Market Overview
Political risk from the French Presidential election is becoming a key driver of increasing euro weakness in recent days. With a deterioration in polling numbers for candidates such as Francois Fillon and Emanuel Macron, the prospects of Marine Le Pen improve. Whilst the market is still not anticipating a victory for Le Pen in the second round, the probability is apparently now above 40% and there still needs to be an adjustment to dfactor in the increased risk. This is showing through in the spread between French over German government bond yields which has pushed over 80 basis points to its widest since November 2012. This has become a key gauge of the market’s view of the election risk and is a driver of the euro. On the US side, there is a wait and see mode across dollar pairs (other than the euro) in front of the FOMC minutes tonight. The feeling from FOCM speakers this week has been that the Fed could move in March if the data (especially inflation) continues to improve. Loretta Mester and Patrick Harker both alluded to that this week, however Neel Kashkari has been slightly more dovish. Ifl the FOMC minutes reflect a hawkish tone tonight the dollar could strengthen further.
Wall Street came back off Presidents Day in bullish mood and again closed at another all-time high with the S&P 500 +0.6% at 2365. Asian indices were mixed to positive today although the Nikkei was all but flat down 1 point. European markets are taking steer a slightly more cautious road, but are still mildly positive in early moves. Forex markets show the euro under more pressure but mixed moves on the dollar, with the yen regaining some lost ground. Gold and silver are consolidating and oil is mildly higher after the rollover to the April contract.
Today traders will have some growth data to consider during the European session and a little housing data for the US, but the main focus will come much later with the FOMC meeting minutes. The early session announcements come in the shape of German Ifo Business Climate at 0900GMT which is expected to dip very slightly to 109.6 (from a strong reading of 109.8 last month). The second reading of UK GDP for Q4 2016 is at 0930GMT and is expected to again be confirmed at +0.6% for the quarter. US existing home sales are at 1500GMT which are expected to bounce back slightly to 5.55m (from 5.49m). However the big focus will come from the FOMC minutes at 1900GMT which will be eyed for any signs of hawkish leanings. This may come in the form of mentions of potential balance sheet reduction or a desire to tighten at a faster pace which could increase the potential for a March hike.
Chart of the Day –EUR/GBP
The sequence of lower highs and deteriorating momentum in the past few weeks continues to drag on the outlook for Euro/Sterling and the market is now looking to complete a key breakdown. I highlighted last week the breakdown below the support of the low at £0.8467 but the real breakdown would be a close below the support at £0.8445 which would also be a low for 2017 and is now very much on the cards for today. The momentum indicators continue to reflect a deteriorating outlook, with the MACD lines crossing back down below neutral and the Stochastics just giving another bear cross with downside potential. A close on the RSI below 40 would add to the confirmation. A close below £0.8445 would confirm a top pattern (bearish head and shoulders top) and would certainly imply a test of £0.8300 which is the key December low, which is a massive support over the past eight months since the original Brexit burst higher. The hourly chart shows bearish configuration across the momentum indicators and that rallies will be seen as a chance to sell. There is resistance initially now between £0.8445/£0.8490 which will be seen as a potential “sell zone” for any rallies today.
The strong bearish candle from yesterday has again put a negative complexion to EUR/USD and further downside this morning has driven the market below the key reaction low at $1.0520. This is the key support that will now open further euro weakness for a move towards $1.0450 and the key low at $1.0340. The daily momentum indicators are negatively configured with the MACD lines now falling back below neutral, the Stochastics also negative and now the RSI is below 40 (which confirms a breach of $1.0520). A slocing breakdown would be ideal for confirmation but the hourly chart also reflects negative near term momentum and that rallies should be seen as a chance to sell. The overhead resistance begins with a minor band between $1.0525/$1.0555, with a near term pivot around $1.0590, whilst overhead supply ramps up between $1.0600/$1.0635. The hourly RSI is now failing in the 40/50 area signifying strong selling pressure.
Sterling has held up well in the face of dollar strength in the early part of this week. Posting a positive candle yesterday as the euro fell sharply is an indication that the dollar bulls have not got it all their own way. However there is still a sequence of gradual lower highs on GBP/USD with the initial resistance at $1.2525 and then $1.2550. These will be the levels that the bulls will be eying as the market again opens positively today. It is interesting to see that with today’s early gains, the Stochastics have started to tick higher, something that has not been seen during the course of the past three weeks. The market has also pulled away from the pivot around $1.2430 which has been tested on so many occasions recently but never truly breached. On the hourly chart the momentum indicators suggest a neutral outlook is beginning to take over, with the RSI oscillating now between 30/70, the MACD lines fluctuating and the Stochastics also without a clear trending configuration. This suggests that having held on to the $1.2380 support in the last couple of sessions, the resistance between $1.2525/$1.2550 is likely to contain the recovery, however more of a ranging outlook may be on the cards. The near term pivot at $1.2470 will be near term supportive today, as will $1.2430.
A strong bull candle added 60 pips yesterday and has again improved the outlook as the move seems have had a neutralising impact. The momentum indicators are giving very little in terms of direction with the RSI and Stochastics basically flat around 50 whilst the MACD lines are rather sedate too. Holding above 112.50 means that this is once more growing as a support. The hourly chart is also giving few clues over direction, with the move overnight suggesting a consolidation is now forming. There are a couple of near term pivots within the range, with 114.00 again providing resistance an now 113.20 is supportive. A break either way would give near term direction. Above 114.00 opens the 114.95 high, whilst below 113.20 opens 112.50 again.
Gold
Just as we are seeing with another safe haven (Dollar/Yen), we are increasingly finding gold forming a consolidation pattern. The candlestick formation yesterday was a great case in point. The initial move to the downside failed to be sustained before an intraday rally to form almost a doji candle. However the rebound has not been sustained overnight and the bulls have seen the market slightly roll over again. This market is in wait and see mode now, with the momentum indicators have plateaued with the RSI slipping back to 60, the MACD lines flat and the Stochastics losing their impetus. There is nothing yet to say that the market is going to move into reverse, however the bulls are taking a breather The support around $1220 is growing with yesterday’s $1225.70 low. The hourly chart reflects this consolidating outlook and there is resistance forming just under $1239 which now protects the recent high at $1244.70.
WTI Oil
The market has been consolidating for so many weeks now that every time the price runs up above $54.00, it has been seen as a chance to sell. However yesterday’s strong candle has come with the price closing at its highest level since December and another positive close tonight would be a closing high dating back to July 2015. The bull control has improved but is still not complete with the intraday resistance still being in place at $55.25. There is still a little reticence in the momentum indicators, despite a mild improvement in the RSI above 60 and Stochastics, as the MACD lines are barely ticking higher from neutral. The chart has gapped higher at the open today in light of the contract rollover, however the hourly chart shows the move above $54.15 intraday resistance now means that there is a band of support now between $53.50/$54.15 to look for a higher low in an unwinding pullback. The bulls are pushing for a test of $55.25, above which opens the $57.00/$61.80 resistance band from Q2 2015, but can the move be sustained this time?
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