Market Overview
Traders are beginning to look towards tomorrow’s FOMC decision, as the market outlook for improved risk is tempered by the ongoing trade dispute between the US and China. It seems that the trade dispute is still a key driver of markets, but how the Fed presents its forward guidance at tomorrow’s announcement could determine whether a pause in the dollar strength of recent months, turns into a corrective move or renewed strength.
There are though a number of idiosyncratic factors impacting on major forex pairs, with the euro looking to generate momentum for a breakout as an unexpectedly hawkish sounding Mario Draghi briefly provided a boost yesterday.
German Bund yields pulling higher on Draghi’s comments are euro supportive and help to counter the corrective forces (on rate differentials) of higher Treasury yields over the past couple of weeks.
There is also the factor of how traders view Brexit for sterling in light of last week’s disappointment at the EU summit. With sterling options volatility at multi-month highs, the outlook remains uncertain and once more cable looks under pressure today.
Furthermore, any recovery in commodity currencies remains restrained by the shackles of the trade dispute, but the Kiwi traders will also be looking towards how dovish the Reserve Bank of New Zealand comes across this week. For this morning though, there is a mixed look to equity markets, whilst very little direction of note on forex majors other than a very slightly strong euro again. Will rate differentials start to play into the dollar’s favour once more? We will probably have to wait for the FOMC decision to find out.
Wall Street closed lower last night as a recent run of gains has unwound a touch, with the S&P 500 -0.4% at 2919 whilst the futures are a tick higher. Asian markets have been mixed with the Nikkei +0.3% but Shanghai B was -0.8% lower. European markets are also mixed in early moves. In forex, although the euro was pulled back into the close last night, it is interesting to see it performing well again today as the German 10 year Bund yield pushes to three month highs. For commodities, gold continues to trade around $1200, whilst the push higher on oil also continues with Brent Crude at its highest since November 2014.
It is a quiet European morning on the economic calendar, but into the US session we have the S&P/Case Shiller Home Price Index at 14:00 BST which is expected to slip marginally to 6.2% (from 6.3%). The Richmond Fed Composite index is at 15:00 BST and is expected to drop back to a still very strong +22 (from a 5 month high of +24 in August). The main event will be the Conference Board’s US Consumer Confidence at 15:00 BST which is expected to drop back a shade to 132.0 (from the record high of 133.4 in August).
Chart of the Day – Silver
Is the outlook for silver starting to turn a corner? Possibly, it is interesting to see several technical improvements in recent sessions but it is still a work in progress. I have talked recently about the Gold/Silver ratio reaching record levels recently (suggesting a mean reversion that will mean silver will likely outperform gold in coming months), but this is also now coming with silver beginning to look more positive as a standalone idea too. The price has spent the past three weeks in consolidation and has picked up from $13.90 recently to break what has been a three month downtrend. In the last two sessions the market has been consistently testing above $14.30 pivot resistance, only to just fail into the close. A test of the falling 21 day moving average which has consistently capped recoveries in the past three months is also on going. However it is the momentum indicators which are looking to lead the market higher, with the Stochastics and MACD lines accelerating higher from recent bull crosses, whilst the RSI would be at three month highs above 43. The hourly chart shows a recovery uptrend beginning to form with a recent higher low at $14.00 and yesterday’s low at $14.14. A close above $14.43 would begin to really find traction and open a recovery towards the next key resistance at $14.85. The one caveat is that a recovery on silver needs to have confirmation before conviction can be seen, as this could just be a similar situation to the consolidations of July/August. However, the outlook is beginning to certainly improve.
With Mario Draghi speaking about underlying inflation picking up in his comments at the European Parliament yesterday, it looked as though it was the boost that the euro needed for a decisive bullish move. However the impetus of the move drifted away as the session ebbed and a somewhat disappointing doji candlestick was left. However, the support of the uptrend of the past two weeks remains in play (today around $1.1710) whilst the positive configuration continues to suggest that intraday weakness remains a chance to buy. The market has simply unwound to the breakout support of the old July/August highs around $1.1735/$1.1750 and could now be seen as a chance to buy again. The hourly chart also shows on a near term basis that $1.1720 is a breakout support too. Hourly momentum has unwound to renew upside potential and with trends and longer moving averages supportive a retest of yesterday’s high at $1.1815 should not be ruled out. The real resistance remains $1.1850 and a closing breakout would be a decisive bull breakout.
The market continues to trade with elevated volatility, with each of the past three sessions (since the EU Summit in Salzburg began on Thursday) each having daily ranges greater than the Average True Range of 111 pips. Taking a step back though, the bulls reacted positively yesterday to Friday’s sharp bear candle and across those three sessions the market is only around 30 pips below where it closed on Wednesday. The support of the breakout above $1.3045 remains intact, whilst the rising 21 day moving average (at $1.3030) which had been a basis of resistance throughout the summer months, remains supportive. Momentum indicators need to be watched and the Stochastics are leading the slip back. If RSI and Stochastics both fall below 50 this would be a warning signal. The hourly chart shows an outlook yet to settle but support at $1.3055 is initially to be watched, whilst resistance is at $1.3165 initially. For now corrections remain a chance to buy, but trading with a $1.29 handle once more would shift that outlook.
The yen remains the underperformer of the majors (for now) as risk appetite remains solid (aside from a wobble early yesterday). This means that Dollar/Yen is still pulling higher within the two week uptrend and posting further positive candles. Trading decisively clear of 112.15 now means that the bulls are looking squarely at 113.15 (the July six month high) as the next test. The momentum indicators are firmly now in positive configuration but also suggest further upside potential. The RSI is rising into the high 60s (the July bull run went well into the low 70s) whilst the MACD lines and Stochastics are also positively configured. A move above 113.15 opens 113.75 which is resistance from early January. Intraday corrections are a chance to buy, with the uptrend coming in at 112.50, whilst the trend channel on the hourly chart shows 112.25 is a near term higher low now.
Gold
Gold continues to consolidate as the trading range between $1183 and $1217 plays out. Within that range there seems to be an attraction to the mid-point which is also the psychological $1200 level. Momentum indicators are increasingly neutral and yesterday’s small $10 daily range candle which gave almost no indication of any direction sums up the current outlook. You could tighten up support to $1191.50 and resistance at $1211 but until there is a decisive closing break of $1183 or $1217 it is difficult to trust any move. Definitely a market in need of a catalyst (and one could be just around the corner, with the FOMC decision tomorrow).
WTI Oil
The oil price continues to progress higher and has now made a key break of a resistance that has been a ceiling for the price for the past two months. Since the market corrected back from $75.25 in early July, the bulls have been restrained by resistance in the band $70.45/$71.65, however a five week uptrend has now pulled the market higher to close decisively above $71.65 and re-open that $75.25 peak which is a three and a half year high. Momentum indicators are certainly backing the move with the RSI rising into the mid-60s and having upside potential. The MACD and Stochastics lines also point towards using corrections now as a chance to buy into weakness. There is now a basis of a buy zone between $70.00/$71.65 to look for a renewed bull signal on any intraday slip.
After such a strong run higher over the past week, it will be interesting to see how the bulls react to a negative candlestick coming with a momentum sell signal. Will this now begin to usher in a correction within the uptrend channel of the past three months? Leaving an all-time intraday high of 26,769 a negative candle has taken the sheen off the rally. The RSI crossing back below 70 is the most basic momentum sell signal but this is not backed up by negative signals on MACD or Stochastics yet, so it would be far too early to go on this lone signal. However, a second bear candle today would begin to ask questions of the longevity of the rally and a correction within the channel could be seen. The concern would be that the run higher was almost unencumbered and therefore could see little support and result in a quick retracement back into the first band of support at 26,030/26,168. It would be a chance to buy on a medium term basis though.
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