Market Overview
An incredible day yesterday has completely turned around the near term outlook once more. A whole raft of factors came together to strengthen the euro and weaken the dollar. The prospect of a deal for Greece is now on the table after an agreement between the individual creditors (EU, ECB and IMF) meant that a draft proposal will be put in front of the Greeks. Quite how they will react to this proposal remains to be seen, however it is the most credible plan there has so far been drawn up. News of this today will again be a key driver to market sentiment.
Additionally, with Eurozone flash CPI ahead of expectations the yield on the German 10 year Bund shot higher by around 16 basis points and continues to run higher today. The correlation between Bund yields and the euro is also helping the euro higher. Watch out for the Eurozone services PMIs today as the economic data in the Eurozone has been improving and with the ECB monetary policy, all eyes will be on Mario Draghi to give progress of the ECB’s QE programme, especially with regard to the ECB supposedly front-loading QE purchases.
This big turnaround on the dollar has done little though to inspire life into the equity markets, with Wall Street slightly lower (S&P 500 off 0.1%), whilst Asian markets were mixed overnight with the Nikkei 225 down 0.3%. European markets are slightly higher in early trading. In forex trading, the US dollar remains under corrective pressure, trading weaker against all major currencies today. The euro continues to run higher, whilst the Aussie dollar is the standout performer so far in the wake of better than expected GDP which printed at 0.9% for Q1 better than the 0.7% expected. Despite the ongoing dollar weakness, the precious metals prices have still yet to gain any real upside traction.
In this heavy week of data, once again today contains several crucial releases. The Eurozone Services PMIs are through the early morning with 53.3 expected for the regional data. The UK announces its own Services PMI at 0930BST which is expected to dip slightly to 59.2 (from 59.5). Then into the afternoon, the ECB announces monetary its rates at 1245BST and whilst there is no expectation of any changes to rates, the press conference at 1330BST will be when Draghi will be questioned over how QE is progressing.
The US ADP Employment Report could give an insight into Fridays crucial Payrolls data, at 1315BST with an expectation of an improvement to 200,000 from 169,000 last month. Then at 1500BST the ISM Non-Manufacturing PMI gives us a look at how the service sector in the US is ding, with a slight dip to 57.0 expected (down from 57.8). So all that on top of further updates on Greece, so it promises to be another volatile day.
Chart of the Day – NZD/USD
The recovery bulls will be looking at the chart of the Kiwi and note that the price action of the last few days has formed a pretty well defined “Morning Star” candlestick pattern (strong negative, neutral, strong positive across 3 sessions). This would suggest that there is a near term recovery on the way, especially to be confirmed by a positive candle following up today. There has been an uptick on the daily Stochastics momentum indicator, although there would ideally be more confirmation across RSI, although the MACD histogram is at least moving in a positive direction. It is perhaps not a coincidence that yesterday’s closing level was at $0.7176 which is within 2 pips of the old key low and also the open of last Friday.
That would suggest this is a key near term level. I would also be looking at yesterday’s high which was bang on $0.7200. If these levels can be breached by the bulls (in addition to breaking a near 3 week downtrend) then there is potential for a recovery move back towards initial resistance around $0.7270. Near term support has built around $0.7130/$0.7150 and ideally needs to remain intact.
EUR/USD
A combination of a stronger euro (potential Greece deal and uptick in inflation) and a weaker dollar (weaker factory orders, dovish Fed commentary) culminated in an utterly incredible run higher on EUR/USD yesterday that has gone a long way towards smashing the dollar bulls out of the water once again.
There was very little to suggest the move was coming, but bursting through such key resistance around $1.1065 shows the state of short covering in the market on EUR/USD. The next big test is still ongoing today, with the pressure on the resistance at $1.1210. This was the key reaction high from 22nd May and was a key turnaround day which supposedly put the bears back in control. To lose this resistance today would theoretically re-open the key medium term highs again around $1.1465.
The daily technicals momentum signals have clearly taken this move with glee and all are now turning more positive again, with the Stochastics specifically on a run higher now. A close above $1.1210 today would suggest the near term bounce is gathering momentum today, but ultimately this is a newsflow/data driven move and is likely to be choppy. However, what an incredible turnaround.
GBP/USD
The big turnaround on Cable yesterday look good near term and I am not wanting to play down the extent of the rally, but I see this as playing out the process of a technical rally as part of this medium term corrective phase on sterling. I see a sequence of lower lows and lower highs (previous at $1.5700) forming, which I would view this rally as being another chance to sell in the coming days. The immediate reaction is higher, with the strong positive candle from yesterday and the continuation of this move today. The momentum indicators have turned higher with the move, with a near term bull cross on the Stochastics.
The intraday hourly chart looks to be trying to breakout again today and pulling clear of yesterday’s high at $1.5366 implies an upside move of around 100 pips higher. I will be very interested to see how Cable copes around the $1.5450 resistance which is key near term, which marks the beginning of a band of old overhead supply resistance up towards $1.5550. This is the area I would be looking for the next lower high on sterling. Near term support is now in the range $1.5300/$1.5325.
USD/JPY
The rolling over of Dollar/Yen has not yet been confirmed, but the corrective daily candle yesterday has been followed by more downside impetus overnight in the Asian session today. As I write this, the RSI is giving its most basic sell signal (a move back below 70), whilst the MACD and Stochastics are also rolling over. The corrective signals are lining up near term. I have been saying for a number of days, watch for the support at 123.47 on the intraday hourly chart which marks the low of a top pattern formation, which now would actually target a retracement back towards the 122 breakout (taken as a 150 pip top pattern measurement).
I now see this as increasingly likely in the coming days, with hourly momentum indicators are looking increasingly corrective near term. I see the big breakout at 122 figure now acting as support, with 122.75 an interim level. Resistance now comes with the peak just above 125 figure.
Gold
Considering the remarkable selling pressure on the dollar yesterday, the move on gold was fairly underwhelming. Either this means that gold is rather muted in its response to the dollar, or what I see as more likely, it is waiting for Friday’s Non-farm Payrolls. Technically yesterday’s positive daily candle was supportive of the range, but it still just part of a trading phase in the bottom half of the $1178/$1224 range.
The slight pick-up in the momentum indicators reflects the price action of the past couple of days rather than is a driver of it. The $1200 old pivot level can still be seen as a marker, whilst yesterday’s resistance has built around $1196 near term. Gold is still searching for that catalyst.
WTI Oil
With a rally of over 7% in the past 4 sessions, the outlook for WTI has turned around once again. The volatility of the trading sentiment in recent weeks has been incredible and the bulls are once more looking to regain control. The trend of lower highs and lower lows which had formed a three week downtrend has been broken and a close above $60.90 now suggests that the sequence of intraday higher lows over the past few days can continue.
Hourly momentum indicators confirm the improvement and with near term momentum positive the bulls will be looking at the overhead resistance levels at $61.85 and then the $62.58 key multi-month high. I find it difficult to get too excited to the upside at these levels, as too often over the past few weeks there have been false moves which have been entirely retraced again. This comes with the territory of a volatile range play which is what WTI has become.
There is a pivot band now between $59.50/$60.00 which needs to hold to suggest the bulls are gaining traction.
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