Market Overview
As the US dollar continues its corrective move the question is how far will the dollar weakness go? The move is impacting across markets with forex and commodities especially in focus. The dollar has been under pressure since the disappointment of the lack of decisiveness from the FOCM last week. A series of economic data ranging from the tepid (core PCE yesterday) to the downright disappointing (GDP) have driven the dollar correction further.
However I do not believe that this is a trend that will continue for the coming weeks. I see this move as only a short term condition and perhaps the catalyst for another change of tack will be the Non-farm Payrolls report on Friday?
In the meantime, though the oil price continues to fall and having already moved back into bear market territory, this is now beginning to drag on markets. Wall Street has finally started to correct with the S&P 500 down 0.6%. Asian markets were all weak overnight with the Nikkei down a further 1.9% as the yen continues to strengthen. European markets are showing very muted gains at the open today. In forex, there is a degree of clawback for the dollar early morning today, as the greenback is making up ground against all the major currencies (albeit minor). There are no serious outperformers or underperformers today. Commodities are trading around the flat line with gold, silver and oil all showing little real movement.
The services PMIs are in focus today for traders. The Eurozone services PMI is at 0900BST and is expected to be 52.7. The UK services PMI is at 0930BST and is expected to confirm the flash reading of 47.4. US ISM Non-manufacturing is at 1500BST and is expected to dip slightly to 56.0 (from a lofty 56.5 last month). Aside from the services data there is also the ADP Employment at 1315BST which is expected to remain around last month’s levels with 170,000 (172,000 last month). EIA crude oil inventories are expected to move back into drawdown with 1.3m barrels (having showed an increase of +1.7m barrels last week).
Chart of the Day – EUR/JPY
With the yen strengthening again, the momentum in the selling pressure on EUR/JPY has returned. Yesterday’s bearish outside day candle once more takes the pair to a three week low and now seemingly on course for a test of the key July lows just below 111. The momentum indicators are increasingly concerning now with the RSI confirming the three week low, with the Stochastics accelerating lower and the MACD lines again crossing negatively. Furthermore all the momentum indicators have further downside potential. The hourly chart shows the formation of key overhead resistance now that starts around 114.00 and up towards 114.70. This will now be seen as a near term selling zone for any unwinding rallies. There would now need to be a rally through 115.30 resistance to change the bearish outlook for the near to medium term. On the way towards the lows at 110.80 there is a minor support at an old breakout point at 112.60.
The bulls have continued the recovery which is asking serious questions of the strategy of selling into strength that has been in place for the last few months. The momentum indicators have improved in the past week since the rally began and have broken their medium term corrective configuration. However there is still more that needs to be done, to be considered as bullish, needing the RSI consistently above 60 and the MACD lines rising above neutral. The move has taken the euro above $1.1215 which was a pivot from April, May and June and the concern is that turning bullish will only be proceeded by the next wave of selling. I am still of the opinion that near term strength will prove to be a chance to sell but that also this move has gone further than I had expected. Hourly indicators are all still positively configured. There is a support band now in place at $1.1150/$1.1200 which is the latest base for the recovery to work from. In terms of overhead resistance, the overhead barrier of the underside of the old uptrend is at $1.1310 whilst the Pre-Brexit high is $1.1432.
A strong bull candle yesterday has driven Cable above resistance around $1.3300 to a two week high. However, how far can this sterling rally go with the prospect of a Bank of England rate cut looming large? On a near term basis the bounce is an encouraging move but needs to be backed up with a confirmation candle today and as the European traders have started to sell again, this does not look likely at this stage. The last couple of weeks have been characterised by consistent bull and bear candles, so if today’s candle can post a bullish day then the bulls will feel more confidence in holding on to the gains. The daily momentum indicators have picked up but are still in an unwinding configuration with the RSI under 50, the MACD lines mildly rising towards neutral but interestingly the Stochastics show little sign of real improvement. The breach of $1.3300 improved the outlook but this level has been lost again this morning. The hourly chart is now more positively configured but if the price settles back into the congestion between $1.3200/$1.3300 the impetus will have been lost. The pivot around $1.3160 is also strengthening as support.
The outlook for Dollar/Yen remains under significant pressure with another decisive bearish candle yesterday. The move broke a series of near term supports to now completely open the retest of the key July low at 100.02. The concern would be that the momentum indicators are not only fully bearishly configured but also are showing that there is further downside potential with the RSI only at 35, the MACD lines having just crossed lower around neutral and the Stochastics still falling. The hourly chart shows that the overnight consolidation is struggling with the old support around 101.45 which has turned into new near term resistance with a band between 101.45/101.95 which will be seen as a sell zone today for the test of 100, whilst if the bearish momentum really takes hold then the 99.08 low of the Brexit day could be tested. It would need a move above 102.85 to change the near term outlook now.
With another strong bullish candle, gold is moving ever closer again to its $1374.90 high that was posted a month ago. The momentum indicators are bullish with the RSI in the 60s, the MACD lines bottoming and the Stochastics rising. There is little reason not to expect a serious test of $1374.90 and further gains in due course. The next key high beyond there is around $1392 (the 2014 high) and then $1433 (the August 2013 high). The strategy remains buying into weakness and there have tended to be some intraday dips to take advantage of, with the support band $1346/$1355. Key support is at $1330 now.
WTI Oil
After a period of selling pressure that has seen oil move into bear market territory, WTI looked to be building a minor recovery yesterday. However the bulls could not even sustain an intraday recovery before the pressure built up again and the move merely unwound the momentum for another selling opportunity. The momentum indicators remain negatively configured on the daily chart and having traded clear of the 38.2% Fibonacci retracement at $41.88 this level will be seen as strengthened resistance. The hourly chart shows extremely negatively configured outlook that has simply been unwound to a level at which the bears will start to sell again. The overhead supply between $40.57/$41.90 will be the near term sell-zone now and unwinding the hourly momentum is already helping to renew the downside potential. There is little reason to believe any rallies will be sustainable so expect the bears to retain control for further downside potential to test the next support at $37.60 which is the mid-April low. The 50% Fib retracement is at $38.85.
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