Market Overview
Coming into this week, the question is whether the dollar recovery that was seen in the wake of the stronger than expected Non-Farm Payrolls headline jobs growth is sustainable. Friday’s reaction needs to be followed up by a further push back into the dollar today.
Will there be some profit taking on the euro which has been so strong? Looking across the major instruments today there is a sense that the dollar may struggle for traction. The reaction on Treasury yields suggests that this move has not been a game changer and I remain unconvinced that jobs growth is what the Fed is looking for, as the average hourly earnings merely stabilised at 2.5%. This keeps the policy decision of the next few meetings in the balance (i.e. the potential for balance sheet reduction in September ad another hike in December). This may mean a relatively rangy dollar in the days before the key CPI data on Friday.
Wall Street closed higher yet again as the Goldilocks payrolls report was positive enough to bolster sentiment for the US economy but not enough to price in a tighter monetary policy. The Dow closed an eighth consecutive day higher and now decisively above 22,000 whilst the S&P 500 was also higher by +0.2% at 2477. The Asian markets were strong too with the Nikkei +0.5% and over 20,000. Markets in Europe are trading slightly higher in early moves.
In forex we see the dollar just struggling to sustain the momentum as the euro and sterling bounce back, although the yen is underperforming slightly.
In commodities, gold is flat and the oil price is mildly lower as the range of the past few days continues.
It is a very quiet start to the week for economic data releases. Only really the Fed’s Labour Market Conditions index at 15:00 BST which last month was +1.5. Aside from this, FOMC member Neel Kashkari (voting dove) speaks at 16:25 BST.
Chart of the Day – DAX Xetra
Can the DAX start to build a sustainable rally now? Much still will depend upon the direction of EUR/USD (with the negative correlation continuing to play out), but the DAX is now testing the key near term pivot at 12,316. This was the big June/July lows which has subsequently become resistance in late July/early August. A closing breakout to the upside would improve the sentiment and open a potential recovery which would eye the next resistance at 12,575. The momentum indicators have been bearishly configured for so long and a bull cross on the MACD lines in addition to a positive uptick on the Stochastics would be a positive step now. The bulls would still have much to do to turn a near term rally into a sustainable move, needing really to breach the 12,676 resistance of the July high, but this would be a strong first step. On the hourly chart needs to now push above 70 on RSI and hold a correction towards 40 to help develop momentum required for the rally.
EUR/USD
How will the bulls react to the firs really corrective one day candle? Friday’s strong bearish candlestick in the wake of a stronger than expected Non-farm Payrolls report strengthened the dollar and questions the bull control. The support of a three week uptrend has been broken, however as yet there has been no breach of a previous key breakout. The market will subsequently be looking at $1.1711 which was the August 2015 high and has already been used as a basis of support during the uptrend. The reaction following a strong candle is always an important gauge for sentiment. So far, the euro bulls have been looking to fight back a touch, but the support at $1.1711 will be key now. The momentum indicators have lost some of the impetus and are threatening corrective signals but not yet confirming. Today’s session will be key to this. The hourly chart reflects a potential change in outlook, especially if the hourly RSI continues to fail under 60. Resistance is initially at $1.1850 and then at $1.1910.
Two strong bearish candlesticks in a row have posed some serious questions for the bulls coming into this week. The move has broken the support of a six week uptrend, also taking the market back below the $1.3050 breakout support. The move has also impacted on the momentum with the Stochastics now tracking lower and the MACD lines with a bear cross. Another close below $1.3050 today would confirm the deterioration in the outlook and suggest the market was on its way back to test $1.2930 as the late July low. The hourly chart shows that the bulls have some way to improve again, with lower highs and lower lows forming. There is also negatively configured hourly momentum with the RSI failing around 50/60 now and the MACD lines under neutral. There is a band of resistance $1.3110/$1.3160 that needs to be breached to get the bulls back on track.
The relative yen strength that had been dragging the market lower over the past few weeks now seems to be ending. The four week downtrend was breached on Friday (although not on a closing basis) and the early moves today have again looked to breach the trend. Nothing is confirmed yet but the market looks to be at least now taking on a more neutral stance. The momentum indicators are bottoming, and possibly in the process of turning around. However the market now needs to push for a close above 111.00 which was a ceiling last week and would now constitute a small bull breakout. This would then imply around 120 pips of recovery and then test the next key near term resistance at 112.20. The hourly chart shows a more ranging phase of trading, with a pivot around 110.20. Friday’s low of 109.82 is now key near term.
With a strong bear candle in the wake of Non-farm Payrolls, gold appears to now to be breaking the trend higher of the past four weeks. There is a deterioration in the bull momentum coming through now, with the Stochastics reacting lower (close to a confirmed sell signal) and the MACD lines losing impetus. The reaction to the strong negative candle could be key for the ongoing legacy of Non-farm Payrolls this week. Another bear candle will confirm the bulls have lost the control and mean the $1274 resistance becomes key, whilst also moving the market decisively back into the $1240/$1260 trading band that comes in the middle of the medium term trading range. The market reflects the rolling over, with resistance now forming under $1260 today. A continuation of the hourly RSI failing under 60 and the MACD lines failing around neutral will increase the corrective pressure.
WTI Oil
Oil continued the trend of alternating bull and bear candles, with another positive candle posted on Friday. The market has formed something of a messy consolidation in the past week but there is still the spectre of the bearish engulfing candle that forged the high at $50.43. A second lower high at $49.95 needs to be breached to prevent what still threatens to be a corrective slip. The support at $48.37 and subsequently $48.50 will be then key. The hourly chart reflects an increasingly range bound play with the momentum indicators oscillating within the extremes. The near term pivot at $49.25 is a gauge for near term sentiment but the next decisive move will be above $50.43 or below $48.37.
The gains into new all-time high ground continue to be posted on the Dow, even though the upside is becoming increasingly stretched. The strength of the trend is undeniable with the RSI at 77 on the daily chart. However, this is not historically exceptional as between November/December 2016 and again in February 2017, the RSI spent several weeks over 70. The real test will be the market reaction to a negative session, and whether that opens the gates of profit-taking. For now though the market remains strong but perhaps it is worth leeping an eye on the slight negative divergence on the MACD lines which could begin to weigh. Initial support is 21,940 but in the event of a correction setting in there is little real support until 21,681.
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