Market Overview
The run of dollar strength hit a bump in the road yesterday as an intraday correction back from multi-month highs has opened the potential for a near term correction. Markets rarely run in one direction without any pullbacks and this could be a signal that suggests time for a pause on the recent dollar bull leg. It is interesting to see that the US 10-Year Treasury yield formed a “bearish key one day reversal” on Friday from a high of 3.128% which could be a factor to watch in the coming days as the bond market has consolidated slightly. Already the yield has unwound back towards its multi-year breakout around 3.04%, whilst traders will be watching the 3.00% level with interest now.
There is little data to drive a turn in the move, so newsflow over China trade negotiations will be a factor. The talks seem to be progressing well from the perspective of both sides for now and any further positive announcements should help to boost yields once more. It will also be interesting to watch whether Italian BTP yields continue to spike higher with the prospect of a new Prime Minister on the cards. This could help to determine the near term direction on the euro.
Equity markets have taken heart from a more risk positive environment too, boosted by China talks but also the ever higher oil price. However, with European markets increasingly stretched, how long can this move continue without its own corrective slip?
Wall Street closed strongly higher yesterday with the Dow back above 25,000 for the first time since 16th March, whilst the S&P 500 was +0.7% at 2733. However, with futures all but flat today, Asian markets have been muted (Nikkei +0.2%) with European markets consolidating back slightly in early moves.
In forex, there is a mixed look to the dollar, making gains versus the euro and sterling once more, but the commodity currencies continue to improve (notably the breakout on the Aussie and a growing recovery on the Kiwi).
In commodities, gold is struggling to continue the late rally from yesterday and is dropping back again, whilst the oil price continues ever higher with both WTI and Brent Crude around 0.3% higher.
Once more it is a very quiet economic calendar today with the European morning broadly limited to the UK Public Sector Net Borrowing data for April at 09:30 BST which is expected to show borrowing of +£7.0bn, which would again be an improvement on last year, having seen +£8.7bn for the month of April.
The Richmond Fed’s Composite Index at 15:00 BST is expected to recover back to +9 having unexpectedly fallen sharply to -3 last month.
There will also be a Bank of England focus with the MPC’s Gertjan Vlieghe who speaks at 09:15 BST and the Bank of England’s inflation report hearings due to begin at 10:00 BST.
Chart of the Day – AUD/USD
Considering the strength of the US dollar across the major currencies in recent weeks, the fact that the Aussie dollar has now formed a base pattern shows remarkable performance. The Aussie has been picking up across the majors with major breaks against EUR, JPY and GBP, but now it is adding USD to this growing list. A small three week head and shoulders reversal pattern has completed on a close above resistance at $0.7565 which implies around 150 pips of recovery towards $0.7710, which is an old key pivot. It suggests continued recovery within the 2018 downtrend. The momentum indicators continue to pick up with the RSI and Stochastics recovering strongly whilst the MACD lines have also posted a bull cross buy signal. The hourly chart shows more positive configuration with unwinding moves towards 40 on the hourly RSI seen as a chance to buy, with $0.7530/$0.7565 an initial buy zone today. There is further support at $0.7500, with Friday’s low at $0.7485 initial support above the main higher low (and right hand pattern shoulder support) at $0.7445.
There are signs that perhaps the near term strength of the US dollar is beginning to wane and the reaction during today’s session could be key. EUR/USD has been under negative pressure for a while, as support levels have been consistently breached. However, it was notable yesterday when the support of the December low at $1.1715 held to the pip before the market subsequently bounced intraday. The resulting rebound of 75 pips into the close has formed a small bull hammer reversal candlestick. It is important to say that this is almost an outlier of a positive signal on a chart that is still very negatively configured. There would need to be far more by way of recovery signals before this signal is tradeable. Firstly there needs to be a second confirmation positive candle today, and early signs are not overly encouraging. Momentum indicators have been very negative but the MACD lines have converged now. There is also a glimmer of hope on the hourly chart with the RSI more neutrally configured now and the MACD lines also slightly improved. There would need to be a move above resistance at $1.1820 for there to be a trend change. Initial support at $1.1740 now protects $1.1715.
Whilst the euro bulls are battling to form a recovery, there is little real suggestion that sterling is about to follow suit. Despite a 40 pip bounce of yesterday’s session low, another fairly decisive bear candle formed and the market has begun to slip lower again today. The previous range support around $1.3450 is also now a basis of new resistance and is now proving to be a barrier to gains. Momentum indicators remain deeply negatively configured following the range breakdown that implies 165 pips of implies target which has opened $1.3300 as a target area. The hourly chart shows little in the rebound which looks to have simply been a move to unwind momentum and renew downside potential. Rallies remain a chance to sell. Expect a retest of the $1.3390 low from yesterday in due course. There is now a strong near term sell zone between $1.3440/$1.3490.
Dollar/Yen continues to move higher within its eight week uptrend whereby corrections are seen as a chance to buy. The market just shied away from a test of the resistance around 111.50 yesterday however still formed a positive candle and there is as yet little to suggest that the run higher is set to end. Near term consolidations have been seen along the uptrend which currently comes in around 110.25 so there is room for a near term pause for breath. Momentum indicators have been strongly configured for several weeks during the trend, with the RSI holding up above 60 consistently and MACD lines strongly configured. Old breakouts have been seen as an area of underlying demand and a basis of support to work from, so currently the bulls will be looking around 110.50. The hourly chart shows that this slip of 60 pips has unwound momentum and should now be around where the bulls look to regroup, so today’s session will be an interesting gauge of the near term outlook. Watch the hourly RSI and MACD lines, if they begin to consistently pull below 40 and neutral respectively it could be a move into another consolidation phase.
Gold
It was a strong response by the bulls yesterday to what looked to be another decisive downside break. The intraday recovery from $1281.80 bounced over $10 into the close and formed a bull hammer reversal candlestick. The reaction of the market to this one day reversal could now be key. Another positive candle today could begin to pressure for a recovery. For now the early signs are that the bulls have struggled for traction in the Asian session. Momentum indicators have ticked marginally higher but effectively the market has simply rebounded into the resistance of the low $1290s. Also, on a medium term basis there is now significant overhead supply of resistance between $1300/$1310 meaning that rallies are really going to struggle. The hourly chart shows a less negative configuration now but no decisively positive move developing. For now rallies remain a chance to sell.
WTI Oil
With the Average True Range dropping back to three and a half month lows (c. $1.40) the market has taken on more of a calm drift higher, punctuated by higher lows with small candlestick bodies. The strength of the momentum indicators suggest that corrections remain a chance to buy, with the RSI holding consistently above 60 and Stochastics remaining strong. The MACD lines have converged back together in a similar fashion as they did during the April consolidation and this does reflect a near term period of quiet within the run higher. In the past week the move higher has certainly calmed more into a drift higher, but once again, yesterday’s session pushed through initial resistance to open upside. With the balance of momentum still very strong there is little to suggest that an end to the run higher is coming any time soon. There is a continued basis of support now above the $69.55 breakout, with Friday’s low at $71.00 a near term higher low. Whilst a six week uptrend is supportive around $70.10 today, there could still be a prospect of a slip back, but the bulls remain in control and it would be another chance to buy. Above $72.30 opens the next overhead supply between $73.25/$77.85.
After a period of consolidation where the breakout was being questioned, the bulls have once more returned to the fore to break the market higher above resistance around 25,000. The move comes with the RSI moving into the 60s and at its highest since the February sell-off really kicked in. MACD lines are holding positive configuration and Stochastics are ticking higher in strong configuration to confirm the strength of the move. The strong and solid bull candle breaking resistance has opened upside with resistance at 25,449 next to be tested before the key February lower high at 25,800 comes in. Could it also be that the push higher during yesterday’s session has also been a “breakaway gap” which leaves a basis of support now 24,775/24,839? The next step is to consolidate support above 25,000. A key higher low has also been left at 24,629. The hourly chart shows strong momentum configuration now with hourly RSI above 40 and MACD lines above neutral.
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