Market Overview
Inflation is on the way back. At least that is the assessment of the Federal Reserve monetary policy announcement yesterday. The FOMC statement said that “inflation on a 12 month basis is expected to move up this year” to hit the Fed’s 2% target in the “medium term”.
Fed funds futures have moved on the announcement, with three hikes (suggested in March, June and now December) increasingly being priced in. The key as the year goes on is how hawkish the Fed goes on message over inflation and whether the market has to accelerate its expectations to include a fourth hike.
The dollar has found a degree of support, especially against the yen, and is showing initial signs of traction again within its recent consolidations against the euro and gold. A decisively stronger dollar would pull all these lower. Treasury yields continue to pick up with the 10 year yield back above 2.70% on its way towards 2.80%/3.00% and this should also be a source of support near term for the dollar. At least for now, the dollar selling pressure appears to have abated, with the trade weighted Dollar Index ticking higher. If Average Hourly Earnings begin to pick up too in tomorrow’s payrolls report then traction for a dollar rebound could begin to take hold more seriously.
After a run of two strong days of selling, Wall Street stemmed the tide and closed positively last night with the S&P 500 +0.5% at 2833. Asian markets also reacted well with the Nikkei +1.7%, whilst European markets are also positive at the open. The trend in recent days has been for early European gains to be sold into, so it will be interesting to see if this continues.
In forex, there is a degree of dollar recovery across the major pairs in the wake of the FOMC, with the yen and Aussie the main underperformers.
In commodities, the dollar rebound is driving gold $5 weaker whilst oil is holding up well despite the inventory build and US production moving above 10.0m barrels per day in the EIA report.
The first trading day of the month is a day for Manufacturing PMIs. The Eurozone Manufacturing PMI is at 09:00 GMT and is expected to be confirmed at an extremely strong 59.6 from the flash reading. The UK Manufacturing PMI at 09:30 GMT is not as strong but is still expected to tick higher to 56.5 (from 56.3 last month).
The ISM Manufacturing is at 15:00 GMT and is expected to slip slightly but remain very strong still at 58.8 (down from 59.3 last month).
Chart of the Day – DAX Xetra
The DAX is creaking under the recent corrective pressure. A bullish outlook across trading in recent months is on the brink of breaking down. The support at 13,137 on the cash index supported during mid-January as the market pushed into new high ground. However a run of lower highs, failed intraday rallies and negative momentum indicators now brings that key reaction low into sharp focus. A closing breach of the support would suggest that the DAX is in fact no longer a bullish market, more of a broad range over the past four months. The range low coming in at 12,745 would then come back into range again. With momentum indicators deteriorating, the pressure is mounting. The RSI is below 50 and at a four week low, whilst the Stochastics are accelerating lower and the MACD lines are also in reverse. Yesterday’s candle was another bearish move into the close, whilst also containing another attempt to close the gap at 13,275. It seems like the early rebound again today could try something similar, but if recent trading is anything to go by then the bulls could struggle as the day continues.The hourly chart shows negative configuration and intraday rallies being sold into. Resistance comes in today at 13,268 before another lower high at 13,310 and the resistance at 13,370. What could also be of concern is that there is something of a vacuum of support should 13,137 support fail. The old pivot around 13,000 would be the next target area.
The consolidation of the past week continues, with the Fed seemingly unable to drive any real direction for the dollar against the euro yet. Since peaking at $1.2535 last week, the market has been stuck in a 200 pip sideways band of trading, beset with a series of small bodied and neutral candlesticks. The move has breached a mini two week uptrend, however there is an absence of any significant corrective signals that would suggest the market is ready to unwind the January gains to any sizeable extent. The momentum indicators on the daily chart remain positively configured on a medium term basis but are now drifting as the market looks for direction. This is reflected on the hourly chart with little real direction and the hourly moving averages converged and flat. A breakout above $1.2535 or below $1.2335 on a closing basis, preferably with a strong candle would help to drive direction. The last time the market saw a period of trading such as this, it was an upside break. Non-farm Payrolls tomorrow could be key.
Can the bulls sustain upside traction now, or will the choppy moves of the past week continue? A second positive candle will be encouraging the bulls, however there are signs overnight that perhaps the move is abating once more as the market has just stalled a touch. The momentum indicators have been very strong up until the past week, but have since lost their impetus. The RSI is failing to lift off back above 70, whilst the Stochastics are also flattening and the MACD lines tailing off. Perhaps also the market is settling down too, with yesterday’s traded range of less than 80 pips just over half the Average True Range (at 145) which has been dragged back as a result. The resistance at yesterday’s high of $1.4232 will now be watched today, whilst on the hourly chart the momentum is tailing off. A move below $1.4120 would suggest the rebound is moving into reverse again, bringing $1.4000 back into play.
Has the dollar recovery finally started to take off? With the low at 108.27 holding firm in recent days, a corner appears to have been turned with a decisive bull candle yesterday followed by continued gains today. The next step will be for the momentum indicators to also decisively move higher. Watch for the RSI to find traction above 40, the MACD lines crossing higher and the Stochastics also moving forward. The hourly chart shows the pair trading above their hourly moving averages, and above the initial resistance at 109.20. The breakout would come above 109.75 which if confirmed would complete a base pattern and open a 150 pip upside recovery target. The hourly chart also shows a near term band of support 109.00/109.20 that the bulls are working from this morning. Above 109.75 the next resistance is at 110.20.
Gold
The mixed signals over whether this is a burgeoning correction, or a consolidation that the bulls will quickly buy into continue. Gold is subsequently consolidating around the old support at $1344 which is now a basis of resistance. A run of lower daily highs continues (the latest at $1347.50) but also yesterday’s positive candle shows how the market is still in the balance. The near term signals on the technical are corrective, but there is an indecisive drift to the move lower too. The support coming in at yesterday’s low at $1332 will be key near term as if the market fails around this old $1344 level to come back and breach $1332 then the pressure would mount to the downside for $1324. However the hourly chart shows the buyers are hanging on. Despite this though, if the hourly chart continues to fail under 60 then the pressure will also mount. There is a mild corrective bias still in force for now, but a move above $1350 would certainly begin to put the bull back in control. Non-farm Payrolls tomorrow could be the key to unlocking this period of consolidation.
WTI Oil
Although the EIA inventories saw surprises across the board, how the market reacts to such a big surprise inventory build in crude stocks could be key to the near term outlook. This ends a run of ten weeks of crude drawdown and suggests that US producers have woken up from their winter hibernation. However, the reaction of the market has been fairly positive, with a bullish candle and gains on the day. Despite this though the near term technical outlook is still negatively biased and the bulls need to continue this move to improve the outlook. There is a pivot around $64.90 which needs to be broken to improve the outlook now as the hourly chart shows intraday rallies are now being sold into the a series of lower highs and negative configuration across momentum indicators. There is a band of resistance now between $64.65/$65.20 which will be key near term. Initial support comes in at $63.65 however if the corrective technicals continue then a test of $62.85 will remain likely.
Is that it? Is the sell-off done already? That is what the bulls will be asking themselves as Wall Street bounced strongly yesterday to leave a low at 26,028. However, with a negative one day candle across the session, more needs to be done to avert the near term negative factors of the downside gap which is still open at 26,435. The bear cross on the MACD lines is also still live, whilst the RSI is still under 70. If these factors are redeemed then the bulls will be confident, however there needs to be more of a recovery before the bulls can be confident again. Furthermore, the underside of the old uptrend is resistance around 26,500. Looking on the hourly chart the move still has work to be done too as the configuration of the indicators is still negative following the sharp deterioration earlier this week. Yesterday’s high at 26,338 is now resistance initially.
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