Market Overview
The dollar outperformance of the past week have not been due to dollar strength, but more to do with concerns in the Eurozone over Italian debt and the negative impact on the euro. The risk averse impact has sent the dollar higher. However, there are question marks over how sustainable this move is. Treasury yields are almost exactly where they were prior to the FOMC rate hike a week ago.
The Fed hiked and remained confident, whilst Fed chair Powell remained very confident in a speech yesterday. However, the Italian politician who questioned Italy’s participation in the euro backtracked yesterday and this appears to be stabilising the euro now. Furthermore, overnight reports in Italian media suggest that a compromise could be met to reduce the budget deficit back to 2.0% in the coming years back from 2.4% next year.
If the fears surrounding the Italian budget can begin to subside then Eurozone yield spreads will unwind (Italian 10 years over German bunds spread is back from a five year high of 3.0% this morning) then the euro will regain its poise once more. Italian yields are 10 basis points lower this morning which is encouraging in early moves.Risk appetite is relatively stable today and equities are finding a degree of support.
Wall Street closed mixed yesterday, with the Dow higher, S&P 500 all but flat at 2923 and the NASDAQ mildly lower. Futures are looking to form support with the pick-up in sentiment today.
In forex, there is support for the euro today and sterling is being dragged with it. The yen is a mild underperformer along with the Kiwi.
In commodities, the rebound on gold is holding well, whilst oil is into a second day of consolidation after the recent run higher.
Traders will be on the lookout for services PMIs today in addition to a potential steer for Friday’s payrolls. The final Eurozone Services PMI is at 0900BST which are expected to be confirmed at 54.7 54.7 flash reading, up from 54.4 in July). There is also the final Eurozone Composite PMI which is expected to be back at 54.2 (which would be a shade down from the 54.5 last month).
The UK Services PMI at 09:30 BST s expected to drop back a shade to 54.0 (from 54.3 last month), whilst the US ISM Non-Manufacturing at 15:00 BST is expected to fall back to 58.1 (from 58.5 last month). There is also the ADP Employment change today at 13:15 BST and a forecast of 187,000 (163,000 last month) is close to the current payrolls expectations for Friday.
The EIA oil inventories are 15:30 BST are likely to cause some intraday volatility on the oil price, with crude stocks expected to build by +1.5m barrels (+1.9m barrels last week) with distillates expected to drawdown by -1.7m barrels (-2.2m barrels last week) and gasoline stocks with a build of +1.2m (+1.5m last week). Finally there are a couple of FOMC speakers to watch out for, with Lael Brainard (permanent voting dove) at 1900BST and Loretta Mester (voting hawk) at 19:15 BST.
Chart of the Day – EUR/CHF
The euro has been under pressure across the majors in recent sessions with fears over Italian debt. However, one major that does not seem to have made much of an impression in this time has been the Swiss franc (which has also been slammed against the dollar). We spoke about a base pattern on EUR/CHF last week and this is still a work in process. A couple of sessions have been somewhat choppy with long downside tails on the candlesticks but it is interesting to see the market continues to buy into the weakness. This is forming a recovery uptrend channel over the past couple of weeks and if this move continues, then a test of the 1.1450 August resistance should be seen. A broken two month downtrend has improved the near to medium term outlook and the market is now supported by a rising 21 day moving average (at 1.1305) which was previously resistance.
The bulls appear to have survived by the skin of their teeth what would have been a key breakdown, as support at $1.1505 has held to the pip. The selling pressure through the euro in the past few sessions has significantly weakened the neutral outlook on EUR/USD but it would have needed a decisive close below $1.1505 to turn the outlook corrective again. For now, this has been averted. Today’s early rebound is also helping to improve the outlook again. It is also interesting to see that if this support does continue to hold, there is currently little lasting damage to the medium term outlook on momentum and this could even become another opportunity to buy. This is furthered by the configuration on the hourly chart with the momentum showing positive divergences and picking up again. The resistance overhead at $1.1620/$1.1630 is initially the barrier, with the pivot at $1.1650 key near term. Holding on to today’s low at $1.1535 would also help.
The near term move remains corrective as the market has posted a run of lower highs and lower lows over the past couple of weeks. However, it is interesting to see the market picking up from the (tentative) support of a seven week uptrend yesterday, and maintaining the support into today’s early moves. This reaction low at $1.2940 is now key to preventing a retreat to $1.2800 from forming. So today’s session takes on added importance. Momentum has been slipping back but as with the euro, if the support holds, then momentum can settle with little real lasting negative impact. The first move needs to be holding back above $1.3000 for the bulls today and then to push decisively back above the near to medium term pivot at $1.3055. If that can be achieved then the prospect of a lasting recovery can resume. Hourly momentum has picked up, but only in so far as unwinding near term stretched positioning. Today is a big session for the bulls.
The trend is your friend until it ends. On Dollar/Yen, the negative candle from yesterday’s session has pulled the market back from the multi-month high of 114.05 but the three and a half week uptrend comes in at 113.15 today and this seems to simply be an unwinding move within the uptrend. Throughout the run of this trend there has never been more than one negative candle in a row, so the likelihood is that the market will support this slip and buy again today. There is good support at 113.15 from the previous breakout too and any weakness will still be seen as a chance to buy. Momentum is strong but stretched and there is a prospect of a mini unwind, however it would really take a breach of the trend and break of support at 112.50 to suggest that the run is over. The hourly chart shows the momentum picking up again in positive corrective territory from initial support at 113.50. A break back above 114.05 opens 114.70 again.
Gold
Holding on to the support around the five week range lows, the bulls have gone one step better and posted the largest positive candle since 24th August. This move has bolstered the range prospects and improved momentum indicators instantly. The next step will be to put together a run of bull candles and break through the range resistance. There is though considerable resistance of the run of highs between $1211/$1214 through the range, with key near to medium term resistance of the old July/August pivot at $1217. There is an undoubted improvement in the outlook over the past 24 hours but this now needs to be built on in the coming sessions. The psychological $1200 is again a pivot as support and once more will be seen as a gauge of sentiment within what remains a trading range between $1180/$1217.
WTI Oil
Can the oil price continue to run higher? Yesterday’s session has just posed a question or two. After an acceleration higher in the past three sessions which included a breakout to almost four year highs, a mildly negative candlestick has just taken some of the wind out of the sails of the push higher. This comes with the RSI above 70 and now means that a negative session today could begin to usher in some profit-taking. The acceleration has moved away from what was a fairly orderly trend higher in recent weeks, and a retreat may now be seen, with the support of this trend at $73.15 today. If momentum has been lost, then there is room for an unwinding move. Any retracement back towards $71.65/$72.75 would be seen as an opportunity. Further gains above $75.90 opens $80.
Considering the risk averse forces impacting across financial markets yesterday, a positive close on the Dow was an impressive result, but closing at an all-time high above 26,769 was even more so. The key to the near term outlook remains how the market reacts to the gap higher on Monday, and it does not seem to be looking back. This week’s traded low at 26,596 remains supportive with the gap still open at 26,515 and above 26,350 as a key higher low now. Holding on to the renewed improving momentum is important for the continued run higher as the Stochastics and MACD lines are turning higher again and the RSI remains strongly configured. Corrections within the uptrend channel are still seen as an opportunity and even if the market retreated to fill the gap, this would still likely to be seen as a chance to buy. The bulls will certainly now be eyeing further all-time highs, whilst the top of the trend channel (which seems to consistently be targeted by the breakouts and today comes in at 27,030) becomes a subsequent target.
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