Market Overview
Recent US economic data have put the pressure on the dollar. Markets are fully committed to a rate hike at next week’s FOMC meeting however the data has been increasingly sluggish and question the growth potential and inflation expectations for the US further down the line. This is dragging on US 10 year yields and the dollar is suffering. This dollar weakness is helping to underpin the euro and also allowing sterling higher. Both currencies also have key risk factors towards the end of this week (the ECB monetary policy and UK general election) but the dollar weakness is certainly lending them support. Add in the strong moves for both the Japanese yen which has fallen below 110 this morning and gold which continues on its run towards the $1295 April high again.
Concern over the stabilisation in the Middle East are growing too, with Qatar under pressure as seven countries including Saudi Arabia, Egypt and the UAE have cut diplomatic ties, over Qatar’s alleged links to extremist Islamic groups. The geopolitical concerns with destabilisation of politics in the Middle East is helping to drive safe haven flow and curb risk appetite.
Wall Street closed marginally lower last night with the S&P 500 -0.1% at 2436, whilst Asian markets were mixed to lower (Nikkei -0.1% on yen strength). European markets are also marginally lower in early moves.
In Forex the dollar is weaker across the board with the yen a strong outperformer. However, the one Forex major that is underperforming the dollar is the Aussie. The Reserve Bank of Australia monetary policy held rates at 1.5% but with concerns over growth numbers there could be downside risks to this. Gold is strong on the safe haven demand, up almost $10. Oil is marginally higher but it is worth noting the tendency for early rallies to be sold into.
It is a relatively quiet day for the economic calendar with the US JOLTS job openings at 15:00 BST the only really significant market moving factor, with jobs expected to fall back slightly to 5.65m (from 5.74m last month).
Chart of the Day – EUR/JPY
For the past month the market has been stuck in a range between 122.55/125.80. There have been questions over whether this range would be a consolidation before a continuation upside break, or turn into a top pattern. As yet the outcome in uncertain however latterly the sellers are once more making a push. The consolidation has been around the old key breakouts of 123.30 and 124.10, however it is interesting to see that 123.30 has been supportive on several occasions. The latest downside break below 124.10 has opened 123.30 again today and the reaction around this support could be crucial to the potential break of this consolidation.
With the deterioration in the momentum indicators in the past few weeks there has been concern that this range would turn into a top pattern, however the support has been ongoing. Despite the market testing 123.30 on an intraday basis on several occasions the buyers have prevented a closing breach of the support. The old 1241.10 breakout has also been a near term pivot and becomes a basis of resistance now. However only a close below 123.30 would really suggest there is traction in a top pattern formation. For now continue to play this as a range but beware of the key support under threat.
The bulls had a bit of a break yesterday as a mildly corrective candle formed that pulled the market back from the breakout above $1.1267. However there is little reason to suggest this is anything more than a brief pause in the run higher. Maintaining the near term support at $1.1200 will give the bulls the platform for the next push higher. The momentum indicators retain their positive configuration with the RSI in the high 60s and Stochastics positive. There is the slightest of hints on the MACD lines that the bulls are not in complete control but nothing to get too worried about yet. The early move today is to look to build support again.
The hourly chart shows a consistent run of higher lows, whilst hourly momentum uses the unwinding moves to renew upside potential with the RSI supported around 40 and MACD lines supported around neutral. The recent high at $1.1285 protects $1.1300 whilst the medium to longer term target from the base pattern remains $1.1350. Support at $1.1100 continues to grow.
The election week has started well for sterling. Despite the UK Services PMI disappointment, sterling traders have bought in the wake of the terrorist attack (perhaps with a view of it helping the Conservatives). Technically yesterday’s candle may have slipped slightly into the close however the session was bullish and this positive sterling/negative dollar angle has continued into today’s session. The momentum indicators are ticking higher again with the RSI back above 50 and Stochastics rising.
The hourly chart shows a move above $1.2920 has formed something of a near term upside break of resistance and with momentum improving the bulls will be gaining in confidence. A decisive move clear of $1.2920 would open $1.3000 which has been a basis of resistance whilst $1.3050 remains key near term. Support is growing above the old long term $1.2775 breakout with $1.2830/40 having been a basis of support in the past week. Initial support is now the overnight low at $1.2890.
The dollar is under real pressure again. It had looked yesterday as though the bulls were ready to fight for the support around 110.20, however a decisive downside break this morning has re-opened the downside. Momentum indicators are a real concern now too, with the RSI confirming the break on a move below 40, the MACD lines consistently in decline below neutral and the Stochastics also negatively configured. A close below 110.20 today would give full confirmation but the sellers do now look to be in control again.
The next support is the 50% Fibonacci retracement of 100.07/118.65 at 109.35 however is the sellers continue to gain momentum then a test of the April low at 108.10 should not be ruled out. The hourly chart shows resistance now at the previous breakdown of 110.20, with yesterday’s high at 110.72 adding to the growing resistance below the pivot at 111.60. Rallies are a chance to sell.
With the dollar under increasing bear pressure the gold price continues to make solid ground in its recent bull run. Closing well clear of the old pivot at $1261 has opened the upside and the market is now well on course to test the $1295.40 April high. Momentum is strongly configured with the RSI in the mid-60s, MACD line rising strongly and the Stochastics in bullish configuration. This all suggests that intraday corrections are a chance to buy.
There is a long term pivot band $1300/$1310 which is an increasing possibility now. The hourly chart shows an initial support band now $1277.50/$1283.30 that will be seen as a decent entry point now.
WTI Oil
Yet again the early intraday rally was sold into yesterday and the downward pressure continues in the wake of the OPEC meeting two weeks ago. The head and shoulders top formed below the neckline support at $48.00 implies a correction back towards $44.00 and the market is putting increasing pressure now on the next support which is a key pivot through March and May at $47.00. A close below $47.00 would then open the downside once more.
The momentum indicators remain corrective but also with downside potential. The MACD lines have only just crossed lower whilst Stochastics are moving into bearish territory. Rallies remain a chance to sell with a band of resistance between $48.00/$48.40. The hourly chart shows that the hourly RSI around 60 is a selling opportunity.
Yesterday was a day of consolidation following Friday’s breakout. Technical momentum indicators remain very strong on RSI, MACD lings and Stochastics all rising and this suggests that buying into weakness remains viable. Previous breakouts become supportive and it was interesting to see the old all-time high of 21,169 being used to the tick for yesterday’s low.
The bulls will be eying any corrections and there is support between 21,070/21,112 from the old April and May highs which will be seen as a buying area now. Last week’s reaction low at 20,943 becomes increasingly important now and the bulls will remain in control whilst this support remains intact. Initial resistance is at 21,225 from Friday’s high but there is little reason to believe this will not be broken to the upside once the bulls get going again.
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