Market Overview
Markets have just begun to develop a wait and see approach. It appears that the positive rhetoric on the trade negotiations do not appear to be enough to drive market sentiment anymore. There needs to be something more concrete to give markets an idea of detail on the final outcome. The US trade deficit great to a ten year high yesterday and puts into stark focus the need for the US to get a deal that involves China buying more US goods.
With Chinese import growth falling dramatically in recent months, in the absence of a trade deal, the prospects of an improvement in the deficit look bleak. The dollar rally of the past week or so has begun to lose momentum too, although not against the currencies whose central banks have given cautious and dovish leaning updates on monetary policy this week (i.e. the Reserve Bank of Australia and the Bank of Canada).
Focus therefore turns to the European Central Bank today. Will the ECB also pivot back towards an easier monetary policy? The euro has consolidated around $1.1300 for much of the past 48 hours, but a significant downward revision to inflation and growth forecasts would hit the euro. The market reaction will also come of whether the ECB looks to extend its liquidity operations to the region’s banks with further TLTRO funding. It is probably too early to start looking at tweaking the forward guidance of the deposit rate though. It could be another pivotal day for the euro.
Wall Street closed lower again yesterday with the S&P 500 -0.7% at 2771 whilst US futures are lower again today (c. -0.2% currently). Asian markets were also cautiously lower overnight, with the Nikkei -0.6% but the Shanghai Composite continues its near term outperformance with gains of +0.2%.
Forex trading is very muted amongst the major pairs this morning, with almost no direction on the dollar, euro, sterling or the yen; whilst there is a very mild rebound on Aussie and Kiwi after recent weakness.
In commodities, the consolidation of the past couple of sessions on gold continues, whilst the same is true of a very muted oil price.
The Eurozone is in focus today with final Eurozone GDP first up at 10:00 GMT with the expectation that the +0.2% Q4 growth will be confirmed, with +1.2% year on year growth. The main event of the day is the ECB monetary policy announcement at 12:45 GMT which is expected to sow no change on the deposit rate at -0.40% and the main refinancing rate at zero. Mario Draghi’s press conference at 13:30 GMT will be interesting too whether there is a change in forward guidance on policy (no expected yet) or the discussion over extending the TLTRO liquidity mechanisms.
The US comes with the Weekly Jobless Claims at 13:30 GMT with 225,000 expected (225,000 last week). The run of Fed speakers continues today with Lael Brainard (voter, leans dovish) speaking at 17:15 GMT.
Chart of the Day – EUR/NZD
The commodity currencies have all been coming under increasing pressure in recent sessions. The strong breakouts on EUR/CAD and EUR/AUD have already been seen, but will EUR/NZD join the party? The technicals are certainly edging that way but are yet to have the decisive breakout. The major cross has been in downtrend channel throughout 2019 but this channel seems to be breaking higher. Last week’s high at 1.6725 is a barrier, but confirmation of an upside break would be the move above 1.6765. This would mean a higher low (at 1.6460) and a higher high. Momentum indicators are hinting at improvement but the RSI needs to move into the mid to high 50s, whilst the MACD lines above neutral would also be needed to improve the outlook. Leaving behind this week’s low at 1.6600 and a push above 1.6765 would open 1.6850 which has been a pivot over recent months and is another key barrier in the recovery. The hourly chart shows an improvement in momentum in the past couple of sessions as the bulls are building up for what looks to be a test of resistance and intraday weakness is becoming a chance to buy.
The near term corrective pressure has been contained around the old $1.1300 support area as a key ECB meeting approaches today. Technically, the corrections within the trading range of the past 6 months have looked to build support around $1.1215/$1.1300 so this move seems to be in keeping with this. There has been a drift lower on momentum indicators in the past week, but in a fairly benign fashion, with the RSI holding around 40. Yesterday’s low at $1.1285 is initial support but in truth the ECB is likely to give the chart the near term direction this afternoon. The hourly chart shows initial resistance of a pivot around $1.1310/$1.1320 and then at $1.1350 which is the gauge for a renewed recovery within the range. A decisive close below $1.1300 would though ramp up the pressure to the downside on key support at $1.1215.
It is interesting to see that the dollar bulls have had a go in the past couple of sessions, in trying to drag Cable lower, but traction is increasingly hard to come by now. Two very small daily candlestick bodies with long lower shadows suggest that the selling pressure is dissipating. A higher low yesterday also adds to this outlook. The sense of support is growing and the reaction low at $1.3095 is now taking increased importance. The hourly chart reflects this move towards an improvement, with a downtrend broken, the hourly RSI pushing above 60 and hourly MACD lines above neutral. If this continues and the market can push above $1.3200 then the bulls will have successfully battled against the stronger dollar to hold on to the gains. Positioning for a retest of $1.3300/$1.3350 could then begin to form. There is further support of the pivot at $1.3050, whilst below $1.3000 begins to increase the momentum for a correction within the range again.
The small bodies of the candles in recent sessions points towards a market uncertain of the next move. This is turning into another consolidation. There is little to suggest this is anything more than a pause for breath in the run higher, however the bulls will be interested to hang on to the breakout above the medium term pivot at 111.35. There is continued strength in the outlook on momentum indicators, with the RSI ticking slightly back into the mid-60s, Stochastics still strong and MACD lines positively configured. The hourly chart shows a drift consolidation which is more a wait and see formation than anything really decisive. There is resistance that has formed just under the overhead supply around 112.25 from November/December but given the strength of the technicals this is still likely to provide another chance to buy. 111.00/111.35 is a near term buy zone, whilst 110.40 is a higher low.
Gold
The price has begun to consolidate in the past couple of sessions as the selling pressure has just begun to dissipate. Importantly, this remains above the key higher reaction low at $1276. However, there is a growing uncertainty as to whether this is just a pause in the selling, or if it will be the beginning of a recovery. Support may be intact, but two very small bodied candlesticks reflect an indecisive market. There is still a corrective configuration on momentum indicators, with the RSI in the mid-30s and Stochastics below 20. However, for the RSI the key lows of October and November came between 35/40 and this will encourage the bulls that if the support at $1276 can hold, then the long term recovery can get back on track. With this in mind, trading under the clutch of old supports between $1298/$1302, which are now new resistances, is a band of overhead supply to restrict a recovery. This means that support at $1276 is key whilst resistance at $1302 is also important. The hourly chart shows a ranging move under initial resistance of a pivot around $1290 and above initial support at $1280.70.
WTI Oil
A surprise jump in EIA oil inventories helped to drag the price back towards the key near term support band $55.00/$55.55, however the support continues to hold and this consolidation of the past couple of weeks (between $55.00 and the medium term pivot at $58.00) continues. The consolidation is now breaking the support of the 10 week uptrend which weakens the bullish outlook. However, whilst the support of the 38.2% Fibonacci retracement around $55.55 and last week’s low of $55.00 remains intact on a closing basis, then the momentum of the recovery will still be fairly positive. That said, the momentum indicators are effectively just drifting as part of the consolidation. This is also a drift within a still positive configuration, with the RSI above 50, MACD lines above neutral. Initial resistance is at Tuesday’s high of $57.20 which now protects $58.00, a level that is increasingly important.
The drift lower of the past week is beginning to give the bulls something to think about. Having peaked at 26,241 the Dow has now dropped back over 2% in that time and the positive technical outlook is being strained. Another negative candle yesterday has now closed below the 76.4% Fibonacci retracement (which is at 25,715) and is at a two week low. This is coming with momentum indicators which are beginning to find negative traction (RSI id into the mid-50s and at a 6 week low) whilst Stochastics are also pulling decisively lower. The support of Monday’s low at 25,611 will be watched now as a breach (confirmed on a closing basis) would compete a near term top pattern on the hourly chart, to imply around 630 ticks of further downside. The support at 25,310/25,440 will then be the next level to watch. There is a mini reaction high now at 25,877 as initial resistance under 26,155/26,241.
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