Market Overview
The dollar is under pressure as the FOMC meets for the first time in 2019. There are several factors at play which are pressuring the dollar, but the market seems to be anticipating that the Fed will lean dovish tonight and signal a pause (even if only briefly) in its rate hikes. How explicitly this is communicated could be key, but also whether the Fed signals that the balance sheet reduction may be put on manual (this would certainly cheer equity markets). This is coming as the US and Chinese trade delegations meet for the next two days to discuss the prospect of an agreement that can avert continued escalation in the trade dispute that ultimately hampered market sentiment so badly in the second half of 2018.
Treasury yields have lost direction in recent days, but need to be watched with both the Fed and potential news flow out of the trade talks. It is interesting to see the Chinese yuan strengthening to six month highs against the dollar and is an indication that sentiment is turning against the greenback.
Back here in Blighty, the Brexit circus continues to rumble on and Parliament has effectively given Mrs May the greenlight to go back to Brussels and renegotiate over the main sticking point in the Withdrawal Agreement, the Irish backstop. She’s got two hopes, the problem is that one of them is “Bob”…
Wall Street closed mixed again, with the S&P 500 a shade lower by -0.1% at 2640 and futures also similarly lower today (seeming Apple’s after hours jump on earnings that were not as bad as expected, have done little to boost sentiment). Asian markets were lower overnight with the Nikkei -0.5% and Shanghai Composite -0.5%. European markets are also mixed, with FTSE futures +0.5% (negative correlation with sterling again?) and DAX futures all but flat.
In forex, there is a dollar mild negative vibe going on, with sterling finding a degree of support overnight, the yen a shade stronger, whilst the main outperformer is the Aussie after a tick higher on inflation.
In commodities the big news is the continued rise in gold through the $1310 key long term pivot and silver up at six month highs. Oil is flat.
The Fed meeting is clearly the main focus on the economic calendar today, but in front of that there will be a watchful eye on several other announcements. Eurozone Economic Sentiment for January at 10:00 GMT is expected to drop to 106.8 (from 107.3) which would be a 13th consecutive decline and the worst reading since November 2016.
German inflation is often seen as a lead for the Eurozone wide inflation reading, with German CPI at 13:00 GMT which is expected to show monthly CPI dropped by -0.9% in January which would drag the year on year CPI back to 1.6%.
For the US data, the ADP-Employment change is at 13:15 GMT which is expected to show growth of 170,000 (down from 271,000 in December). Pending Home Sales for December are at 15:00 GMT and are expected to improve by +0.5% (after falling by -0.7% in November). The EIA Oil Inventories are at 1530GMT and are expected to show crude stocks again showing an inventory build of +3.0m barrels (after last week’s build of +8.0m barrels), with distillates in drawdown of -2.0m (-0.6m last week) and gasoline stocks building by +2.0m barrels (+4.1m last week).
The FOMC monetary policy decision is at 1900GMT which is expected to show now change, holding rates at a Fed Funds range of 2.25% / 2.50%. Fed chair Jerome Powell also holds a press conference at 19:00 GMT.
Chart of the Day – Silver
The breakout on gold above $1310 has been a key move (see below), but is it being accompanied by a similar breakout on Silver? It would seem so. Silver has been in recovery mode since November and an uptrend has been formed following the recent rebound from the low of $15.15. With a decisive run higher on Friday last week, the market is now breaking above $15.87 which if confirmed on a closing basis would be a key move to a six month high. Looking at the momentum indicators, a breakout would be a strong signal coming with renewed upside potential. The Stochastics are accelerating higher, the MACD lines are on the brink of a bull cross above neutral and the RSI is rising in the high 60s. A closing break above $15.87 would open the next resistance at $16.21 and $16.49, whilst the next really important resistance is not until $17.35. The hourly chart shows strong near term momentum configuration where intraday corrections are a chance to buy, with the hourly RSI above 40/50 continually in the past week, whilst support comes in at $15.68 initially above $15.56.
There has been a very mild positive bias coming back into play within the trading range as the market looks to now use the $1.1420 near term pivot as a basis of support. This suggests a move back towards the range highs is preferred now. However, since November, any rally towards $1.1500 has eventually faded and this is a key basis of resistance (the absolute resistance remains the early January high of $1.1570). Momentum indicators have ticked higher in recent sessions as the market has picked up from $1.1300 again, but essentially this is very much a range play. The hourly chart shows the mild positive bias and near term weakness is being bought into. The Fed meeting this evening is likely to mean a day of limited direction could be seen in front of 1900GMT.
The latest development in the Brexit process has come and the positive aspect of the technicals remains in place. We discussed yesterday the prospect of getting through with the four week uptrend and the support at $1.3000 intact, which seems to have been seen. A couple of negative candles have been a warning shot, but the strength of the run higher is still in place. Today’s candle could be an important move as traders view events in the cold light of day. There is still a feeling that corrections remain a chance to buy, and the early move today has found support at $1.3055. This is above the $1.3000 breakout and the $1.2920 pivot. The hourly chart shows an unwinding move which has taken some of the shine off the positive configuration and needs to be watched, but there is no panic for the bulls quite yet. Resistance at $1.3140 and then $1.3215.
As the FOMC approaches the air has been sucked out of the moves on Dollar/Yen. This comes as the market has now been trading in a 90 pip range for the past nine sessions. There is a mild negative bias in the past few sessions, with slightly bearish twinges to the candles, however, this is nothing significant enough to have any conviction with. There is a slight negative drift to momentum forming, but again limited conviction. This is reflected on the hourly chart with the hourly RSI failing under 60 and MACD lines around neutral, whilst the rebound yesterday failed around 109.50 for the second session. However, it needs a close below 109.10 to open 108.65 as next support area. The resistance at 110.00 continues to mount.
Gold
The bulls are positioning strongly as the market finally moves to breakout above $1310, the long term pivot barrier. This pivot band $1300/$1310 has been a crucial turning point for the market for over two and a half years but breakouts consistently propel the market in the direction of the break. That is why a closing breakout above $1310 is so important. If confirmed on a two day closing basis (especially with the FOMC tonight) it now opens $1325 initially as the next basis of resistance, a minor reaction high from May 2018, however, the key $1366 April 2018 high would be then open. The bulls are well positioned, with the Stochastics moving strongly higher, MACD lines moving for a bull cross above neutral and the RSI strong above 70 with upside potential. The reaction on Monday shows the support is strong between $1296/$1300 now and intraday weakness looks to be a chance to buy.
WTI Oil
It is becoming clearer that decisive direction is hard to find on oil. The strong bear candle from Monday which broke the five week uptrend looked set to put pressure on the key support at $50.40 but this move was quickly negated by yesterday’s move which decisive saw the bulls bounce straight back. This suggests that the only real signals to be ready to move on would be a bullish closing break out above $54.25 or a bearish failure of support at $50.40. This range is reflected in momentum indicators which have tailed off in recent days. However, given the lack of follow through from the bears and the positive bias retained on momentum indicators (Stochastics above 80, RSI above 50), upside pressure is still favoured for a move towards the next Fib level at $55.55 and 38.2% retracement of $76.90/$42.35. Monday’s low is initially supportive at $51.35.
There are a few worrying signals beginning to creep in as the Dow continues to consolidate above the 50% Fibonacci retracement support at 24,333. In yesterday’s report we discussed the prospect of an “evening star” candlestick set up, which although not a perfect example, is a potential topping pattern. The move to fill the intraday gap from 24,677 (OK, within 2 ticks of it) at yesterday’s high before slipping back again, will do little to help the bulls either. However, whilst the support of the Fib level holds on a closing basis at 24,333 the current move will remain a consolidation. Momentum is reflecting a consolidation, for now and retains a fairly positive configuration still. A close below 24,333 would complete a small top pattern and imply a retreat to the old pivot at 24,000 again. Resistance at 24,860 protects 25,000.
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