Market Overview
As markets have increasingly consolidated as the March FOMC meeting comes to a head tonight there is a suggestion that perhaps the near term dollar correction has gone too far.
With the slowdown of key growth data points of major economies such as China and the Eurozone, the Fed turned “patient” in the January meeting. Little has improved since then and if anything the US data points (several delayed due to the Government shutdown) have backed up the need for patience. With no rate hike expected from a now data dependent Fed, there is an assessment that the FOMC’s dot plots calling for two hikes in 2019 will be scaled back more towards what interest rate futures markets are pricing (i.e. zero).
Growth projections and inflation could also be revised lower. But has the market gone too far? CME Group (NASDAQ:CME) FedWatch is actually pricing a 25% probability of a rate cut this year. The dollar has slipped back in the past couple of weeks, but Fed chair Powell remains confident of the US economy.
Whilst only two FOMC members are seen dovish in calling for no hikes this year, this group is unlikely to swell so much that there is a realistic prospect of a cut this year. The dollar could get some respite if this is the case as the market tends to swing too far before having to wake up to the reality of a US economy which is still holding up relatively well.
How the Fed comes across could potentially be pivotal today. What could also be a key component is how the Fed addresses its balance sheet normalisation. Currently around $4 trillion (down from $4.5 trillion previously) how much lower will the balance sheet be reduced to? This could be a pivotal Fed meeting for major markets, at least near term.
EUR/USD is at a technical crossroads, whilst gold is again hovering around a long term pivot at $1.1310, whilst life needs to be breathed into Dollar/Yen.
Wall Street closed very uncertain, with the S&P 500 closing less than a tick lower at 2832, whilst US futures are all but flat today. This has played into Asian markets with the Nikkei +0.2% and Shanghai Composite -0.1%. In Europe, there is a more cautious look as market react to a late slip into the close on Wall Street, with FTSE Futures -0.5% and DAX futures -0.8% in early moves.
In forex, as Treasury yields have bounced a touch overnight, there is a mild rebound on the dollar across the forex majors. The Aussie and Kiwi are underperforming as questions continue to surround the progress in the US/China trade talks. Furthermore, sterling is slipping back a touch as UK Prime Minister May writes to the EU-27 asking for an extension to Article 50.
The dollar rebound is negative for commodities, with gold and silver a shade lower, whilst oil is all but flat.
Even though the latest performance of the Brexit circus has been put back as the third Meaningful Vote has been postponed, there are a couple of big events on the economic calendar today with UK inflation and the Fed. UK CPI for February is at 09:30 GMT and is expected to stay steady with headline CPI at +1.8% (+1.8% in January) with core CPI expected to remain at +1.9% (+1.9% in January).
The big event is undoubtedly the Federal Reserve monetary policy decision for March at 18:00 GMT. There is no expectation of any change in rates with a Fed Funds range of 2.25% to 2.50% which was last raise in December. Also look for the economic projections being changed (likely cut), the shift in the dot plots and any changes to the balance sheet normalisation. Fed chair Powell has his press conference at 18:30 GMT.
Chart of the Day – USD/CHF
With the Fed set to announce monetary policy tonight, the dollar correction on Dollar/Swiss has once more come back to a key pivot level. Since November, time and again, the 23.6% Fibonacci retracement of the 0.9540/1.0130 rally around 0.9990 has played out as a crucial turning point for the market. It is a key consolidation point for the market and when the market starts to trade through this level is has tended consistently to move back to either the 38.2% Fib level (around 0.9900) on a breakdown, or back to the 1.0130 high on the upside. Yesterday’s close was bang on 0.9990 and the market is broadly flat this morning. The market perception of the Fed tonight could be crucial in starting this track, but coming into the meeting, the 23.6% Fib is again a key consolidation point. Looking at momentum indicators, there is a mixed outlook, with the near term momentum clearly negative (RSI falling to nine week lows below 50, and Stochastics pulling lower with downside potential. On the flipside though the MACD lines are simply corrective within a positive configuration. Closing below 0.9980 would be a seven week low and certainly open for a technical correction back to the 38.2% Fib level again. This looks to be one to trade in the direction of the Fed decision tonight.
EUR/USD
The recovery on EUR/USD is still in process as the market posted another positive session yesterday. However, there is still the concern that this remains a move that has the potential to simply be a rally within a continued medium term bear market, and will be so until the resistance at $1.1420 is broken. This is a market at a crossroads, with the RSI still hovering around the low 50s (where the February rally failed) whilst MACD lines are in a similar position to. Having traded above $1.1300 for the past few sessions, this is once more a key gauge for the outlook and a closing failure would suggest the dollar bulls are back in the box seat. The market has stalled a touch this morning as the Fed meeting looms tonight, but unless there is a hawkish surprise then the recovery remains on track. It needs to make the crucial break though. Support initially at $1.1320.
With no Brexit vote now this week and the anticipation of the Fed meeting tonight, it is not surprising that Cable traders all but took a rest day yesterday. Big volatility has been a feature in recent weeks, but yesterday’s daily range of 72 pips was a shade over half the Average True Range of around 140 pips. The open today is equally as settled. With momentum indicators flattening off this is a quiet period before the next probable storm. The hourly chart reflects a near term ranging outlook. The Fed tonight could be interesting, but in the meantime, there are still broadly 50 pip increments of support at $1.3200, $1.3150, $1.3100 and $1.3050. For resistance, there is a near term band of $1.3300/$1.3310 capping the upside in recent days, but a close above $1.3300 would be a positive signal in front of the recent high of $1.3383. There is still a positive bias to Cable and corrections are a chance to buy for a likely Brexit related rally in due course.
The market has become increasingly benign in recent sessions, losing any real sense of direction. There is the mildest of positive biases, given the shallow uptrend and positive hue to momentum indicators, but taking a step back, the market has traded between 110.75/111.90 for the past nine sessions. The hourly chart shows a basis of a pivot around 111.60 and the pick up overnight is mildly pressuring higher. However, until there is a close under 110.75 or above 111.90 there is little real suggestion of the market moving decisively anywhere. Preference is to be long, but there is very little conviction trading Dollar/Yen for now.
Gold
Gold is on the brink again as the Fed approaches. This is clearly a case of the market expecting a dovish lean from the FOMC tonight. As the market continues to look for a breakout, a closing move above the long term pivot at $1310 would be a signal to turn bullish and be confirmation of a breakout. With another intraday failure at $1311 yesterday, the bulls look ready. The technicals are certainly going that way, after three consecutive positive candles and momentum beginning to tick higher. Just like the price testing the $1310 pivot, the RSI is also back around the low mid-50s which is effectively a pivot line too. The Stochastics are bull kissing higher, whilst the MACD lines are threatening to also cross back higher. The hourly chart shows the bullish positioning is mounting, with a run of higher lows and higher highs in an uptrend of the past two weeks. Confirmation above $1310 opens $1316 (the old February pivot) and the ranging highs between $1327/$1333 in due course. Support at $1298/$1300 is also growing in importance. The risk is that the market has gone too far in its expectation of a dovish Fed tonight, but the technicals are improving again.
WTI Oil
A solid, if unspectacular breakout on WTI above $58.00 implies $3.50 of additional upside in the coming weeks and a move towards $61.50. However, there was an interesting technical development as the market pulled back from the session highs yesterday. The Fibonacci retracements have been consistently used as consolidation points, and yesterday’s high of $59.57 was a shade below $59.60 which is the 50% Fib level. Could this be another consolidation point? The RSI is in the high 60s and similar to where the February rally began to consolidate, whilst the Stochastics have also threatened to lose momentum. Coming ahead of the FOMC tonight, this would not be a surprise. Yesterday’s doji candle is a sign of uncertainty and the market has ticked a touch lower this morning. A pullback towards $57.50/$58.00 support should not be ruled out initially before further gains are expected in due course.
The bulls just had their reins pulled back on them yesterday as the market posted a mildly negative daily candlestick with a slightly negative close on the session. That the bulls have been restrained in front of the FOMC meeting tonight will come as little surprise but pulling back over 200 ticks from the day high will just raise an eyebrow or two. For now, momentum indicators are still positively configured and the market still looks set up for further gains. However, once more the 76.4% Fibonacci retracement at 25,715 comes back into play as a consolidation point. Resistance is at yesterday’s high of 26,110 under the February highs 26,155/26,240. Buying into weakness is still the default strategy unless the Fed flips a hawkish surprise tonight.
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