Market Overview
Never underestimate the power of the Fed to impact the markets. The doves are clearly winning the argument resulting in yesterday’s dovish announcement, which dragged the Fed back far more in line with market views on the potential for rate hikes in 2016. The FOMC decision significantly move markets last night and they are still reacting to the move today. According to the “dot plots” instead of the four rate hikes in 2016 that had been suggested by the December meeting, the FOMC now expects just the two. Janet Yellen also stressed that the FOMC also remains concerned about the impact of the international financial conditions. This has all had a significant impact on markets, with Treasury yields dropping significantly, the dollar sharply weakening, commodities rising and equities also boosted. The big question is whether it now puts the dollar on a far more corrective path in the medium term. The market reaction in the next few days as the dust settles will be interesting now.
Wall Street closed moderately higher with the S&P 500 up 0.5%, whilst markets in Asia were also broadly positive, with the exception of the Nikkei which was -0.2% on a stronger yen. European markets are also pulling higher. In forex markets there has been a consolidation for the euro and sterling, whilst the yen continues to strengthen. Furthermore, the commodity currencies are also continuing to benefit with the Aussie especially breaking out (also helped by better than expected Australian unemployment data overnight). The general risk appetite generated by a dovish Fed is also helping oil to push strongly higher, continuing the gains of yesterday when a tri of good news flow (OPEC/Russia meeting set in Qatar on 17th April, oil inventories lower than expected, dovish Fed) have driven a breakout to new highs dating back to early December on WTI. The gains on gold are another big story, but can the move last?
The central bank decisions do not stop there though, with the Swiss National Bank set to announce today at 0830GMT (no change expected) and the Bank of England at 1200GMT (again no change expected). There is final Eurozone inflation at 1000GMT (-0.2% exp), whilst for the US data weekly jobless claims are at 1230GMT (267,000 exp) and the Philly Fed manufacturing is also at 1230GMT and is expected to show -1.4. The US JOLTS jobs openings are at 1400GMT and expected to dip slightly to 5.57m from 5.61m
Chart of the Day – AUD/USD
The Aussie has been consolidating following its sharp breakout above $0.7385 a couple of weeks ago. The dovish Fed announcement has now resulted in a bullish engulfing candle that has left further support at $0.7415 and could now put pressure back on the highs. The momentum indicators are at such a bullish configuration with the RSI holding above 60, MACD lines positive and Stochastics also holding a bullish outlook, this could now drive a move above the resistance at $0.7595. This is key resistance that has been hit as an old key floor around $0.7600 from the first six months of 2015. A breakout above $0.760 would then open upside towards $0.7850. The support around $0.7385 has now been significantly strengthened.
Financial markets have reacted strongly to the dovish announcement from the Fed last night and the euro has given a significantly bullish reaction to the news. Another huge bullish engulfing candle (the second in a week following the bullish engulfing last Thursday in the wake of the ECB monetary policy) has resulted in another break to the upside. The pivot band $1.1050.$1.1100 has been the platform once more and there has now been a breakout above $1.1217 resistance with over 140 pips added since the Fed announcement. Technical indicators have turned positive again. Perhaps now these two huge fundamental events are out of the way the chart can begin to settle down. So once more the day following a huge candle can often be telling. The European traders are reacting positively and this is validating the move seen yesterday. Near term hourly momentum studies may look a touch stretched so this could curb the initial positive move. Once again it will be the treatment of the support around $1.1050/$1.1100 which will be key for the medium term outlook. Next resistance overhead is the February high at $1.1375 and possibly $1.1465.
Cable had been under increasing pressure in the days running up to the Fed, however the dovish FOMC announcement has added support which previously had not been forthcoming. Has this now changed the outlook for the chart though? The daily chart now shows a strong bullish candle which has ensured that the breakdown of the support at $1.4115 was not confirmed, but perhaps we should look towards the reaction of the market today to see if this move is validated. The daily momentum indicators are still looking corrective since the Stochastics sell signal and MACD lines have struggled to recover above neutral, however the hourly indicators are more positive. The hourly chart is also interesting as aside from the initial reaction to the Fed, and if the market has can hold on to the move above resistance at $1.4250 the outlook will begin to turn more positive again. The Asian session has shown no appetite to continue the buying and it will be interesting to see if the Europeans can build up a head of steam. $1.4220 is supportive and a break back below initial support at $1.4200 would re-open the $1.4115 low again.
The dollar weakness in the wake of the Fed has pulled the pair below an array of near term supports and now means that there is beginning to be some traction in the downside move. There have not been three consecutive bearish candles since the original sell off back towards 110.98, but for now the early selling pressure in the Asian session means this is a real prospect. The momentum indicators are reacting to the negative with the Stochastics accelerating downwards. Now that the support at 112.15 has been breached there would be added concern for a downside break should there be a close below 112.00 as this has not been seen throughout the recent range. It would certainly be a sign that the bears were mounting pressure for a test of the big low at 110.98. The hourly chart shows more direction is now showing through on the momentum indicators and that rallies could now be seen as a chance to sell. The resistance comes in at 112.60 and 112.95 prior to the old pivot at 113.15. The near term outlook could be very important to see whether this is still a range to play or whether there will be a downside break.
Gold
A strong bullish candle that added over $30 on the day has drastically improved the outlook for gold. It has given the gold bugs a significant lift to what looked to be an increasingly corrective move. The reaction today will be very interesting as although the near term outlook has improved (Stochastics have turned higher), there is still a series of bearish medium term divergences on the momentum which are the concern. I spoke recently about the pivot around $1260.60 which had been forming the break back above it is a positive near term move which could now re-open the recent highs as the bull move is validated. The next resistances would be $1269.40 and $1282.50. Once the dust settles we will get more of an idea of how sustainable this move is for the gold bugs.
WTI Oil
Support for WTI came in to hold the support around $36.10 yesterday to provide a platform for the bull move and maintains the positive outlook. This support has now taken added importance for the medium term perspective. It looks as though the bulls are now on the brink of an upside breakout above $39.00 for a continuation pattern breakout would subsequently imply an upside projection of $2.90 higher meaning around $41.90 could be seen in the coming week. Technically the outlook remains positive with the Stochastics maintaining a position of strength, MACD lines still positive. Maybe the RSI could be a touch more positive but for now the bulls still hold all the strong cards. Whilst the support around $36 remains intact the medium term outlook is for a continued rally towards the $43.50 implied target from the double bottom base pattern and also around the late November high.
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