Market Overview
Central banks have been in focus overnight with the Fed, the BoJ and RBNZ all announcing monetary policy, but surprisingly none of them have changed policy. However, this has led to some sharp swings in the forex markets as clearly some sort of action had been priced in, especially for the yen and the kiwi dollar. Although there was no rate hike from the Fed last night (as expected) there has been a subtle hawkish shift in the FOMC statement. There has been far less emphasis on the global economic and financial factors. This has reduced some of the impediments preventing the Fed from hiking rates. However the Fed still remains cautious with the continued concern over the lack of growth and low inflation. Leaves the possibility of a June hike on the table but by no means is it likely. The reaction on US Treasuries was interesting as the 2 year yield has fallen sharply away overnight suggesting reduced expectations of a rate hike. Wall Street barely budged with the S&P 500 closing just 0.2% higher. The real action has come though overnight with the BoJ and the RBNZ decisions.
The Bank of Japan was expected to expand the use of negative rates to bank loans and perhaps even extend quantitative easing. It did neither, but also cut expectations for growth and inflation, the yen has subsequently gone on a tear again. Furthermore, the Nikkei 225 has closed sharply lower, falling by 3.7%. It was in the balance as to whether the Reserve Bank of New Zealand would cut rates again, but opted not to, instead noting that it expected inflation to strengthen as the effects of a recovery in energy prices came through. The kiwi has subsequently also strengthened sharply. With such strong moves against the dollar, the greenback is also mildly weaker against the other forex majors as the European session takes over.
Traders will be looking out for German CPI inflation which is released at 1300BST which is expected to fall back to +0.1% for the year on year reading (from +0.3%). The US Q1 GDP Advance reading is at 1330BST and is expected to come in at +0.7% annualised. Weekly jobless claims are also at 1330BST and expected to be 258,000.
Chart of the Day – FTSE 100
The breakout above 6237 implied a target of 6435 and the rally came within a few ticks of the target only to engage what proved to be an almost full retracement back to 6250. However the bulls now seem to be happy to build from above the breakout support and now the upside potential has been renewed. Yesterday’s candle was a bullish engulfing pattern which with a close at the high of the day really adds to the positive intent. The momentum indicators have unwound and are picking up again from areas of good support with the RSI bottoming at 51 and the Stochastics also beginning to bottom above 50 again. The hourly chart shows a near term base above 6298 implies 6348 initially but with positive configured momentum the bulls are ready to push back higher again to retest the recent high at 6427. Today’s early decline has questioned the appetite for the rally and needs to now form support once more above 6255, but I still believe there is potential for a test of the key October high at 6487. The importance of the support at 6237 has strengthened with the recent correction.
The FOMC statement yesterday has done little to impact the chart of EUR/USD. There was a minor degree of dollar strength once the initial volatility subsided last night, but the pair has once more steadied back to prior levels. This means that a third consecutive positive candle has been posted and further pressure is being seen on the old pivot band around $1.1330. It is interesting to see that the last two candles have long upper shadows which would suggest an appetite for buying that is failing. The momentum indicators have picked up again and for now I continue to expect another lower high in place under $1.1395. The hourly chart shows signs that upside impetus may just be tailing off slightly in the past couple of days and should be something that is kept under observation. A move back under the initial post-Fed low at $1.1270 would re-open the correction, with further support at $1.1230.
A slightly corrective candle with a loss of 32 pips on the day has just stopped the bulls in their tracks for the time being. The big question is whether the prospect of a breakout above key medium term resistance at $1.4670 has prompted a rethink of expectations, with a high posted at $1.4638. For now this is merely a consolidation of the recent gains but we must be on the lookout for renewed correction now. The Stochastics will be an indicator that is an early warning sign as the lines begin to cross lower. So far the RSI is still above 60, which should be seen as a signal of strength still. The old resistance high in the band between $1.4410/$1.4515 should now be supportive and any failure of this band would put the pressure back on the downside. The hourly chart shows that near term momentum has unwound back to levels where the bulls should be ready to resume control if this is going to continue to be a strong run higher, so this becomes a bit of a crossroads. The hourly RSI below 40 would be a signal.
A massive sell-off has come overnight with the lack of action from the BoJ. The failure to further ease monetary policy has resulted in an intraday swing lower of 300 pips (so far) and completely destroys the prospects of a recovery as the rally has once more been used as a chance to sell. The overnight decline went straight through the initial support around 109.75 and is now eying a test of 108.75 and a possible full retracement back to 107.60 which is the lowest level of dollar/yen since October 2014. These sharp moves will often have a degree of retracement so expect the volatility to continue today. However this is clearly an unwinding of expectations of the additional use of negative rates that came through last Friday, with some added downside for good measure. The 109.75 area could therefore become an area of resistance once more. Once the dust settles we will get more of an idea, however we can expect pressure on 107.60 in the coming days.
Gold
The FOMC statement has done little to really impact the gold chart. A mild degree of dollar strength initially started to drag on the gold price but the overnight decision by the BoJ has helped the safe haven play and resulted in a bounce of around $12 from $1237.60. Gold subsequently continues its mildly positive move within the range that had started to come through yesterday. A move back above the pivot band at $1243 adds to the bullish bias within the range and a move through the minor resistance at $1252.60 has re-opened a move towards the more considerable resistance of the 11 week range above $1260. Daily momentum indicators are giving little indication that this is the start of a burgeoning bull run, remaining rather muted for now even if they do reflect the mild bullish bias. Keep in mind that rallies above $1260 continue to be sold into. There is further support at $1231.10 and the $1225 pivot.
WTI Oil
The oil price has remained strong even in the face of the slightly hawkish shift in the FOMC statement which has driven a mild bout of dollar strength. The price is now trading clear of the previous resistance at $44.50, closing yesterday with a second consecutive strong candle around $45.30. It now seems to be on its way towards $48.35 which is the key November high. There is an 8 day uptrend that has formed and intraday corrections are now being seen as a chance to buy with the hourly chart showing support at $43.75 near term. The support around $42.60 is now becoming increasingly important for the near to medium term bulls. The daily momentum indicators remain positively configured with the RSI, MACD and Stochastics all looking strong, a view confirmed on the hourly chart.
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