Market Overview
After a day under pressure yesterday, the consolidation on the dollar is moving closer to a correction as markets look to Non-farm Payrolls. This may be something of a surprise as the dollar appears to have (at least temporarily) become decoupled from the movement on US Treasury yields which continue to move higher. Despite the strength of Treasury yields and the positive surprise in Wednesday’s ADP employment change, there is an air of caution in the forex market moves, there is still a minor dollar bear bias that is forming.
The trade weighted dollar index needs to hold up above 100.65 to prevent a small top pattern formation that would imply a corrective target of 99.25. This is showing with the euro aching to break higher, sterling making ground and the yen also looking close to support.
The payrolls data will be interesting today as it will be a risk-on report on a strong number. With a Fed rate hike pretty much guaranteed in a couple of weeks, strong US data will be taken as risk positive. However, there is a caveat of political risk in Europe with the concern of Sunday’s Italian referendum weighing on sentiment, the reaction to which will be seen on Monday morning.
Equity markets are beginning to look more corrective with the S&P 500 now below is previous breakout, falling 0.3% to 2191. Asian markets were also lower overnight with the Nikkei down 0.5%. The European markets are again looking weaker with the DAX confirming its near term breakdown.
Traders will be watching for the Non-farm Payrolls in today’s US Employment Situation. After the ADP employment change beat by 55,000 expectation will be positive going into the data. The headline Non-farm Payrolls are expected to improve to 175,000 (from 161,000) so there is upside risk of a headline beat given the ADP surprise on Wednesday.
However the markets will also be keenly watching for average hourly earnings which are expected to be +0.2% for the month and this would hold the year on year growth at around 2.7%. The unemployment rate is expected to stay at 4.9%, whilst the laborforce participation rate will also be a key factor given that it dipped back slightly to 62.8% last month.
Chart of the Day – DAX Xetra
The DAX had been hanging on to the near term range between 10,575/10,800 by a thread, however, yesterday’s move decisively broke through the support to complete a near term top pattern. This means another retracement within the broader 4 month trading range 10,175/10,827. The implied break is for 225 ticks of downside to 10,355.
The momentum indicators have been leading the market lower in recent days but also show that there is further downside potential on both the RSI and the Stochastics. The old support band 10,575/10,600 within the near term range now becomes an area of overhead supply and rallies will be seen as a chance to sell. The key near term resistance is the reaction high at 10,692.
The hourly chart shows the negative configuration of the hourly indicators with the rallies failing around 60 and the hourly MACD lines now with a bearish outlook. Already, the intraday chart shows a pullback to the neckline which found resistance before falling away into the close. The hourly chart shows minor support around 10,450 which is an old pivot around mid-range that has consistently been seen as a turning point near term.
EUR/USD
The euro bulls responded extremely well to a very disappointing session on Wednesday, to close yesterday’s session strongly higher on the day and continue the recovery. With the momentum indicators leading the way higher (RSI at a 3 week high, Stochastics with a confirmed buy signal and the MACD lines giving a bull cross), the market is this morning pushing to complete the near term base.
The early session move back above $1.0660 is encouraging with the move to an intraday two week high also positive. A close above $1.0685 would complete a base and imply 130 pips of recovery back towards the old support turned resistance around $1.0800.
The hourly chart shows the improvement in momentum and intraday corrections are a chance to buy. There is though a significant caveat and that is the Italian referendum on Sunday. Perhaps it is a surprise that the euro is looking to breakout ahead of the vote and this could limit gains or even drive a drift lower on caution ahead of the vote. A “yes” vote would be euro positive. The added factor of Non-farm Payrolls means it could be a volatile day.
With over 80 pips gained on the day the bulls would be happy on Cable. However it could have been so much better after an intraday push above the resistance at $1.2673 could not be held and the market closed below the mid-point (mamabuzu line) of the candle. However the momentum is now gaining traction with the RSI is back to 50 and the Stochastics rising strongly. Today’s early gains are adding to the positive outlook on a near term basis, but there needs to be a close above $1.2673 to confirm a bullish breakout, having failed the first time.
The hourly chart shows positive configuration on momentum now and the bulls finding support at the $1.2557 pivot before pushing higher again. I am a near term buying into weakness. Yesterday’s high at $1.2695 adds resistance, whilst $1.2415 is now key support. Non-farm Payrolls will add volatility today.
USD/JPY
Is the dollar rally under pressure again? After the strongest bull candle for months was posted on Wednesday, yesterday’s follow-up candle was corrective, which poses questions of the bull run again. The daily momentum indicators are still strong but they are showing signs of fatigue.
If the RSI drops back below 70, the MACD lines cross lower and the Stochastics fall below 80 this would be a concern for the bulls. Furthermore, on the hourly hart the market has fallen below the support of an old key high for the first time during the uptrend. This may not be much but the signals are mounting.
The hourly chart also shows there was also a failure to breakout back above 114.82 which has strengthened the resistance. The hourly RSI below 45 and MACD lines below neutral would be a warning. The support at 113.30 is taking on an added importance now as if this is broken it would confirm the bulls had lost the momentum and be at least a consolidation play. Subsequent support at 112.00 and 111.35 would then come into play. A breakout back above 114.82 would open 115.95.
The chart continues to post lower highs and lower lows as the rallies are being sold into. The support of the 61.8% Fibonacci retracement of the big bull run between $1047/$1375 is at $1172 and despite the intraday break yesterday, is still being tested this morning. A closing breach clear of the support would open $1125 which is the 76.4% Fib retracement. The concern is that there is very little real support until the lower $1100s and the negative configuration of the momentum indicators does not suggest the selling pressure is yet at an end.
The hourly chart shows the falling hourly moving averages are a basis of resistance (especially the 144 hour moving average at $1283), whilst the hourly RSI continues to fail around 60, the MACD fails around neutral and the Stochastics have turned over again. There is resistance between $1178/$1181 but a rally would need to push through the overhead supply up towards $1200 to really have a chane of a sustainable rally. Expect further retest of yesterday’s low at $1160.40.
WTI Oil
Another impressively strong bull candle reflects the confidence that traders now have to push oil higher. The key October high at $51.93 is now close. If WTI can continue the move higher to see a closing breakout above $51.93, then the continued recovery would be on. There is minor resistance at $53.50 but the next main area of overhead supply does not come in until around $56.60. The momentum indicators are increasingly positively configured and also show upside potential, with the RSI in the low 60s whilst the rallies seen during Q2 saw the RSI habitually up towards 70 and above.
Corrections will now be seen as a chance to buy with the old resistance band $48.75/$49.20 a good buffer of support. The hourly chart shows a minor drift lower overnight but there is good near term support now between $49.00/$50.25 which will be seen as a “buy zone” for a correction today.
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