Market Overview
You just cannot get Donald Trump out of the news right now, and he is proving to be a difficult steer for financial markets. Every day, traders have something different to go on, and more often than not, it will be a key factor that swings the markets once more. Yesterday we heard from Trump and his trade advisor Peter Navarro incredibly stepped in to claim that key trading partners such as Germany, Japan and China have used currency devaluation to their benefit. Is this the beginning of a strategy to devalue the US dollar now? Over the past week, there have been moves that have questioned the positive correlation between the dollar and Treasury yields. Yesterday’s sharp dollar decline came with a dip in the Treasury yields, but yields seem likely to continue higher with a hawkish FOMC and if Trump is pursuing a weaker dollar, this puts the positive correlation once more in doubt.
The selling pressure calmed on Wall Street yesterday with only minor losses as the S&P 500 dropped by -0.1% to 2289. The outlook improved mildly overnight in the Asian session with markets mixed to moderately higher (Nikkei +0.6%), whilst the European markets have opened also positively. In forex, the dollar has clawed back some of yesterday’s losses and is performing well today across the majors ahead of the FOMC tonight, with the yen being the big underperformer so far. The mild dollar recovery is also helping to drag back the gold and silver rallies, whilst oil is basically flat.
The FOMC monetary policy meeting concludes today (announcement at 1900GMT) and is the first since the FOMC raised rates for the second time back in December and pushed out the dot plots. However, this meeting is likely to be somewhat of a non-event this time. It is a meeting without a press conference or revised forecasts/dot plots and is not expected to be a meeting where the Fed increases rates. Traders will watch for any further hawkish signals in the statement.
It is a day full of key economic announcements to keep traders constantly on their toes. The PMIs will dominate the early part of the session, with the Eurozone Final Manufacturing PMI at 0900GMT which is expected to be in line with the flash reading of 55.1. The UK Manufacturing PMI is at 0930GMT and is expected to drop mildly to 55.9 (from 56.1 last month). The US ISM Manufacturing is at 1500GMT is expected to improve slightly to 55.0 (from 54.7). The ADP Employment change is at 1315GMT and is expected to increase to 165,000 from last month’s 153,000 (which proved to be very accurate in signalling the headline Non-farm Payrolls last month). The EIA oil inventories are at 1530GMT and are expected to show a 3.0m build in crude oil stocks. However the main focus for traders will be the FOMC monetary policy announcement at 1900GMT.
Chart of the Day – Silver
The resistance at $17.20 has been a key barrier that has been preventing the bulls grasping control over the past few months. However, there has now been a decisive upside breakout with a strong bull candle. The medium term implications of this move are that a base pattern has been completed which suggests an upside target of $1.20 to $18.40 in the coming weeks. A two day close above $17.20 would help to confirm the move, whilst the momentum indicators are turning higher with upside potential. The daily Stochastics are improving below 80 whilst the RSI is rising still below 70. The $17.20 breakout now becomes an important level of support for a pullback in the following sessions and could come back into play as the market slps back a touch in the early moves today. However due to the breakout, corrections will be seen as a chance to buy. The next resistance is an old pivot from November at $17.95 but the next real resistance is not until $19.00.
The move sideways that broke the uptrend did not do anything to sustainably disturb the bulls. The breach of the trend seems to have just been a consolidation prior to yesterday’s strong bull candle that broke back above the $1.0775 to leave the market at the highest level since early December and back on course for a test of the $1.0850/$1.0870 resistance. The momentum indicators remain bullishly configured and corrective moves will again being seen as a chance to buy. The hourly chart shows that yesterday’s breakout above $1.0775 has become the basis of support this morning but there is a band of support $1.0710/$1.0775 that will be a “buy zone”. Hourly momentum is bullishly configured but just rolled over in the Asian session to leave the market pulling back into the support again. Support at $1.0617 is increasingly important, with $1.0577 now key. Expect increased volatility today with the PMIs, and of course the FOMC this evening.
It is interesting to compare the recent moves on sterling with the euro. Whilst the euro has broken back higher after a consolidation, the chart of Cable looks more corrective and the bulls will have to work a lot harder. The bullish candle managed to add around 95 pips into the close yesterday but the three previous bear candles had cost the market far more than that and the outlook remains very much in the balance. However the bulls will certainly point to the support forming around the key breakout at $1.2430 which still leads to the prospect of this being a correction that is being supported and bought into. The next couple of trading sessions will be key now, with the support of yesterday’s low at $1.2410 taking on increased importance having just rallied. There is resistance around $1.2600 which has also capped the gains in the past few sessions which will be a key indicator. This level is clear on the hourly chart and it is interesting that hourly momentum is again rolling over. There is a minor pivot at $1.2520 which comes into play today as initial support. The PMIs and FOMC meeting will be key volatility factors today.
The yen strength and dollar weakness in the past couple of sessions has completely changed the outlook again. The two big bear candles have bolstered the resistance at 115.60 and now turned back to breach the key support at 112.50. The key is now whether this ends up being a bear move that is confirmed (needs a close below 112.50) or whether it is a range of just over 300 pips, or 350 pips if yesterday’s low of 112.05 is considered. The initial rebound higher today means that already the market has rallied over 120 pips from the low, whilst momentum indicators are not crying out for a downside break. The RSI is holding above 40, whilst the MACD lines are relatively benign. The hourly chart could hold the key to the next move, as the hourly RSI has unwound to 50/55 which is around where the bears have regained control recently, whilst there is resistance initially around 113.50/113.95. The previous 112.50 support has also looked to resume its potency too.
Gold
The outlook has improved once more as the dollar weakness that has impacted across forex and commodities has shown on the gold chart with a strong bull candle. The move decisively takes gold back above $1200 and brings the bulls back into control. There will now be considerable attention given to the key resistance at $1219.60 which was the peak last week. Given the strength of the move yesterday, the bulls need to maintain the momentum and break to the upside, otherwise this will become a $40 consolidation around the $1200 pivot.. An upside break of $1219.60 would mean the initial minor reaction highs within the November to December sell-off at $1222 and $1233 come into play but the next real resistance is not until $1241. The Stochastics have ticked higher and the RSI is rising back above 60 and with upside potential. The low from Friday at $1180.70 is now the key low. The $1200 psychological level has become near term supportive now and with the early slip back today, the hourly chart shows a band of support $1195/$1203 for little corrective moves to now build support from as dips are bought into. However, the bulls still need to breakout.
WTI Oil
The resistance at $53.50 had been strong last week before a false upside break, however having broken back below, the barrier at $53.50 is growing once more. The past two sessions have seen intraday rallies failing within 10 cents of $53.50 and the bulls are again unable to find the traction in a push higher. The daily candles have been corrective in the past few days and another failure at the resistance which has formed a neutral, uncertain candle at best, is becoming a concern. A close below $52.50 would complete a small top pattern and imply around $1.50 of additional downside. This would put the pressure on the pivot at $52.00. The daily Stochastics crossing back lower is a near term corrective signal that will add to the bull concern within the range, whilst if the RSI drops back below 50 it would also be a negative development. The hourly chart shows a ranging market still with neutral momentum indicators, however the support around $52.50 will be watched today.
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