Market Overview
With the majority of countries around the world celebrating Labour Day (over 100 countries so I believe, including most European major markets) we could be set for a fairly subdued trading session. However, there is an element of good news flow that is helping sentiment, as the US has extended its delay in the implementation of steel and aluminium tariffs on the EU, Canada and Mexico for another month. The real target of these tariffs was also focused on China, so this should come as little surprise, however this is still good news for sentiment and has allowed risk to improve in the early throws of today.
The dollar remains a key outperformer across the forex majors and resumed its recovery path yesterday. Interest rate differentials have once more become a key driver in forex, and despite the drop in the US 10 year yield below 3% (to currently 2.95%) in recent sessions, the German 10 year yield has lost around 10 basis points since the ECB meeting and the euro subsequently is under pressure. In a move widely expected by consensus, the Reserve Bank of Australia has held monetary policy steady with rates at +1.5%. The Aussie dollar is steady so far but the market will be watching for what RBA Governor Lowe says this morning.
Wall Street closed lower yesterday dragged back by telecoms with the S&P 500 -0.8% lower at 2648. With Wall Street futures bouncing a touch, Asian markets ticked higher (Nikkei +0.2%) and in Europe, the FTSE 100 (pretty much the only market open) is also mildly higher in early moves. In forex, the dollar is again stronger and hitting the euro and sterling. In commodities, this dollar strength is again a drag on gold which is now approaching the key medium term pivot band $1300/$1310, whilst oil is creeping higher as newsflow on Iran and its nuclear program have hit the wires.
With much of Europe on public holiday for May Day today, it is down to the UK and US to give direction from their Manufacturing PMIs. After the recent disappointment in the Q1 growth stats for the UK there is added focus on how the PMIs suggest the second quarter is shaping up. UK Manufacturing PMI is at 0930BST and is expected to show that the sector is slipping back a touch to 54.8 (from 55.1 last month). Then on to the US ISM Manufacturing at 1500BST which is expected to show a mild dip back in the strong recent reading to 58.3 (from 59.3 last month). Traders of the Aussie dollar will be continuing to look at the monetary policy implications of the RBA with comments from RBA Governor Lowe at 1020BST, whilst Governor Poloz of the Bank of Canada speaks at 1930BST.
Chart of the Day – EUR/CAD
The rally on EUR/CAD in the wake of the Bank of Canada policy meeting seems to have run out of steam and the selling pressure is once more re-asserting. Although this move continues to be counter-trend to the massive 14 month uptrend channel, the corrective downtrend from the past five weeks is still a negative drag in the near to medium term. Bear candles are racking up once more and the market yesterday closed at its lowest since early February. The intraday support of the April low at 1.5455 is the big test today and a decisive breach re-opens a retreat to the big pivot at 1.5370. Momentum indicators are negatively configured with the RSI turning lower from 50 and now with downside potential in the mid-30s, the MACD lines crossing back lower again in addition to a renewed negative signal on the Stochastics. The hourly chart shows the market turned strongly negative at 1.5590 leaving strong resistance there yesterday with once more 60 on the hourly RSI being the limit and neutral on the hourly MACD lines. Intraday rallies today are now a chance to sell with initial resistance 1.5530/1.5560.
The euro has resumed on its corrective path once more. The positive aspects of the rebound candle from Friday are being negated as the selling pressure pulled the market lower yesterday. The old key support at $1.2155 is subsequently an increasing basis of resistance now as the market has closed below the old breakout at $1.2090 it looks set to trade back towards the $1.2000 psychological level. The next support is at $1.1915 and is likely to be tested in due course. The momentum indicators remain negatively configured with the RSI dropping towards 30 but still retaining a degree of downside potential, whilst the MACD lines are accelerating lower. Intraday rallies remain a chance to sell, with the hourly chart showing anything around 50/60 on the hourly RSI being an area where the bulls now struggle. Initial support of $1.2055 from Fridays low.
Anyone thinking that markets do not look at key technical levels will do well to note that yesterday’s intraday low just prior to a rebound came at $1.3711 which was just 1 pip from the $1.3710 March low. However, although there was an intraday bounce which saw the market close almost 60 pips off the lows, a negative candle was still formed and the market remains under bear pressure. Perhaps it is just delaying the inevitable, but it is interesting to see that the market is also giving regard to the long term uptrend on Cable too. For now, the Cable bulls are hanging on, just. As with EUR/USD, there is a strongly negative configuration to momentum now, and rallies are being seen as a chance to sell. The hourly chart shows that this is simply an unwinding move within the bear run, with the RSI once more failing in the 50/60 region and the MACD lines unwinding towards neutral. Initial resistance is $1.3810 above which implies a further bounce of 100 pips, however this is all counter to the increasingly negative trend developing on Cable. Rallies are a sell for a retest of $1.3710.
During this dollar recovery the market has tended to pull higher within the trend, only to go for a period of consolidation before breaking out to the upside once more. The market has drifted sideways for the past few sessions but the configuration remains strong within the recovery uptrend and there is little indication that this trend is about to fail. The resistance that has formed at 109.55 in recent days should do little to hold the market from the continued recovery with a rebound to 110 likely, whilst the February high around 110.50 also will be in mind. The hourly chart reflects a near term consolidation and with support forming at 108.95 above the reaction low at 108.55, the bulls will be taking this as a pause for breath. The mid-April sideways consolidation shows that the market can move like this for several days, and with the FOMC on Wednesday evening and payrolls on Friday, whilst many countries on holiday for Labour Day, today is likely to be a muted affair.
Gold
On several occasions in 2018 the long term pivot band between $1300/$1310 has housed an underlying level of demand that has supported the market. This band of support is being tested again. Yesterday’s candle had a look at the support and bounced, but this morning we are seeing another go by the sellers. I have been a great advocate of this support holding on gold and have been impressed by the fact that whilst major forex currencies have been bashed by dollar strength, gold has held up relatively well. Now we shall see if this long term support is to continue. The bulls will know the significance of a closing breach of $1300 which would complete a multi-month top pattern and imply around $65 of further downside. The concern for this test is that the RSI is now beginning to move below 40, whilst the MACD and Stochastics are looking increasingly negative. The hourly chart shows a run of lower highs in place, with a band of resistance growing between $1315/$1320. A close below $1310 would certainly be a warning shot across the bows today. Below $1300 the initial support is at $1260 and then $1236.
WTI Oil
Once more a session ending with a small candlestick body and long shadow (both higher and lower) on WTI which reflects the ongoing consolidation. This suggests that there was initial selling pressure that was bought into, but the upside was also snuffed out into the close. This continues the tendency for the market in the past week and a half to buy intraday weakness into the $67.10/$67.75 band. There is a mild positive bias forming this morning and it will be interesting to see if the bulls can sustain some sort of positive traction now. In recent days there has been a gradual weakening of momentum and a strong session will be needed to snub this out. This comes with the Stochastics now drifting lower and MACD lines which are set to cross lower. However at this stage this is more of a reflection of the consolidation range that has formed between $67.10/$69.55 and subsequent loss of upside impetus. In this way, there would still be an expectation that corrections are a chance to buy on oil. For now though we continue to await a break of the range which would imply c. $2.40 in the direction of the break.
As the uncertainty of the outlook for the medium term continues, it is interesting to see uptrends and downtrends are being broken on an increasingly shorter time frame. However yesterday’s solid bear candle came at the resistance of a recent 9 day downtrend and now threatens the market lower. Within this move, momentum indicators have been more neutrally configured as they have settled down, but how the market responds to this latest drop away could be key to the near term outlook. The RSI is increasingly hovering around the 50 neutral points, whilst the MACD lines have flattened just under neutral. A renewed run of negative candles would swing momentum lower again. There is a mild negative bias still across the medium term outlook, reflective of the fact that a run of lower highs continues in recent months. The hourly chart shows a deterioration in outlook following a loss of initial support at 24,195 and if this is confirmed by additional losses today then the low around 23,825 becomes a key support.
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