Market Overview
There is a cautious look to the markets on Tuesday morning as traders in the UK and US return from public holidays to consider how comments from Fed chair Janet Yellen will impact on sentiment and the prospects of a rate hike. Yellen said in a speech on Friday that a rate hike would be appropriate in the coming months if the economy keeps improving. The Yellen comments have helped to drive the dollar higher across the forex majors and impacted on precious metals too, although there is a slight pause for breath this morning. The dollar has pushed to a nine week high on a trade weighted basis and traders will need to weigh up issue of how to balance the improvement in the US economy and the concern over a Fed rate hike. Today’s trading has the added element of the US and UK markets playing catch up too. Asian markets have given a positive handover though with the weaker yen helping the Nikkei 1% higher, with the added prospect of a delay to the next sales tax hike by Japanese Prime Minister Abe. European markets have a far more cautious start to the day though, trading around flat.
In forex markets there is a mixed picture forming today with sterling remaining positive and continuing to trade off the improved prospects of the UK remaining in the EU (at least according to the trend of polls). The Aussie has been relatively strong today off the back of local data on housing, credit and current account. After eight days of weakness, the gold price has looked to unwind some of those losses, with silver higher and oil also mixed to higher.
Markets will be looking at inflation today with the flash Eurozone CPI at 1000BST which is expected to tick higher to -0.1% (but still in deflation) for the headline and improve to +0.8% for the core basis (from +0.7%). The market will also pay extra attention to the core Personal Consumption Expenditure (the Fed’s preferred inflation measure) at 1330BST which is expected to be 0.2% for the month. There is also the S&P Case Shiller House Price Index at 1400BST which is expected to drop to +5.1% (from +5.4%), whilst the Conference Board’s Consumer Confidence is at 1500BST and is expected to improve to 96.1 (from 94.2).
Chart of the Day – NZD/USD
The commodity currencies have been under pressure in recent weeks as the dollar has been strengthening again. The kiwi has been one of the better performers but even that has now started to take on a far more corrective outlook. The consolidation that had been holding firm for a couple of weeks, broke down on Friday (in the wake of the Yellen comments that supported the prospect of a move towards the next US rate hike). The strong bear candle which closed below $0.6700 was a two month closing low along with a multi-month intraday low too. The outlook now seems to confirming a strategy to use rallies as a chance to sell. The daily RSI has also pushed below 40 for the lowest since the end of January, whilst the Stochastics are firmly negatively configured and the MACD lines are now decisively below zero. The hourly chart shows a trend lower over the past couple of weeks and that today’s rally is another chance to sell. If the sequence of lower highs continues, the next test is the late March low at $0.6667 whilst the outlook continues to suggest that a move towards the double top pattern implied target (which formed at the beginning of May), which suggests continued pressure on the key February/March lows around $0.6560. The intraday hourly chart shows a band of resistance around $0.6730/$0.6770 as an ideal sell zone, with the bulls only finding any real near term respite above the resistance at $0.6805.
The dollar strength that has dragged EUR/USD lower of the past few weeks is once more back to the key crossroads of the long term pivot band. The 50 pip band of support between $1.1050/$1.1100 is again back in play and this is now being tested. The consistent run of lower highs and lower lows in the correction has resulted in a corrective configuration on the momentum indicators which is now more negatively configured with the RSI consistently below 40, the MACD lines below neutral and the Stochastics firmly in negative placement. The latest rebound high from Thursday last week came around $1.1215 which was the old support from late April and is now a strengthening overhead barrier. The initial support around $1.1100 has held so far but with the sequence of lower highs, is likely to come under further pressure. The hourly chart shows momentum has already started to roll over again, with a near term pivot around $1.1160. A move below $1.1050 would open considerable further correction towards $1.0800.
Despite the fall away on Thursday/Friday (exacerbated by the Yellen comments) last week, there is a strength to sterling now that suggests that the bulls are more resilient. Momentum indicators are more positively configured and it will be interesting to see how the European traders take hold this morning after yesterday’s reduced trading for the bank holidays in both the UK and US. The immediate key level to watch is the $1.4585 low from yesterday which could start to be seen as another higher low above $1.4440. I spoke last week about a 100 pip band of support between $1.4560/$1.4660 and this has held through the correction and helped to unwind momentum that had gone for almost 300 pips of gains in three days last week. Corrections are now being seen as a chance to buy, but the $1.4585 low needs to remain intact. There are now a couple of key highs in place at $1.4740 and $1.4770 and a break through these levels would confirm a more bullish medium term outlook.
There has been a significant technical improvement in wake of a late run higher on Friday (following the comments from Yellen) which has driven an upside breakout from the band of consolidation. The move drove a second strong bullish candle yesterday which has broken through several key technical levels. It has broken decisively through the 10 week downtrend channel, through the resistance band 110.60/111.00 and above the 55 day moving average. The RSI confirms the move with a push towards 60, the MACD lines above neutral and Stochastics positively configured. The last move to confirm a bullish breakout on a medium term basis would be a close above 111.80 resistance of the late April high. The hourly chat shows a band of support now between 110.60/110.80 today which needs to hold to prevent giving back the gains and losing the breakout momentum. The key near term support is now 109.50 with a breakdown putting the outlook under pressure once more.
Gold
Gold has now completed eight consecutive bearish candles as the price has slid back towards the key medium term support once more. The consistent use of intraday rallies as a chance to sell has heaped on the downside pressure and the close below the $1208 which were the key February/March lows certainly shows that the sellers are in control now. The failure of the support at $1191 would be the final move to put the outlook firmly negative. The configuration of the momentum indicators is also a concern now with the RSI below 40, MACD lines below neutral and Stochastics negatively configured. Today’s early rebound is breaching a 10 day downtrend but there is little to really suggest yet that once more the rally will not be sold into. The old support within the band around $1224 will be eyed as a selling opportunity for an unwinding rally and further pressure on the key supports look likely.
WTI Oil
The bulls may remain in control as the oil price continues to trend higher, but the gains are now fairly slow and considered. This comes as the RSI continues to fluctuate around 70 which reflects the positive momentum but also that the pace of the gains are likely to be rather slow (with 70 tending to be the limit of the RSI throughout the rally since February). The main uptrend for the price comes in around $45.50 today, but there is also a sharper uptrend which also seems to be something that the bulls are tracking, rising today around $47.70. Support continues to be left at higher levels with $46.75/$47.40 an increasingly strong band to watch. Thursday’s peak at $50.20 is now the initial resistance but there is still little to suggest that a test of the key October high at $50.90 is not going to be seen. Minor and intraday corrections continue to be bought into, with the intraday hourly chart showing initial support building at $48.65/70 which could become the next higher low.
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