Market Overview
Financial markets are still trying to settle after the sharp weakness seen in the dollar at the back end of last week. Despite it being the PMIs day yesterday there was little real direction to be garnered from market moves as markets broadly consolidated the strong selling pressure on the dollar that was seen firstly in the wake of the disappointment of the FOMC and then the weak US growth data. Questions are now being asked of whether the Fed will be able to hike at all this year. As this week moves on there will be a series of data points with the ISM Non-Manufacturing and Non-farm Payrolls which will paint more of a picture of the potential for a rate hike, however for today markets are looking rather muted. Even a rate cut from the Reserve Bank of Australia has not managed to stoke the fires of the dollar bulls (in mitigation, the 25 basis points RBA rate cut to 1.50% was widely expected). Equity markets still have something of a millstone round the neck of the rally as the oil price continues to be dragged ever lower and yesterday hit $40 again (on WTI) for the first time in over three months.
On Wall Street, the consolidation continues with mild losses on the S&P 500 (down 0.1%) whilst Asian markets were also broadly slightly lower (Nikkei 225 -1.5%). European markets are also following suit and are mildly lower at the open. In forex, the dollar weakness of the past few days is again showing signs of continuing, with the dollar the biggest underperformer of the major currencies. That includes the Aussie which was down around half a percent in the wake of the RBA, but has since pared those losses and is actually trading positively against the US dollar. Commodities are trading slightly higher with the dollar weakness with gold, silver and also oil up to around half a percent higher.
Traders will be looking out for the UK Construction PMI at 0930BST (expected to drop to an alarming 43.8 from 46.0) being the first indication of the sector post Brexit. The Fed’s preferred inflation reading, the Personal Consumption Expenditure is at 1330BST with traders interested to see if there is any traction in a move towards the 2.0% inflation on the core data which was 1.6% last month.
Chart of the Day – USD/CAD
Since the big 3 month Loonie rally finished at the end of April with a low of 1.2468, the dollar has steadily been strengthening. With the occasional correction against the recovery uptrend, this has resulted in the formation of a series of higher lows but with a solid uptrend, which is currently rising with support at 1.2950. The recent correction seems to have found support at 1.2998 once more around the pivot of the 23.6% Fibonacci retracement of the 1.4689/1.2458 sell-off which has previously acted as a turning point. The recent correction also found the bulls returning once more with the RSI at 50, with the momentum indicators now suggesting that corrections are seen as a chance to buy. With the buyers returning with a solid positive candle that should now help to reinvigorate the bulls. The July highs of 1.3240/1.3250 are now likely to come back under pressure and a move back towards the 38.2% Fibonacci retracement at 1.3310, with resistance at 1.3295. The hourly chart shows a band of support today 1.3025/1.3075 which will be seen as a near term “buy zone” now for intraday corrections.
The sharp rise on Euro/Dollar which hit a high of $1.1197 in the wake of the Fed decision not to hike and weaker than expected US growth numbers, is beginning to consolidate with a mildly negative spinning top candlestick posted yesterday. The debate is whether this is a consolidation that comes ahead of another move higher, or whether the dollar will begin to strengthen again to drag the pair lower. Technically the improvement has resulted in the RSI breaking a three month trend lower to improve the outlook, though MACD lines are for now still negative they are rising back towards neutral. However not enough has yet been achieved to suggest that this move is sustainable. There is an old pivot around $1.1215 which is providing overhead supply but if the RSI can sustain a move into the 60s then the bullish momentum will be building. This is becoming an important time for the pair, with $1.1150 near term supportive on the hourly chart.
There is still very much of a neutral near term outlook for Cable with very little real direction over the past week. It is likely that this move could continue perhaps until the Bank of England monetary policy decision on Thursday. However the momentum in the recovery from the $1.2796 low has drained away and the indicators are struggling at best now. The RSI and MACD lines are barely registering in the recovery whilst the Stochastics (the most sensitive of the three momentum indicators) have now started to fall away again. There has now been alternate bull and bear candles for the past 8 completed sessions, the latest of which was yesterday’s negative retracement move. The hourly chart shows the key resistance increasing around $1.3300 with the old pivot around $1.3160 taking on an increasingly important near term support. Hourly momentum is showing little but a range play with the moving averages flattening. The key support remains around $1.3060.
Friday’s strongly bearish candle in the wake of the BoJ disappointment has changed the outlook to negative again after the two week recovery period. However the bears are now back in the driving seat with the momentum indicators negatively configured, with the Stochastics accelerating lower, the MACD lines crossing negative and the RSI below 40. Rallies are now to be seen as a chance to sell as the hourly chart shows a top pattern in place below the neckline support of 104.00. The measured implied downside target is around 350 pips which means the key low at 100 could be back in range if the Dollar/Yen sellers really get their teeth into a bear run. Yesterday’s candle was very mildly positive but does little to impact the overall outlook and according to the hourly chart the initial resistance at 102.85 could become a barrier today, however the neckline at 104.00 is the more considerable area of overhead supply. Friday’s low at 101.94 is the initial support but expect this to come under further pressure before a retreat towards 100 again.
Gold
The bulls look to be back in the driving seat with the strength of the positive candles over the past week managing to pull gold clear of the previous consolidation and through the near term resistance at $1346.70 to re-open the resistance around $1375. The momentum indicators are certainly now improving and increasingly positive with the Stochastics accelerating higher, the MACD lines ready to cross positively again and the RSI pushing back towards 60. Intraday corrections are now being seen as a chance to buy with a pivot area developing around $1346. The last couple of days has seen $1355 forming as new near term resistance but one this is clear there is little really to prevent an assault on the $1375 high again. Friday’s low at $1329.60 is increasingly important now near term.
WTI Oil
The sell-off on oil continues and shows little sign of stopping. If anything, it is beginning to accelerate, with yesterday’s decline of nearly 4% pulling the price to $40, the lowest since mid-April. The Fibonacci retracements of the $26.05/$51.67 bull run are becoming interesting again. The breach of 38.2% Fib at $41.88 has become the basis of resistance and the next Fib level of 50% at $38.86 is the next target and the mid-April low of $37.60 is within site. The concern that any bulls would have now is that the momentum is now increasingly bearish and the RSI is the lowest since the oil price hit a low back in January. This is a trending move so there is little reason to believe that the RSI cannot continue to move below 30. The hourly chart shows an intraday resistance now between $40.60/$41.90 to use for a chance to sell.
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