to perform well. Yesterday’s ISM Manufacturing positive surprise helps to build a picture that suggests the US is not slowing sharply into the second quarter of the year. Treasury yields have jumped sharply higher in recent sessions, with the 10 year yield 13bps off its lows of last week and the yield curve now un-inverted between the 3 month/10 year duration. Positive US data is a key driver of continued dollar outperformance.
One more, much to the incredulity of everyone outside the bubble of Westminster, UK MPs still cannot decide on a way forward to square the circle of Brexit. Alternative indicative plans for an EU Customs Union, a rehash of a common market and a second referendum were all voted against. Sterling is trading lower on the uncertainty whereby the events of last night surely raise the potential for an accidental “no deal” Brexit. However, taking a step back, if the market realistically felt this likely, sterling would be way more than just half a percent lower today. Cable closing below $1.3000 should still be seen as a gauge for traders’ sentiment turning more negative.
Overnight, as expected, the Reserve Bank of Australia held rates steady at 1.50% (no chance, +1.50% exp, +1.50% last) in a fairly neutral announcement. The Aussie has underperformed slightly, slipping almost half a percent.
Wall Street was strong overnight with the S&P 500 +1.2% at 2867, although US futures are just giving back some of these gains today falling -0.2%. In Asia, there has been a fairly cautious session, with the Nikkei -0.1% and Shanghai Composite +0.2%. European markets are steady in early moves with the FTSE futures and DAX futures around +0.1% higher. In forex, the dollar remains supported even though Treasury yields have dropped back a touch leading to a mild bout of risk aversion today. The dollar is gaining across the forex majors, although the safe havens (yen and Swissy) are holding firm, whilst sterling is the big underperformer. In commodities, this uncertain outlook for risk means that gold is fluctuating around the flat line, however the positive outlook for oil remains on track.
It is a fairly European morning with the UK Construction PMI at 09:30 BST which is expected to improve slightly to 50.0 (49.5 in February) although the impact is likely to be minimal given the Brexit focus and that construction only constitutes around 7% of the economy. US Durable Goods Orders are at 1330BST and are expected to grow by +0.2% on the month for the core, ex-transport read (-0.1% in February).
Chart of the Day – NZD/USD
The Kiwi came under pressure last week on the back of a dovish surprise from the Reserve Bank of New Zealand. The ensuing correction on NZD/USD has pulled the market back towards the support of the six week uptrend (today at $0.6765) and this means the medium term ascending triangle (under resistance at $0.6940) continues to build. However, is this a buying opportunity? On a near to medium term basis, this is a ranging configuration with the RSI having been oscillating between 40 and 60 for two months now. Support formed last week around $0.6770 and means that momentum indicators are now looking to bottom out again. There does seem to be an appetite to support the market between $0.67220/$0.6770 in recent months and this looks to be another chance to buy the range (or consolidation triangle). The support of the long term pivot at $0.6720 remains intact and support from January at $0.6705 is now key support. As the bulls regather themselves again, the upside bias (backed by the MACD lines) should re-assert with the $0.6925/40 highs to come back under pressure in due course. Initial resistance is yesterday’s high at $0.6835.
The euro bulls have been fighting hard to hold support in recent days, but alas the dollar remains strong and is pulling the market lower again. For much of yesterday’s session the euro was looking at forming some sort of recovery, but could never break through initial resistance at $1.1250/$1.1260 and with the US ISM Manufacturing data strength the dollar went on a run again. The result was a bearish candle and bull failure which has continued below the $1.1212 basis of support today. The key March low at $1.1175 is now open to be tested today. This becomes a very important session now as if the market formed another negative candle then the prospect of recovery will be denied again. The importance of the resistance at $1.1250/60 is growing now and this is a key gauge for sentiment on EUR/USD. Below $1.1175 is a level not seen since June 2017 and opens $1.1110. Looking at the RSI there is a tendency during the bear phases to go back towards 30, so there is downside potential.
Sterling remains a very difficult call due to Brexit, but Cable continues to hang on to the support around $1.3000. Even in light of last night’s latest Brexit gridlock, the bulls are still happy to support. There is a drift of lower highs and lower lows of the past few weeks, but the true gauge of a shift in outlook would be on Cable closing below $1.3000, a level that has been defended on numerous occasions in recent weeks. In the absence of this, the pair has drifted lower and momentum indicators unwound, but with little real decisive direction. Breaking the three month uptrend leaves the market in a neutral configuration, albeit with some intraday volatility. Yesterday’s high at $1.3150 is initial resistance under $1.3200. There is initial support at $1.3030 this morning.
Dollar/Yen has been pulling higher as risk appetite has improved and the dollar has strengthened in recent sessions. The move that has been edging higher began to accelerate yesterday with the solid positive candlestick decisively back above 111.00. This comes with an acceleration in momentum indicators with the RSI into the mid-50s, and Stochastics pulling decisively higher. The key question is whether this is a move that is the beginnings of a strong trend. The resistance at 111.90/112.10 will clearly be key to this. However, reaction to yesterday’s move will be an interesting gauge today, as the bulls building on a strong session with further gains would be a very positive sign. For now this is a rally into the early March congestion. The RSI into the 60s would be a positive signal of something building. The hourly chart shows support now 110.80/111.00 needs to hold for the bulls to continue their run.
Gold
The last two sessions have proved to be disappointing for the bulls looking to generate momentum for a recovery. The resistance of the old long term pivot at $1300/$1310, which is now a barrier, is playing out to limit upside. Near term support at $1286 has struggled to contain the slip back this morning and the more important support band $1276/$1280 (which marks a potential three month head and shoulders top) is coming under increasing pressure. Momentum indicators rolling back over suggest the bulls are struggling and there is a growing risk of a test of the key support. Subsequently the $1300 level is becoming an increasingly important gauge once more. The hourly chart shows the hourly RSI is failing around 60 in the past week and MACD lines are under neutral, a reflection that the negative near term configuration continues. This would need to change if the bulls are to find any sort of traction.
WTI Oil
Another close higher and a decisive positive candle has pulled WTI well clear of the previous resistance band at $60.40. This also pulls the market clear of the 50% Fibonacci retracement at $59.60 which opens 61.8% Fib at $63.70, with the next price resistance at $63.60. There is a small upside target implied from a breakout of a $2.40 range meaning $62.80 is now possible in the next week or two. It also means that $60.40 is a breakout support and $59.60/$60.40 is a basis of a “buy zone” for intraday pullbacks. Momentum is positively configured with the Stochastics ticking higher above 80 again and RSI pushing into the 70s. This is a decent trend but the market does have a tendency to quickly consolidate breakouts rather than run out higher. So this may begin to restrict immediate upside potential and could result in some stalling of the run higher. However, this would only be seen as a temporary situation and any unwinding move is a chance to buy.
After several weeks where traders have lacked conviction, the Dow has just exploded higher in the past couple of sessions. Two bullish upside gaps that have not been given a second thought through the sessions. The market has now closed at its higher level since November and is testing the November high of 26,278. Momentum indicators are reacting strongly to the move with the RSI accelerating into the mid-60s, Stochastics pulling strongly higher and MACD lines on the brink of a bull cross. Given the hourly chart is very stretched on a near term basis, an unwinding move is possible. However the bulls will be looking to use the recent breakout levels as a support band and means that 26,110/26,240 is now a basis of underlying demand. A close above 26,278 effectively opens the next resistance which is the all time high of 26,952.
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