Market Overview
There could be huge volatility in major markets over the next 24 hours as three significant events take place. Markets are braced ahead of ECB monetary policy, James Comey’s testimony and the UK election, all of which could drive significant volatility. The ECB monetary policy meeting is expected to signal a shift in policy direction, whilst former FBI Director Comey testifies before the Senate Intelligence Committee, whilst it is polling day in the UK general election. We had a flavour of the ECB decision yesterday as ECB sources suggested a cut in inflation forecasts and potential increase in growth forecasts. However the main move will be the shift in intent on the statement towards risks now being “balanced”.
This would mark the very first stage of a potential normalisation of monetary policy. The Senate Intelligence Committee posted Comey’s opening statement on its website yesterday and it appears that the testimony may not be too incriminating for President Trump, leading to an increase in Treasury yields, with Wall Street higher and the dollar also clawing back some lost ground. It may be that Comey will not be the trigger to impeachment that many liberals had hoped. However the biggest risk event will be the UK election, for which we will see the first reaction at 22:00 BST tonight with the exit polls after voting closes. There will be huge volatility overnight tonight on sterling. The base case is a mild increase in Conservative majority which could cause the least amount of sterling volatility. However a large Conservative majority would see sterling spike higher and a hung parliament (no overall control) which involves the Conservatives losing their majority would be very sterling negative.
Wall Street closed mildly higher yesterday with the S&P 500 +0.2% at 2433 although Asian markets were mixed to slightly lower (Nikkei -0.4%). European markets are though cautiously higher although the FTSE 100 is understandably timid.
In Forex, the dollar seems to be unable to hold on to yesterday’s recovery gains and is again mildly weaker, with the yen the outperformer. Positive Chinese Trade Balance data, where imports and exports both beat expectations, are doing little to inspire the bulls too much ahead of the key risk events today.
In commodities, gold has found support after yesterday’s decline. Oil is just over half a percent higher but is merely showing a dead cat bounce following the 5% fall in the wake of the sharp increase in EIA inventories yesterday.
The first real focus of the day will be the ECB monetary policy decision at 12:45 BST. No change is expected on the rates with the main refinancing rate at 0.0% and the deposit rate held at -0.4%, however the statement of forward guidance will be watched with a “balanced” outlook of risks. Focus will also be on ECB President Mario Draghi’s press conference at 13:30 BST. The US weekly jobless claims are at 13:30 BST and are expected to drop slightly to 241,000 (from last week’s 248,000). The exit poll of the UK general election is at 22:00 BST and has the potential to drive significant volatility for sterling.
Chart of the Day – EUR/GBP
On a day with such significant potential volatility for both sterling (UK election) and the euro (ECB), what is the technical outlook?
The market has been stuck in a medium term range for months now oscillating between £0.8300/£0.8850, however the recent rally towards the top of the range is running out of steam with the high this week at £0.8773. The run higher has been strong but has lost momentum this week and shows signs of rolling over once more, just under the £0.8788 March high. The momentum indicators are beginning to show negative signals with the RSI below 60 and the Stochastics crossing back below 80.
Furthermore, the MACD lines are on the brink of a bear cross, the last two sell signals of which in January and March started significant correction phases again. There is support at last week’s low of £0.8653 will be an initial gauge and a breach would open a corrective move. The subsequent support is with a medium term pivot at £0.8600 and then at £0.8530. There will be volatility around the ECB this afternoon and then the UK election overnight. A strong Conservative majority would drive the correction lower towards £0.8350 and possibly even test the £0.8300/£0.8380 support (if extremely large), whilst a hung Parliament would drive the pair above £0.8788 towards £0.8850. The hourly hat shows lower high resistance at £0.8715 and £0.8755.
The prospect of today’s ECB meeting has clearly been a dominating thought for traders in recent days. Initially unwilling to take a view but then leaks yesterday of potential inflation downward revisions pulled the euro first lower and then bounced on leaks of upward growth revisions. So the euro is flat again, however the initial support at $1.1200 has been bolstered in the process. Technically the momentum remains positive and corrections remain a chance to buy, however there is a mild drift lower on the MACD lines which nags and prevents a strong bullish outlook. The ECB meeting today will drive volatility and the resistance at $1.1285 initially caps the upside, before $1.1300.
There is a risk that the euro bulls have pushed the market too far too soon and a profit taking “buy on rumour sell on fact” move could be seen. However there is still a strong argument to say that any corrections will still be bought into. Support remains at $1.1200 initially and then the long term pivot at $1.1100 to maintain the near to medium term bull run going.
Technically the bulls are strengthening their grip once more as the UK goes to the polls. Another solid bullish candle yesterday suggests that the market is confident in a Conservative majority that will increase, albeit perhaps more in the 30 to 50 seat region rather than over 100 seats that had been previously deemed possible.
The technical momentum indicators are turning positive again with the MACD lines bottoming whilst the RSI and Stochastics are also rising. Next resistance is $1.3012 with support at $1.2845 from Monday’s low. However the key levels to watch today will be $1.3050 as resistance and the long term support at $1.2775. Today (or at least overnight tonight) will not be about technicals but more about news flow. Comey’s testimony could add some fireworks but the big volatility will be tonight at 2200BST when the first exit poll of the UK election is released. That is when the real fun will begin.
Rallies remain a chance to sell on Dollar/Yen. The breakdown below 110.20 on Tuesday was a decisive move that opened the downside once more towards a test of perhaps even the 108.10 key April low. The momentum indicators remain negatively configured with the RSI under 40, MACD lines falling below neutral and Stochastics negative. A solid positive candle was posted yesterday as the market heard that Comey’s testimony was perhaps not as damning as perhaps possible, however the bulls have to fight a lot harder to drive a serious recovery.
The overnight rebound hit 110.00 to the pip before backing away again as the bulls again seem unable to get much of a sustainable footing in the market. There is resistance of overhead supply at 110.20/110.45. Pressure is coming back again on the 50% Fibonacci retracement of 100.07/118.65 at 109.35 and a close below would continue the drop back towards 108.10. The hourly chart shows an unwinding move back towards 60 on the hourly RSI which has tended to often limit the recoveries in recent weeks.
The market formed a solid negative candle yesterday in reaction to a somewhat middle of the road statement from James Comey. This took a degree of the safe haven demand out of the gold price and means that the price has stalled for now at $1296. This is just under the long term pivot band of $1300/$1310 whish is a key area of overhead resistance now.
Today’s reaction could therefore be telling of the near term direction now. A second bearish daily candle could begin to question the bull control. Momentum indicators are strongly configured still and the bulls remain in control. However a move back below yesterday’s low at $1282.50 would begin to see a slight sign of a trend formation, and also see a band of support $1277.50/1283.30 then tested. Ultimately the bulls would remain in near to medium term control above the $1261 pivot, however will the first signs of a corrective move start to form today?
WTI Oil
Oil has been smashed by the larger than expected EIA oil inventories, falling over $2.50 and over 5% on the day. The old pivot support at $47.00 has been blown out of the water and the market is continuing towards the implied downside target of the small top pattern below $48.00 which is $44.00. The next support is at $45.53 which now protects from a full retracement back to the May spike low at $43.75.
The concern the bulls will have is that the momentum indicators are bearishly configured but with plenty of downside potential. The RSI is falling in the mid-30s, the MACD lines are accelerating lower only just below neutral and the Stochastics are negatively configured. Rallies are a chance to sell with the old $47.00 pivot initial resistance and then the neckline/pullback resistance of $48.00/$48.42. The early move today is mildly higher but a dead cat bounce is not to be unexpected, given the huge sell-off from yesterday. Initial support of yesterday’s low at $45.65 is likely to be revisited in due course.
Corrections remain a chance to buy with the recent little dip in the Dow once more being bought into. The market has moved higher again with the opening statement of James Comey being deemed to be not as damning as perhaps it could have been. The near term breakout support band 21,070/21,112 has come back in as a basis of support with yesterday’s low at 21,113. Daily momentum indicators remain strongly configured and there is clearly a demand for the bulls to resume control. This will remain the case near term whilst the reaction low from last week at 20,943 remains intact. The hourly chart shows positive momentum configuration and the recent slip back from the all-time high of 21,225 has given a chance to renew upside potential.
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