Market Overview
After having been so strong in recent weeks, there has been a little respite from the dollar strength that has formed in the wake of the Federal Reserve policy announcement. However, this move is unlikely to be a game changer. In its statement last night, the FOMC noted that inflation was close to its 2% target. In a dovish tilt though, it also said that moves around the inflation target could be symmetrical, suggesting a tolerance to allow inflation to run a touch higher than target. This suggests that there may not be a clamour for a fourth hike this year (three are currently priced in). The data surrounding inflation may well drive the need for a fourth hike though in the time to come, but for now this has just pulled the reins on the dollar bull run.
Treasury yields have dropped a touch and the dollar is marginally weaker across the board this morning. However, with the payrolls report tomorrow, should Average Hourly Earnings jump more than expected then this could easily resume the run of dollar strength. The Fed remains the only serious tightening central bank of the majors and nothing has changed in this regard.
In other news, the delegation of President Trump’s trade negotiators is now in China to discuss the tariffs. Although no resolution is expected immediately, this increases the possibility that newsflow could be a factor to drive markets again in the coming days.
Wall Street closed lower again as the market continues to struggle for any upside traction, with the S&P 500 -0.7% at 2636. With Wall Street futures all but flat, Asian markets have been mixed overnight (Nikkei -0.2%) whilst European markets are reacting lower in early moves.
In forex, there is a degree of unwind on the dollar across the major pairs, but little decisive move.
In commodities, this early dollar weakness is helping gold $5 higher, whilst oil is consolidating following yesterday’s late jump back.
Another day jam packed with key data points, with Eurozone inflation and Services PMIs all key announcements to watch. The day begins with the UK Services PMI at 09:30 BST. This is worth around 80% of the UK economy so is always the most important forward looking data point for the UK. Consensus expects there to be a recovery to 53.5 following an 18 month low last month of 51.7. This recovery would be back to around levels of much of 2017.
The Eurozone flash CPI for April is at 10:00 BST which is expected to show inflation remains subdued with a headline CPI of +1.3% (from a downwardly revised +1.3% last month) and the core CPI to dip back to +0.9% (from +1.0% last month).
US International Trade Balance for March is at 13:30 BST and is expected to improve to -$50.0bn (from -$57.6bn) which would be the best level since October. ISM Non-Manufacturing is at 15:00 BST and is expected to slip slightly to 58.1 (from a very strong 58.8 last month), although would be a third month in a row of decline.
Chart of the Day – EUR/NZD
The corrective move continues to pull Euro/Kiwi lower as the negative candles begin to rack up. The strong run of positive bull candles of mid to late April is now moving into reverse, with the market now forming a run of lower highs and lower lows. With the momentum indicators also now swinging lower there is a corrective outlook back within the range again. The bearish key one day reversal marked a key high around 1.7255, whilst a lower high has been left at 1.7180. Fibonacci retracements are an interesting gauge with 38.2% Fib of 1.6667/1.7256 around 1.7030 which is the next target area. The hourly chart is taking on more of a corrective configuration now with intraday rallies being sold into within a trend lower. There is a pivot at 1.7180 now with a near term sell-zone 1.7120/1.7140. Anything around the 23.6% Fib level at 1.7115 is a likely consolidation area too. Below 1.7070 the next support is around 1.7000 but more importantly the outlook has now shifted and the bears now look in control, at least for the near term.
In the wake of the FOMC decision, rallies remain a chance to sell on EUR/USD. The downtrend of the past two weeks continues to drag the market lower and the resistance of the trend is falling at $1.2030 today. Momentum indicators remain extremely negatively configured and further decline towards a test of the January low at $1.1915 is still preferred. Beyond there is the prospect of initially $1.1815 and then the December higher low at $1.1715. The main overhead supply of resistance now lies between $1.2090/$1.2155 but the way the trend is accelerating lower, the market may struggle to reach there before the sellers resume control. The hourly chart shows consistent negative configuration with the hourly RSI failing around 60 and initial resistance at $1.2030.
The trend of dollar strength (and sterling weakness) that has dragged Cable sharply lower in recent weeks is now falling around $1.3710 which is the old support of the key March low. This is significant as there is a band of resistance now between $1.3655/$1.3710 which is now in place as overhead supply that will prevent a recovery from gaining any real traction. Such is the strength of the bearish outlook that even intraday rallies are being sold into on a consistent basis. Yesterday’s early move higher failed into the close for yet another disappointing session for anyone long of Cable. The market has now fallen in eleven of the past twelve sessions. Momentum indicators remain deeply negatively configured and despite the RSI being below 30, this is merely a reflection of the strength of the decline, rather than an oversold condition that will induce an immediate technical recovery. The initial support of yesterday’s low at $1.3550 is not expected to be a key low, with the next real support at $1.3455 from the January low. The early rebound today is unlikely to inspire a recovery and on the hourly chart this shows as simply another unwinding move within the downtrend that is likely to be pounced upon by the bears once more.
With a small doji candle formed yesterday there is a degree of uncertainty that has been brought into the run higher, however with a stream of higher lows in place, it is unlikely that any weakness on Dollar/Yen will last for too long. There is a basis of support at 108.95/109.55 from last week’s mini consolidation range and this is now an area of underlying demand near term. The momentum indicators remain strongly configured and suggest that rallies will continue to be seen as a chance to buy. The RSI may have been hovering around 70 during recent sessions and also ticked lower today, but with Stochastics and MACD lines still strong, there is little suggestion of anything malign lurking yet for the bulls. The hourly chart shows this to be a drift lower overnight that is helping to renew near term upside potential. A loss of 108.95 would require a degree of more caution, however, for now this should throw up another chance to buy. Breaking above 110.00 yesterday suggests a test of 110.50, the February high, whilst beyond there is 111.50.
Gold
The gold bulls continue to defend the key long term pivot support at $1300. A second close inside the $1300/$1310 range maintains the negative near term momentum of the downtrend built over the past two weeks. However once more in today’s session, an early rebound has been seen, but can the bulls build on it. The daily momentum indicators remain broadly correctively configured with the MACD and Stochastics lines negative, however the hourly chart shows how the market has had a serious look at $1300 on several occasions in the past couple of sessions, but the support holds firm. The problem is that if there is another failure to recover today, then the resilience of the support will again be pressured. A closing breach of $1300 opens $1260. The hourly chart shows resistance around $1313 from yesterday’s rebound high (in the immediate aftermath of the Fed), whilst $1315 is an old support which is now resistance. With the two week downtrend falling at $1312 today the situation could come to a head very soon. The volatility of Non-farm Payrolls tomorrow could be the swing factor.
WTI Oil
The support of the recent two week range is likely to come under further scrutiny as the momentum continues to drain out of the run higher. The EIA inventories caused some intraday volatility with crude stocks building more than expected, but WTI then jumped on the FOMC. However, will this last, with the technical outlook deteriorating in recent days, and the market now eying a test of the $66.65 support. The near term sell signals on the MACD and Stochastics indicators suggest that the prospect of a near term correction continues to grow. The support of the higher low at $65.55 could now come under pressure. Resistance continues to build at $69.55.
Despite the intraday rebound that clawed back just under 300 ticks into the close on Tuesday, the bulls could not build on the traction of this move and disappointingly sold off into the close yesterday. The downside gap at 24,163 has now been filled and will be something of a concern now. Momentum indicators are deteriorating once more, with the RSI dropping back, whilst the MACD (bear cross) and Stochastics (bear kiss) lines are also exhibiting concerning developments. This is all playing out under the shadow of a growing downtrend of the past two weeks that suggests rallies remain a chance to sell. This all points towards the fact that the support between 23,810/23,825 of the past couple of weeks is likely to be retested in due course. A breach of this band of support opens the recovery higher lows of early April, with 23,740 and 23,523 before the key low at 23,345. The hourly chart reflects te growing negative configuration and there is now a near term pivot resistance around 24,200.
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