Market Overview
Markets are cheering the agreement that was seemingly struck between the US and the EU over trade yesterday. Donald Trump and Jean Claude Juncker have agreed to aim for zero tariffs on a range of goods and is seen as a rare piece of good news that means that there will be no new tariffs whilst negotiations are ongoing, preventing the implementation of autos tariffs (at least for now) and averts a trade war. Amongst the good news there is always a caveat with Trump though, as it does rather worryingly vindicate his rather aggressive stance that he is taking on trade disputes across the world. However, it means that some of the stronger dollar move that has come amidst the escalation of trade tensions in recent months could now begin to ease. At least this is the initial reaction on forex markets. The charts of major pairs are showing that the dollar is now at an inflection point near to medium term and is threatening to roll over. However, it is interesting that the initial reaction is that this is coming as Treasury yields pick up against other major yields such as the German Bund and Japanese JGB. Equity markets have also responded positively and it will be interesting to watch the DAX which is likely to outperform, even ahead of the ECB later today.
The ECB monetary policy is a massive focus for traders today. The rate decision is at 12:45 BST which is not expected to show any surprises after the decision in the last meeting to taper the asset purchase program to €15bn per month between September and December. The main refinancing rate is expected to be kept at 0.0% with the deposit rate at -0.4%. The interest will come in the press conference (at 13:30 BST) where Mario Draghi will be quizzed on the meaning of “summer” with regards to the forward rate guidance which is currently expected to remain “at present levels at least through the summer of 2019”. Does this mean September and beyond (dovish), could it mean a potential hike to the deposit rate in July or August (mildly hawkish)? Expect Draghi to do his best to avoid being pinned down on a definitive answer.
There could also be some interest in the inflation outlook which is currently termed as “underlying inflation is expected to pick up”. Overall though this could be a fairly muted ECB meeting and the ranging euro looks set to continue.
Wall Street closed strongly higher with the S&P 500 +0.9% at 2846, although futures are giving some of that back early today and Asian markets are mildly weaker (Nikkei -0.1%). However, European markets are taking the positives and are higher, with the DAX looking stronger in early moves.
In forex majors, there is a mini consolidation after a move against the dollar into yesterday’s close, although the yen continues to perform well.
In commodities, after a jump into yesterday’s close, gold is giving back a couple of bucks, whilst oil is consolidating after yesterday’s supportive surprise EIA inventory drawdowns.
Aside from the ECB there will also be interest in how the US Durable Goods Orders at 13:30 BST which is expected to see a month on month improvement of +0.5% for core Durable Goods (ex-transport). The US Weekly Jobless Claims are at 13:30 BST and are expected to show 215,000 (up from 207,000 last week).
Chart of the Day – USD/CAD
A really interesting move is being seen on several dollar major pairs, however the move on Dollar/Loonie may just be the most stark as the market has retreated to a crucial near to medium term inflection point. The market has been increasingly choppy in the past couple of weeks, throwing a range of conflicting candlesticks, however yesterday’s move has now decisively broken the support of a three month uptrend. A strong bear candle has also closed below the key July low at 1.3060. The importance of breaking this support is elevated due to the fact that it has been a key medium term pivot area of the old breakout highs 1.3065/1.3125 and has been supportive. However, the closing breach has completed a six week top pattern to imply 220 pips of additional correction. The momentum indicators are also increasingly corrective, with a recent bear kiss on the MACD lines, Stochastics falling and the RSI now having fallen below 45 which is a three month low and suggest a key turning point to end the strong dollar phase. Having broken the trend channel there is now resistance with the underside of the old uptrend at 1.3160 today, with Tuesday’s reaction high at 1.3190 now near term key. The pivot band 1.3060/1.3125 now becomes a sell zone.
The euro found some support late in yesterday’s session in the wake of the agreement between President’s Trump and Junker. This formed a bull candle on the day and means that EUR/USD is pressuring the upper barrier of the trend lines that have been converging over the past five weeks. Initial resistance at $1.1750 remains intact as the European session takes over but it will be interesting to see how much traction the bulls can muster in front of the ECB meeting this afternoon. The near term technical position has improved a shade with Stochastics and MACD lines ticking higher but essentially the market has simply rallied to the upper reaches of a still very neutral phase of trading (i.e. RSI is still between 45/55). The resistance of the July high at $1.1790 is more considerable and protects the medium term range high at $1.1850. Having formed a decent bull candle yesterday, the market has left support today at $1.1650.
Another mild bull candle has seen the recovery of Cable continue to creep higher. However, this remains a rebound within the downtrend channel, so bull will need to be cautious of getting too excited. For now, the momentum indicators are still neutrally configured and are just unwinding, with the RSI back around 50 and only mild upticks on MACD and Stochastics lines. Within the (admittedly shallower) downtrend channel of the past 8 weeks, rallies have continually been seen as a chance to sell, whilst there is a pivot around $1.3200 which is coming in today and will be an interesting near term gauge. A consolidation that begins to see the rally peter out would be seen as another opportunity. The top of the downtrend channel is at $1.3290 which coincides with initial resistance at $1.3290, before the key July high at $1.3360. On the hourly chart, momentum is more neutrally configured now and the bulls are clearly making an impression, however they need to make a serious dent in the consistent selling into strength outlook. As yet, this has not been achieved. Initial support $1.3130 and then more at $1.3070.
As the yen has strengthened across the majors and the dollar has slipped over the past week, the market for Dollar/Yen has been pulled lower. There has been a degree of consolidation around the old key breakout resistance 111.15/111.40 which now seems to have broken decisively to the downside. The importance of this continued correction grows to the fact that the support of a four month uptrend is now breaking. This comes with a continued corrective outlook on momentum indicators which is threatening to turn more negative. The RSI has continually found a low around 45 throughout the uptrend (the lowest was 43.3 in late May) and this is again being seriously tested. Although not a key higher low, a breach of 110.25 support would be a telling downside break, being a four week low (surely confirmed if there were to be a 109 handle). Having peaked at 113.15, the market has since posted four consecutive lower highs, meaning 111.40 is initially an important resistance to watch as the market looks to use intraday rallies as a chance to sell. The hourly chart shows 50/55 is a limit on the RSI now, whilst the MACD lines are struggling around neutral.
Gold
Another market standing on the brink is gold. The consolidation of the past week has pulled the market sideways to an extent at which the downtrend channel is now breaking. In itself this does not signify an impending recovery, but if the market started trading above the $1236 old key breakdown which is now overhead supply, then the prospect of a near term recovery will grow. Momentum indicators suggest the market is also close to something, with the MACD lines again edging to cross higher. Watch out for the RSI pulling above 40 and Stochastics pulling above 50 in order to signal improving bull traction. A close above $1236 opens $1248 and then $1266. For now this is just a sideways consolidation still (and it is interesting that gold is struggling a shade this morning). Indicators on the hourly chart are now far more neutrally configured. Initial support is at $1228 and then $1218.
WTI Oil
The larger than expected EIA inventories contained larger than expected drawdowns across the board and with US production growth stalling, the oil price has been supported. This means that the market can pull further clear of the key pivot support at $67.00 and pull higher to test for a move above an old pivot around $69.50. Momentum indicators continue to stabilise following the recent corrective phase, with the RSI importantly picking up again around 40 but it will still be the MACD lines with watching to see if they continue to bottom around neutral. A close above $69.50 would be positive for a move to retest $71.10 which is an important lower high now that the bulls need to overcome to re-engage their control.
6
Having used the support of the 50% Fib level at 24,980 and broken out to multi-week highs, the bulls are in control and are looking to use weakness as a chance to buy. This is exactly what we saw during yesterday’s session. Early weakness into support at the three week uptrend was bought as the session progressed. This leaves another strong bull candle and a move that has broken out above the June high of 25,402. Momentum is now increasingly strong again, with the RSI into the mid/high 60s (the strongest since January) and the market closing at its highest level since February. The strength of momentum suggests that weakness will continue to be near term buying opportunities. The support of a three week uptrend comes in at 25,165 today. The 61.8% Fib level at 25,367 now becomes a basis of support, with the next high at 25,800 and the 76.4% Fib level at 25,845.
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