Market Overview
The market reaction to the Brussels terrorist attacks would suggest that whilst there will always be a knee jerk reaction with a flight to safety and a degree of caution, the initial moves will often be retraced. Once more we saw yesterday the strong moves into the safe haven plays such as the yen and gold, completely having unwound 24 hours later. The caution still remains in the market and equities are weaker as a result, but the mass flight into safety has not continued. The dollar has strengthened in the past few days and this continued yesterday as more Fed members talked up the prospects of rate hikes in the coming months. Looking past Brussels, markets seem to be far more interested in the views of Fed officials who continue to come out to claim that an April rate hike may yet be on the table. This remarkable twist in the face of the hugely dovish climb-down from the Fed last week makes it even more remarkable. After FOMC hawks Lacker and Williams having previously talked about April, Philadelphia Fed President Patrick Harker has backed their view, whilst habitually dovish Chicago Fed President Charles Evans has also talked about two hikes and possibly more dependent on inflation. It will be interesting to see if the impact on the dollar continues.
The dollar has been stronger against most of the major currencies overnight, with the commodity plays such as the New Zealand dollar and Canadian dollar under pressure as the oil price has fallen back in early moves today. It is interesting to see the yen having held up well overnight. Gold is under pressure, trading about 1% lower. European equities are slightly lower at the open after a similar close on Wall Street and Asian markets traded mixed.
There is little of interest with regards to data out of Europe, so we look towards the US and New Home Sales at 1400GMT which are expected to improve by around 3.2% to 512,000 from 494,000 last month. The EIA crude oil inventories are at 1430GMT and are expected to show another build of 2.5m after the lower than expected 1.3m build last week (as a reference the API oil stocks showed an increase of 3.5m barrels yesterday).
Chart of the Day – GBP/JPY
Sterling/yen has been in recovery mode since late February where a rally from 154.75 has set in. However, the overhead resistance of the old key low at 164.00 has acted as a ceiling for the rally and this move looks to have been once more a counter-trend move which is another chance to sell. The momentum indicators such as the RSI and MACD lines have simply been unwinding back towards neutral and have renewed downside potential. Then if you also consider the bearish configuration of the Stochastics (which have also just formed a “bear kiss” in the decline), the outlook is under pressure again. The past couple of weeks of consolidation underneath the 163.95 old key January low seems to be building a near term top pattern again (possibly seen as a head & shoulders top). This pattern has been creaking under the pressure and would complete on a move below 159.00 support. Yesterday’s intraday dip below the neckline did not quite confirm on a closing basis but if the momentum indicators are anything to go by it could only be a matter of time. A downside break would imply a retest of the 154.75 low (with 154.00 the measured downside target). The initial resistance today comes in a 30 pip band 159.80/160.10, with more considerable resistance at 161.80 which is also the right hand shoulder of the pattern.
The euro continues to slide steadily lower as the gains inspired by the dovish move from the Fed last week continue to unwind. The selling pressure is by no means substantial and momentum indicators on the daily chart reflect a corrective move so far without warning of sharp losses. The move has unwound the euro but is now looking to have broken the initial support around $1.1200 which was a previous resistance area. This seems to be opening a deeper correction back towards $1.1100 again, the top of the long term pivot band. The hourly chart shows the sequence of lower highs and lower lows in the past few days and a near term corrective configuration on hourly momentum. However, for now I see this as more of an unwinding move rather than the beginning of a period of dollar strength. Resistance comes in at $1.1260 and $1.1285 before $1.1340, but it could be an occasion for the bulls to bide their time.
Sterling still seems to be the forex major that is hit the hardest when the dollar strengthens. Once more, yesterday as saw a sharply negative candle on cable which has dragged the pair 160 pips lower in a move that again muddies the waters of a possible recovery. Technically the momentum indicators are looking to be under a bit of pressure again as the Stochastics have sharply fallen away. The Stochastics are the most reactive of the momentum indicators and need to see confirmation through the RSI and MACD lines, but as yet nothing too serious has been seen. The price action of the last two days has now almost entirely unwound the move seen in the wake of the dovish Fed decision last week. Now with the retracement in full swing, the key support has to be the mid-March reaction low at $1.4050 as a breakdown would put the bears back in control. Until then it is a difficult chart to read as the price action has been so choppy in the past couple of weeks. Clearly near term momentum is negative, with the hourly chart showing resistance found around $1.4220 and the 61.8% Fibonacci retracement of $1.4051/$1.4514 at $1.4228. The previous pivot level around $1.4280 also is now an important level for the bulls to overcome to re-engage a recovery. Below $1.4050 would re-open the bears and $1.3833 comes back into view again.
The US dollar has reclaimed some of its lost ground in the past few days and it is interesting to see that on a day where safe haven plays were in demand, the yen was weaker on the day against the dollar. For now, my views of dollar/yen have not changed, and this is still just an unwinding move that will prove to be a chance to sell again. I see all the momentum indicators as confirming this. However the near term move is for a dollar rally. The move may have been able to push back above the resistance at 112.15 but there is a further barrier at 112.60. However I do not see strength in the hourly momentum and a move back below 112.15 could now re-engage the selling pressure again. There is further resistance with the old pivot banc at 113.15. Support from the initial reaction to the flight into safety on the news of the Brussels attacks comes in at 111.35.
Despite the concern over the terror attacks in Brussels, the demand for gold gradually petered out throughout the day yesterday. The daily candle closed the day as a rather drab and meekly positive session which has been followed up by continued downside pressure which has shed over $10 in Asian trading overnight. I see this as the continued struggle that gold is having now over a medium term basis with the loss of upside momentum as the RSI, Stochastics and MACD lines continue to fall away. This means there is pressure on the reaction low at $1225.70 which was seen last week just prior to the Fed decision. A break below $1225 would mean lower highs and also lower lows were forming, and would also put pressure on support at $1211.20 and possibly even back towards $1200 area. Yesterday’s high at $1259.60 has added to the resistance with the hourly chart also showing a break below the old pivot at $1237. Negative configuration on the hourly momentum indicators suggest rallies are increasingly being seen as a chance to sell.
WTI Oil
On a day that could have been filled with significant volatility due to the terrorist attacks in Brussels, the oil price had a relatively sedate session yesterday. Coming as the first day of the new front end month contract (for May) the momentum remains positive and the bulls are still well positioned for further gains. The next resistance is around $42.00 whilst the upside target remains the $43.50. With strong momentum indicators continuing across all the RI, MACD and Stochastics, corrections are still seen as a chance to buy. That means that the initial weakness seen today is likely to be seen as that. The charts now show good breakout support coming in around $39.00, with the $40 psychological support also a marker now.
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