Market Overview
The positive medium term outlook for the dollar has been tested in recent sessions, but the reaction of the market yesterday would suggest that the bulls are not ready to give way quite yet.
The ECB monetary policy meeting was almost as much of a non-event as you could get, on interest rates Mario Draghi said, 'at this stage we do not see the need to modify the forward guidance'. However as the ECB press conference wore on, there was an interesting move, perhaps as the market saw Draghi saying that 'significant monetary stimulus is still needed' and with German yields pulling lower, the euro suffered.
The knock-on impact has been for the dollar to strengthen again. US yield higher and the dollar stronger as the realisation that the Fed still seems to be fairly out on its own on a decisive tightening cycle. The attention now turns to US growth today as the final driver of the week. With a big number expected, the debate is whether this is an anomaly with the threat of trade tariffs creeping into corporate outlook statements. A magic 4% would certainly result in a triumphalist tweet or two from President Trump. It could also see the dollar pick up further too.
Wall Street saw a mixed performance yesterday, mostly on the huge sell-off on Facebook (NASDAQ:FB), meaning the Dow (without Facebook) climbed +0.4% whilst the S&P 500 (with Facebook (NASDAQ:FB)) fell -0.3% and the Nasdaq (tech heavy, Facebook heavy) lost -1.0%. However, more reaction to results will be seen today after the stellar numbers from Amazon (NASDAQ:AMZN). Futures are mildly higher. This has all driven a mixed to slightly positive Asian session (Nikkei +0.5%) and reasonable gains in European markets around the open.
In forex majors, there seems more of a settled feel to markets today, with little real direction other than a mild outperformance on the yen as the 10-Year JGB moves up to the 0.1% limit. Sterling is also a shade weaker as the EU’s Brexit negotiator delivers a withering response to the UK’s trade proposal. In commodities, gold has found a touch of support whilst oil is consolidating..
The big focus for traders today comes with the announcement of US Q2 GDP Advance with the first reading of growth expected to show a big jump in the traditionally strong second quarter. Consensus forecasts suggest the print will come I at +4.1% (up from the final reading of +2.0% for Q1). Expectations seems to have wildly varied in recent weeks but it is interesting to see the Atlanta Fed’s GDPNow model recent cut to an estimate of +3.8% (from +4.5% just over a week ago), so it will be interesting to see whether there is a mild disappointment today. There is also the final reading of Michigan Sentiment for July at 15:00 BST which is not expected to show any change from the prelim of 97.1 (97.1 in the July prelim, down from 98.2 in the June final).
Chart of the Day – EUR/CAD
The Canadian dollar has been showing signs of improvement across the majors, and with the euro slipping too, this is also reflected in the move lower on EUR/CAD which completed a five week top with a closing breach of 1.5285 yesterday. The move implies continued decline is now likely back to test the mid-June reaction low at 1.5120 now. The market is now trading below all the moving averages which are now rolling over again following the June rebound. Momentum indicators confirm yesterday’s downside break with the RSI at an 8 week low, the MACD lines are set to cross back below neutral and the Stochastics accelerating lower. The hourly chart shows how a negative configuration has taken hold in the past week with intraday rallies being sold into. There is a band of resistance now 1.5285/1.5325 to use as a sell zone of near term overhead supply.
The euro came out of a very dull ECB monetary policy meeting a bit on the rough side. Losing 85 pips on the day, a solid negative candle has dragged the market lower again within the one month converging trend lines. Although, as yet there is still little real direction to speak of, another negative candle today may begin to suggest there is some intent growing. Momentum indicators still show little direction but if the RSI started moving consistently below 45 (i.e. out of the 45/55 range of consolidation of the past four weeks) then there could be something to go on. A move back to a one week low below $1.1650 has effectively re-opened the $1.1570 July low whilst the lower of the converging trendlines is supportive around $1.1595 today. The hourly chart shows a previous band of support $1.1650/$1.1660 and if this now becomes a basis of resistance then it will be an early indication of an increasingly corrective sentiment growing. There is minor support at $1.1625, whilst resistance is now growing between $1.1715/$1.1750.
The downtrend channel of the past couple of months continues to be a reflection of selling into strength on Cable and yesterday’s move may just have been the latest signal. The market has been creeping higher in recent sessions, but a bearish engulfing candlestick pattern (key one day reversal) seems to have stopped the rebound in its tracks. There has been a pivot around $1.3200 in recent weeks and it is interesting to see the rally failing at $1.3215 before selling off yesterday. Momentum indicators remain negatively configured with the RSI and Stochastics seemingly failing around neutral again. However the hourly chart shows the market is still not decisively negative again, with the support of the higher low intact at $1.3070, but if this level is breached then the outlook would turn significantly more negative again for a retest of below $1.3000 psychological and then the key low at $1.2955. Watch for a potential failure around $1.3130/$1.3170 to form another intraday lower high being a bear trigger.
The dollar bulls have been pulled back from the brink after yesterday’s intraday rebound actually formed a bull hammer candlestick which signals intent to support the recent corrective move. The four month uptrend has been (and still is being) seriously flirted with, but for now arguably remains intact (at least on a closing basis). The RSI is hanging on above 45, which is important too. Support is in at 110.60 now but once more the market is back into the resistance band of the old breakouts 111.15/111.40 and it would need a close above 111.40 to suggest the bulls are serious about a renewed move higher. The hourly chart shows a marginal improvement in the outlook but more needs to be done. The overnight support at 110.90 will be an initial gauge this morning.
Gold is another chart that has been flirting with a potential recovery but was hit yesterday by the renewed outperformance of the dollar. Again finding resistance under the old key support at $1236, an intraday break of the downtrend channel could not be sustained and renewed weakness formed a bearish outside day candle. The reaction today could now be key, as a second consecutive bear candle would suggest the market taking direction after a period of consolidation. Initial support is at $1218 and a closing breakdown would confirm renewed selling pressure for a retest of $1211 and (the still likely) retest of $1204.50, the July 2017 low. All the while, the importance of the resistance at $1236 continues to expand. Momentum indicators remain negatively configured on a medium term basis, but have been little impacted so far by yesterday’s move. An early reaction higher is encouraging for support but the US GDP data later this afternoon will likely have a big impact on the near term outlook.
WTI Oil
Despite a day of consolidation, the market retains the positive bias of improvement that has built through a number of positive candles this week. However, the old pivot around $69.50 still seems to be hampering the bulls, at least in the near term. After yesterday’s “spinning top” positive consolidation candle, the bulls will look for renewed momentum to arrive today that can take the market clear of $69.50 and pressure overhead resistance. Momentum indicators have settled and this has meant that the corrective selling pressure of earlier in July seems to have dissipated for now. However a close above $71.10 is needed to put the bulls into a renewed swing higher. The hourly chart shows a series of higher lows at $68.20 above $67.60 which protects the key medium term pivot at $67.00 which is supportive.
Another bullish candle and another push to multi-month highs as the buying pressure continues to throw the market higher. Yesterday’s opening gap may still be open at 25,433 and is likely to still be filled, but there is a decent band of breakout support now with the 61.8% Fib level at 25,367 and 25,400. The strength in the run up of momentum indicators suggests there is still upside potential in the current move, with the RSI still just in the high 60s (the market spent the best part of nine weeks above 70 around the turn of the year). On the hourly chart there is also a strong configuration on momentum indicators with the hourly RSI bottoming consistently now between 40/50 and near term weakness continually seen as a chance to buy. The next upside target is 25,800 with the February high, whilst the 76.4% Fib around there at 25,845 makes this the next likely consolidation zone (having burst straight through 61.8% Fib with little regard). The uptrend of the past few weeks comes in at 25,240 today.
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