Market Overview
The markets are looking rather cautious again with all eyes turning to today’s crucial ECB monetary policy decision. The rates decision is at 1245GMT and is expected to show a 10 basis points cut to the deposit rate to -0.40%, whilst Mario Draghi’s press conference at 1330GMT could also contain further unconventional easing measures through adjustments to the quantitative easing program. The market is a little bit more cautious on what Draghi will do this time around as the December meeting showed not to overestimate what the ECB can deliver. Still though, Draghi has been talking up the action and could once more leave himself open to criticism if he fails to deliver again. Wall Street closed marginally higher last night with the S&P 500 up 0.5%, whilst Asian markets were mixed overnight (although the Nikkei was helped by a weaker yen to close up 1.2%). European markets are trading around the flat-line in early trading.
In forex markets there is an air of slight dollar strength which is sweeping across the majors, with the US dollar outperforming across the board. The kiwi was a big mover late last night in the wake of an unexpected rate cut by the Reserve Bank of New Zealand. In cutting rates by 25 basis points, the RBNZ noted the deteriorating outlook for global growth since December and also noted subdued inflation. There will now surely need to be a pricing in for further monetary easing from the RBNZ. In commodity markets, the gold price continues its slide of the past couple of days and is down another half a percent, as is the oil price.
Overnight there was another factor that traders need to consider with Chinese CPI inflation unexpectedly jumping to 2.3% (1.9% had been expected). Although this may sound like positive news, it is to be taken with a pinch of salt as February is a distorting month with the Lunar New Year and the data is expected to be settle in the coming months. Furthermore, the PPI inflation was in line with estimates at -4.9% which although is on an improving path, is still something which should encourage the People’s Bank of China to engage further stimulus.
Aside from the ECB, the US weekly jobless claims are announced at 1330GMT and are expected to stay around the 275,000 mark.
Chart of the Day – USD/CAD
As the Bank of Canada struck a fairly upbeat tone in holding fire on monetary policy yesterday and the Canadian dollar has reacted with according strength. A large bearish engulfing candle continues the downside move on USD/CAD, with the projection target of 1.3170 from the descending triangle completed on a move below 1.3635 still on course. Technical signals remain bearishly configured with rallies being seen as a chance to sell and with the RSI at 32 there is still further downside potential in this current run lower. The next support coming in at 1.3220 is a minor old consolidation level from November with the next key reaction low not until the November low at 1.3035. Interestingly the old breakout level from the September/November 2015 highs of 1.3455 also coming back in as a basis of resistance in the past week meaning that there is a band of resistance now 1.3455/1.3500. The intraday hourly chart also shows a near term pivot at 1.3370. Continue to use rallies as a chance to sell USD/CAD.
Ahead of today’s crucial ECB meeting the outlook for the euro is neutral. Trading in the middle of the long term trading band, the euro has settled between the medium term pivots at $1.0800 on the downside and $1.1050 as resistance. The candles have become all rather neutral with small bodies in the past few days. Momentum indicators are also neutral with the RSI and Stochastics both settling around 50 and the MACD lines flat at neutral. The hourly chart shows a similarly neutral picture, and although there is a minor support band around $1.0950 in effect today’s ECB meeting is likely to be a high volatility event that is likely to bring either one or both of the medium term pivots at $1.0800 and $1.1050 into play. A big bazooka of easing would put $1.0800 under pressure with a break opening $1.0710, whilst a disappointing damp squib of an announcement opens $1.1050 and $1.1100 as the key overhead resistance. We wait to see what Mario Draghi has in the locker.
Although the rally on cable may have run out of a bit of steam for now, the selling pressure is being averted, for now. The downtrend that has been in place since December is still the key medium term technical factor though and this is putting downside pressure today at $1.4280, which also coincides with Monday’s reaction high resistance. Momentum indicators are also rolling over with the RSi tailing off around the 50 mark with other rallies in previous months failing between 50/55. Yesterday’s doji candle reflects a near term uncertainty in the current move and this could easily be due to traders being unwilling to take a view ahead of the big volatility event of the week, the ECB meeting, which is likely to drive large amounts of dollar flows. The hourly chart shows a rather neutral configuration over the past few days, with the initial high low at $1.4132 still intact as support. I still favour using the recent rally as a chance to sell and a decisive breach of this support would open $1.4045 but for now we await the catalyst.
Once more we have seen the outlook flip around as this rather messy period of trading continues. In the past few weeks, each time there has been a sign of decisive direction forming, there has been a retracing move that has negated the sentiment. Yesterday we saw a positive rebound that coupled with additional gains today has snuffed out the burgeoning bearish intent. The support at 112.15 has remained intact and so the outlook within this ranging period is again neutral. Looking at the hourly chart it is interesting that the market is still regarding 113.15 as a pivot, which overnight has been used as a minor supportive level to provide a very slight positive bias within the medium term range. The resistance at 114.25 is to be watched today as this is a lower high below 114.55 and under the key medium term resistance at 114.87. This is another chart that is increasingly waiting for the next catalyst.
After a second consecutive negative candle there is now the prospect that the bulls are losing control of the gold rally. The uptrend that has been in place since mid-January is now being broken and the downside pressure is beginning to mount. I have been concentrating on the momentum indicators for a while now and they have been bearishly diverging, with especial concern for the RSI (which would confirm a bear signal on a move below 60) and the Stochastics (which have given a bearish crossover signal). The MACD lines have also crossed lower. I am also looking at the 21 day moving average (at $1235) which has flanked the rally throughout the whole of 2016. The intraday hourly chart has taken on a bearish configuration with the old $1260.60 high providing the basis of resistance, momentum indicators more negatively orientated and rallies now being seen as a chance to sell. A decisive breach of yesterday’s low at $1243.50 would open the downside towards $1224.40. A decisive move above $1260.60 re-opens the highs again at $1277.80 and $1279.60.
WTI Oil
The oil price jumped strongly yesterday returning a big bullish candle that helped to unwind the previously corrective candle that was seen on Tuesday. The bulls had already been supportive but the EIA oil inventories gave the price a boost into the afternoon. The move re-affirms the uptrend that has been in place for the past 4 weeks and put WTI back higher again to retest the resistance of the January high around $38.40 (although yesterday’s high was $38.50 the subsequent reaction lower suggests this is still a resistance in place). A closing breakout would be a bullish signal for the next leg higher in the recovery to continue. The subsequent overhead resistance comes in quickly, beginning at $39.00, before the psychological $40 level, then $42.00 and $43.50 which coincides with the base pattern target. I continue to see the oil price as a recovery play but also expect the gains to be fairly steady. Momentum indicators remain positively configured for the continuation of the rally. The hourly chart shows that corrections continue to be bought into at higher levels, with $36.10 now the initial support to watch out for, with the rising 89 hour moving average a basis of support at $36.96. The uptrend support comes in at $36.50 today.
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