Market Overview
After Brexit has dominated the trading outlook for the past couple of weeks, markets are looking rather cautious as attention now turns back to the US with Non-farm Payrolls today. Ahead of the report there has been a more cautious mind-set taking over after the strong recovery gains across European equities yesterday. After last month’s extremely disappointing headline of 38,000 for Non-farm Payrolls, a number which shocked the Fed (according to the FOMC minutes) markets are rightly cautious and this could drive relatively quiet trading up until the announcement at 1330BST. The dollar is under a little corrective pressure moving into the European session but traders are unlikely to want to take a view after last month’s surprise. The ADP employment change saw a mildly higher than expected read for the private payrolls and some may think this sets us up for a strong payrolls, however the ADP failed to call last month’s Non-farms and it is possible that it is a case of once bitten, twice shy. The caution is also due to the late sell-off on oil yesterday after a slight miss on the expectation of a drawdown on the EIA crude oil inventories which saw oil sold sharply into the close.
The S&P 500 closed mildly lower (-0.1%) on the back of the falling oil price, whilst Asian markets have also closed lower (Nikkei down 1.1%). European markets are a little more reticent though this morning, only slightly lower in early moves. In forex trading, the dollar is underperforming almost all of the majors, with slight gains on the euro, sterling and yen. Gold and silver are flat to slightly lower, whilst the oil price is slightly higher as it unwinds some of yesterday’s losses.
Traders will be focused squarely on the Employment Situation report at 1330BST. The headline Non-farm Payrolls number is expected to show 175,000 up from last month’s 38,000 although the May number is expected to be revised higher. Unemployment is expected to edge slightly higher to 4.8%, perhaps helped by the Participation Rate increasing from last month’s 62.6. The average hourly earnings will also be another key data to watch, expected to be +0.2% on the month which would improve the year on year read to +2.7% (from +2.5%) as traction in earnings continues to be seen.
Chart of the Day – EUR/JPY
With the recent selling pressure on the euro and the safe haven preference for the yen, the outlook for EUR/JPY is not positive. The technicals show that once more in the past few days, the selling pressure has resumed again. This has shifted the momentum indicators negative again and there is also downside potential in the moves. The RSI is only just below 30, having hit the low-20s during sell-off in January and February. The Stochastics are also falling away whilst also having further downside potential. The intraday rebound that was seen on Wednesday which on a risk recovery saw a rebound of 160 pips into the close, has simply turned lower again and was seen as a chance to sell. The hourly chart in fact shows that there is a pivot level at 112.60 which has capped the upside. The hourly RSI topped out around 60 again as it has repeatedly in the past week, whilst the hourly MACD lines are also struggling again at neutral. This all points to a retest of 110.78 and subsequently the post-Brexit low at 109.45.
With the euro back under pressure again yesterday the corrective outlook is gathering pace. The euro has now consistently found resistance around $1.1100 and is close to a closing breach below $1.1050 which would confirm the deterioration. The momentum indicators are correctively configured without being overly bearish, however an intraday breach of $1.1022 would suggest that the bears are really beginning to gain the upper hand. It is Non-farm Payrolls today and the market would be a touch subdued this morning, but in the wake of the announcement there will be an expectation of elevated volatility. The key resistance remains $1.1188 and I see rallies as a chance to sell for a likely eventual retest of the Brexit inspired low of $1.0909. The hourly chart shows that the band of near term resistance $1.1095/$1.1120 held well yesterday and will again be the initial barrier today.
It looked briefly yesterday as though a break back above $1.3000 would inspire the bulls into a recovery, however the market never really broke the shackles and the selling pressure quickly resumed. The late 140 pip sell off from the high has left the chart with another bearish candle and one which reflects the fact that the bulls are in no position yet to sustain a recovery and that rallies very much remain a chance to sell. Momentum indicators are still bearishly configured and with further downside potential and the inference is that we have not yet seen the low. The hourly chart shows an intraday pick up overnight from an initial support at $1.2876, however the band of resistance is now growing overhead and is between $1.3000/$1.3047. The payrolls report today could be interesting and will add a degree of extra volatility. The market initially looks settled ahead of the report but even if there is a rally on a weak number, expect this to be quickly sold into to test the low at $1.2796.
The downside pressure continues to chip away at the price as the bearish momentum drags Dollar/Yen ever lower towards 100.00 again. The negative configuration of the RSI, MACD lines and Stochastics is consistent but also shows further downside potential with the RSI only just going below 30 (with the trend lower in January going below 20). The hourly chart shows a sequence of lower highs now in place in the past few days whilst the resistance is overhead around an old support which has formed a barrier band between 101.37/101.46. Hourly momentum is bearishly configured too and any rallies are seen as a chance to sell. The initial support is at 100.18 but the psychological 100.00 level is likely to be tested. I continue to expect a retest of the post-Brexit low at 99.08. There is further resistance at 102.15/102.40.
Gold
In my daily analysis video yesterday I began to discuss the prospect of a slowing of the uptrend and this seems to have continued into today. After six consecutive positive candles, a corrective candle has formed. This is not the most bearish candle ever seen but it does begin to ask questions of the sustainability of the bulls and whether there could be some profit-taking coming in. The move has now started to pull on the momentum indicators, with the RSI back below 70 in the early move today and a bear cross on the Stochastics. It is still far too early to talk about significant corrections but a strong payrolls report today would certainly be negative for gold. Also this could simply be caution ahead of Payrolls, after a strong run. There is now resistance at Wednesday’s high of $1374.90 which is protecting the March 2014 high of $1391. The hourly shows that the minor pullback of the past day has broken the six day uptrend and is now back into the support band $1338/$1358. It is likely to be a case of waiting for the Payrolls report for the next direction now. Key medium term support remains around $1306.
WTI Oil
I discussed yesterday the prospect of a breakdown of the key medium term support at $45.83 and after initial gains, the bears really hit WTI hard in the wake of only a slight miss on the estimates of the EIA crude oil inventories. The turnaround has left resistance at $48.25 in the middle of the pivot band $48.00/$48.50 and a sharp sell-off has closed below the key support at $45.83. This has now completed a top pattern and implies minimum downside target of $41.00. The sequence of lower highs continues which forms a downtrend that links the lower highs that today come in at $49.45, however the bear candles are mounting and the retracement bull candles are of far lower magnitude as rallies seem to now be seen as a chance to sell as bearish momentum turns bearish. The Stochastics are falling towards negative configuration, whilst if the RSI falls below 40 this would add to confirmation. The hourly chart shows the breakdown support is now resistance around $45.83 and there is a band of resistance up towards $47.00 initially.