Market Overview
There are some mixed moves on markets with trading sentiment starting to consolidate as traders begin to settle down in preparation for the Federal Reserve meeting on Wednesday. The moves on major markets have become more reticent and lacking conviction, with EUR/USD and gold lacking direction. This comes as the market fully anticipates a rate hike of 25 basis points by the FOMC tomorrow, however will the Fed also take account of deteriorating inflation signals too in its forward guidance?
One market that has continued with conviction has been sterling, which remains under pressure following the result of the UK election which delivered a hung parliament. Sterling's underperformance could now be a feature of ongoing market moves. However the beneficiary of an underperforming sterling has tended to be an outperforming FTSE 100. We have seen this taking hold once more since Friday and this has continued in the early part of this week.
Wall Street closed lower yesterday as the pressure of a corrective tech sector is beginning to weigh on sentiment, especially on the Nasdaq. The S&P 500 was -0.1% at 2429, whilst this does not seem to have translated too badly to Asian markets with the Nikkei flat. European markets are mildly higher in early moves, with the FTSE 100 outperforming.
In Forex, there is little real direction, although it is interesting to see the commodity currencies starting on the front foot. This comes as the oil price has started to find support in recent days. Reports that Saudi Arabia are doing well in their compliance with the OPEC production cuts have helped to boost sentiment, with the price again around half a percent higher today. Gold is trading around flat.
Inflation will take the focus for traders today. UK CPI is announced at 09:30 BST with the headline CPI expected to stay at +2.7% (+2.7% last month) whilst the core CPI expected to tick mildly lower to +2.3% (from +2.4% last month). It is also worth watching the UK PPI Input prices reading which is expected to drop back to +13.5% (from +16.5%), as this is a reflection of the unwinding sterling weakness which is starting to unwind. The German ZEW Economic Sentiment is at 10:00 BST which is expected to improve slightly to +21.6 (from +20.6) which would reflect positively on German growth. US PPI (also known as factory gate inflation) is at 13:30 BST and is expected to be flat on the month (+0.5% last month).
Chart of the Day – EUR/JPY
For several weeks now the market has been ranging sideways between 122.55/125.80. However recently the support within the band has been coming under increasing scrutiny and now yesterday’s bearish candle closed below 123.30 support for a five week low. The concern has been that the range as been ongoing for several weeks now and the momentum indicators are increasingly corrective with the RSI falling below 50, MACD lines accelerating lower and Stochastics continuing to deteriorate.
A confirmation of aa bearish breakdown would be an intraday move below 122.55 with a close below. That would complete a top pattern and imply 230 pips of further correction. The hourly chart shows hourly momentum negatively configured and a move on the hourly RSI below 30 would be a signal that the bearish momentum is gathering pace again. Resistance is growing under 124.03.
EUR/USD
The euro bulls looked to be regaining control again yesterday however it seems as though the market is still somewhat cautious. The euro weakness in the wake of the ECB and mild dollar rebound after Comey’s testimony had pulled the pair back from $1.1285 and a small top implies $1.1115.
However the FOMC is just around the corner and there is a degree of reluctance and caution is growing. The technical indicators are near term corrective with the MACD lines and Stochastics falling, however there is still a sense that this is a correction within the bull run still. With the support of the long term pivot at $1.1100 still firmly intact the outlook remains to buy into weakness. Yesterday’s high at $1.1232 is initial resistance with the hourly chart showing the near term importance of the $1.1160 pivot is growing as support.
Sterling remains under pressure in the wake of the UK election. The breakdown below $1.2775 was the key move which completed a top pattern and implies around 275 pips of further downside towards $1.2500. Yesterday’s candle just went to strengthen the resistance of the old support, capping around the day high only to sell off sharply through the session again. Rallies are seen as a chance to sell. The momentum indicators are strongly negatively configured now with the RSI at a 13 week low falling below 40, whilst the MACD lines are in decline and the Stochastics have also given a bear cross recently.
The hourly chart is strongly bearishly configured and if the support of Friday’s low at $1.2632 is breached it would then open the support of the old reaction highs from February/March around $1.2600. The hourly chart shows resistance building near term around $1.2700 whilst today’s early intraday high is $1.2680.
The market continues to trend lower over the past five weeks. Having posted the latest reaction high at 110.80 last week, another negative candle yesterday reflects the sell into strength. Momentum indicators are negatively configured and suggest that rallies remain a chance to sell.
The RSI continues to flounder below 50, with the Stochastics similarly configured whilst the MACD lines are also in negative territory. However, it is interesting to see that having held on to the basis of support around the 50% Fibonacci retracement at 109.35, there is a sense of less selling pressure in the market. This is reflected in the hourly chart which is taking on more of a ranging outlook. This may simply be a case of consolidation in front of the Fed though. Initial support is at 109.60.
Gold
After the sharp correction of last week the market is beginning to settle again. The small body of yesterday’s candle came as the market approached the medium term pivot at $1261 and the support is holding. Momentum has reacted to the string of bear candles last week, however for now the move is a unwinding bull correction. The $1261 pivot will remain key and whilst it is still intact on a closing basis, the bulls still have their control over the medium term outlook.
The hourly chart shows the market has settled down in the past day, however there is still a lack of buying pressure, with $1271 as a basis of increasing resistance that is preventing the renewed upside momentum from taking hold once more. The market is still therefore corrective near term but with the market stalling, this could once more be a key crossroads in the outlook.
WTI Oil
A strong bull candle is hinting at possible early signs of a recovery on WTI, however there is a significant amount for the bulls to do for a sustainable turnaround. The market has been posting a series of lower highs and lower lows after the OPEC decision three weeks ago, however the small top pattern continues to target $44.00 and for now rallies will still be seen as a chance to sell.
The recent breach of the $47.00 pivot means that the bears remain in control, whilst $47.00/$48.00 is a sell zone now. Momentum indicators are negatively configured and the mild tick higher needs to find the RSI above 50 and bull crosses on MACD and Stochastics before any real outlook of improvement is believed. The hourly chart shows an unwinding rally however the overhead supply is prime for the next selling opportunity. The resistance at $48.40 is increasingly key.
The Dow is looking to retreat back into the band of breakout support 21,113/21,225 which will be seen as a basis of near term support that is important for maintaining the bull control. Friday’s bull candle that closed at an all-time high and despite the weakness on Monday, an inside day does not suggest that the selling pressure is too significant. Momentum indicators remain positively configured and with the RSI remaining above 60 and MACD lines rising, the configuration remains strong.
The bulls will remain confident to buy into the weakness. Above the support at 20,943 the outlook will remain positive and corrections will be seen as a chance to buy.
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