Market Overview
Markets are still coming to terms with some incredibly strong moves on Friday as the worst Non-farm Payrolls headline number for over five years smashed the dollar rally. After the huge volatility there now needs to be a period of settling for the forex, bond and commodity markets which reacted so significantly. The prospects of a June and also July rate hikes by the Fed have plummeted. Embattled dollar traders will focus today on the comments of Fed chair Janet Yellen, with the market wanting to know the impact of the payrolls disappointment on the prospects for Fed monetary policy. However, markets have a tendency to overshoot in their initial reactions and there could be a retracement in some of the moves, at least near term. We are seeing the beginning of this today. Equity markets struggled to make sense of it all as a weaker dollar tends to be market positive but the shock of the disappointment also played a role with a degree of caution. Wall Street closed down 0.3% whilst the Asian markets have been cautiously lower this morning (Nikkei -0.4% on the stronger yen).
We are seeing a minor dollar recovery today across the forex majors with the dollar positive again all majors. However the biggest underperformer is sterling after the weekend polls showed that there is an increasing prospect of a victory for the Leave campaign in the EU referendum. Gold and silver are only marginally weaker after Friday’s huge recovery. The oil price is showing gains of just under a percent today.
There is no real economic data releases of any note today so the market will look towards the comments of Janet Yellen who speaks at 1730BST.
Chart of the Day – EUR/JPY
The strengthening yen tends to be seen as a reflection of concern in the markets. Having threatened to form a recovery a few weeks ago, the bears have reclaimed control. This is why the latest breakdown on EUR/JPY is something to worry about. The closing break below the support of the May low at 121.50 has taken the pair to a new low dating back to April 2014. The concern from a technical perspective is that there is further downside potential. The RSI is deteriorating and is only just below 40, whilst the February sell-off plumbed the depths of the low 20s on the RSI. Also the Stochastics are negatively configured with further room for weakness. Selling into strength on EUR/JPY seems to be the strategy now, with the resistance in place between 121.45/122.00. The hourly chart reflects the bearish near term momentum and that the bulls would only realistically consider a rally as anything to get excited about on a move above 122.60, but even then the rally is stil just a rebound within the sharper downtrend which comes in around 124.00.
An incredible move on Friday on the back of the significantly disappointing Non-farm Payrolls has seen the EUR/USD pair shoot higher. With a low to high range of 240 pips on the day a whole series of resistance levels have been breached and the outlook completely changed. Momentum indicators have strongly picked up, with Stochastics rising strongly and even the MACD lines crossing. In the least this would suggest now that the bears have relinquished control, however for the time being it is difficult to make certain for the enduring outlook. After such a huge move there will often be a retracement of some degree as the market settles down. This is just threatening to set in today, with the slight decline at the open. With the market just backing away from Friday’s high at $1.1375, the initial support to watch is at $1.1290, below which the more considered old support which is now resistance at $1.1245. Once the market settles we can ascertain the outlook and whether a retest of the old key range high at $1.1465 will again be seen.
There has been some incredible movement on sterling/dollar in the last couple of days as firstly the market has taken account of the extremely weak Non-farm Payrolls data and then over the weekend the suggestion that the UK could be close to leaving the EU. The opinion polls pointing towards a “Leave” victory has sharply dragged on sterling and all of Friday’s gains of over 100 pips have been entirely reversed. The move has broken back below $1.4400 and once more the test of the key May low at $1.4330 looks on again. Technically the market is extremely messy but there is a mild bearish bias and the RSI is at an 8 week low, whilst the Stochastics look to be making a bear kiss (which is a negative signal too). The changing Brexit polls continue to throw around the market and this makes trading in a single direction for any period of more than a couple of days a risky strategy. Friday’s high at $1.4580 is now clearly key resistance. Further levels to watch come in at the near term pivot at $1.4665. The overnight low at $1.4350 is a basis of support.
Dollar/yen had already begun correcting even before Friday’s payrolls report, but the announcement massively accelerated the sell-off and the stronger yen (and pace of decline) will once more be a big issue for the Bank of Japan. The decisive breach of 108.20 has re-opened the May low at 105.52. However the sharp move is showing some near term signs of retracement and it will be interesting to see how the European traders react as the market has bounced slightly off 106.35. There is a minor band of resistance around 107.50, whilst the more considered resistance does not come in until 108.20 again. Watch for the hourly momentum indicators as the hourly RSI has been failing just above 50 in the past week and further signs of this would be a renewed sell signal.
Gold
The sharp gains have re-asserted the outlook that this is a medium term range play once more. The huge bull candle was the strongest move on gold since mid-February but the market now needs to settle down. The bulls may look to be in control but there needs to be a basis of support now to work as an anchor otherwise the drift lower could resume. The momentum indicators are all far more positively configured but also show there is work that needs to be done to convince. Effectively the downtrend since the $1303 high is still a factor, whilst there could be some minor retracement after such a strong move. The hourly chart shows some previous pivot levels which were broken through on Friday now become supportive, with $1233 and a decent band of support now between $1220/$1225. The old range resistances come back once more into play with $1260 where a range of overhead supply begins.
WTI Oil
We are seeing a range play building up as once more the oil price has failed to gain any real traction. This now means that the support at $47.75 is increasingly near term important but the resistance at $50.10/$50.20 is also growing. The momentum indicators remain bullishly configured and that minor corrections are being bought into. As this consolidation continues the medium term uptrend continues to pull higher and is now at $46.30 as it closes in on the key support at $46.75. I still favour upside pressure but am also conscious of the struggle that the bulls are now finding themselves in in breaking some near term shackles. The last couple of days has seen resistance around $49.50 capping the gains.
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