Market Overview
Perhaps equity markets have been too fixated with the perceived benefits of US tax reform and they forgot the other side of Donald Trump’s campaign to become President. Protectionism is a real threat to global markets and risk appetite, but fears of a Trump driven trade war is also feeding into renewed dollar selling.
Trump announced yesterday that he would be slapping on tariffs of 25% on steel and aluminium imports under the apparent guise of protecting US jobs. This now threatens to escalate and quickly, with trade partners in Europe and Asia already intimating at a response. Risk appetite has subsequently been hit, with equity markets strongly lower on Wall Street and subsequently Asia overnight. A trade war also has the potential to hit an already deteriorating US trade deficit which has been a key factor behind dollar weakness in recent months.
The dollar which had been rallying on the back of hawkish comments from Jerome Powell has been hit. A move into safety has seen Treasury yields moving lower, with the US 10 year yield around 5 basis points lower at 2.82%. Other safe haven plays such as the yen and gold are also benefitting. However the dollar is being hit across the board, with a bear key one day reversal on the Dollar Index. Is this the signal the market has been waiting for to drive renewed dollar selling?
Wall Street closed a third day in a row over 1% lower, with the Dow losing 420 points and the S&P 500 -1.3% at 2677. Asian markets mirrored the selling pressure with the Nikkei -2.5% on the double whammy with a stronger yen to boot. European markets are also continuing to fall back this morning.
In forex, there is a degree of consolidation after the strong moves late yesterday, but the yen continues to strengthen and the Swissy is also stronger which suggests that there is still a degree of safe haven moves underway.
In commodities, gold is hanging on to the late rebound, whilst oil is slipping back a touch again.
The big focus will be on what Theresa May can do to improve what looks to be a deteriorating Brexit negotiation. However from a data perspective there will be regard given to the UK Construction PMI at 09:30 GMT which is expected to improve very slightly to 50.5 (from a barely growing 50.2 last month). Construction is only around 7% of the UK economy but could still impact on sterling on a significant surprise.
The revised reading of the University of Michigan Sentiment is also due at 15:00 GMT and is expected to be mildly revised lower to 99.5 (from 99.9) which would still be a four month high and an extremely strong reading.
Chart of the Day – GBP/AUD
With the failure to breakout above the key December high of 1.7995 with a failure in February, the sterling bulls have been served with a few warnings for the longevity of the seven week uptrend. A couple of intraday breaches of the trend have now been exacerbated by a closing breach of the trend on Wednesday. Now with sterling under pressure, the underside of the old uptrend has become a basis of resistance as the momentum indicators have begun to build downside traction. Although early in the move, the MACD lines have started to break lower, but watch for the RSI moving below 50 which would be a one month low and another sign of the bears gathering momentum. Another gauge to watch is the 21 day moving average (currently 1.7745) which has been a basis of support up until now but is being breached. The hourly chart shows a run of lower highs forming with rallies being sold into. A move below Wednesday’s low at 1.7665 would open a move back towards the February lows of 1.7575/1.7600, a breach of which would turn the outlook negative. Initial resistance at 1.7865 with 1.7910 now key.
The recent dollar rally which has dragged EUR/USD backwards still looks to be a near term move within a bigger medium to longer term uptrend on the pair. It looked early yesterday as though the market was finding downside traction but there is a band of support above $1.2090 which is crucial and the fact that the market has now rebounded from $1.2155 to form a bullish engulfing candle should not be ignored. The rebound closed as the high of the day and this move which has been sustained overnight now means that the recent two week corrective downtrend on EUR/USD has been broken. Interestingly, if the market begins to build on this support, the MACD lines look to be bottoming around neutral and the Stochastics are threatening to turn higher around a decent buy signal area. Today’s reaction is now key as if the market confirms the rebound then the bulls will suddenly look far more confident again. The intraday hourly chart shows resistance around $1.2280 with far more positive momentum configuration. Above $1.2360 re-opens the upside again. $1.2220/$1.2240 is initially supportive.
The rebound from $1.3710 has left a small but potentially important bull hammer candlestick. The magnitude of the candle is somewhat limited however the intent is there. An initial move to the downside was bought into with the market closing above the previous key support at $1.3765. Is this enough to signal a turnaround again? There is certainly more that needs to be seen as the momentum indicators are still in decline and in a corrective configuration. The problem for the bulls is that having been broken, the old supports at $1.3765/$1.3855 now become a band of overhead supply full of potential sellers that need to be overcome before the bulls can sit more confidently. The hourly chart shows the rebound has unwound the hourly RSI to 60 and the hourly MACD lines to neutral, both near term crossroads for the outlook. The hourly chart shows the importance of the resistance at $1.3855. A failure and subsequent breach of $1.3710 re-opens a test of the key support band $1.3550/$1.3650.
The near term consolidation has comes to an end with a renewed safe haven flow following Trump’s intentions to impose the tariffs. Subsequently Dollar/Yen fell sharply into the close and the near term support at 106.35 has been broken. Further weakness has been posted overnight and the negative configuration on the momentum indicators is being bolstered. This comes with the RSI falling back towards 30, whilst the MACD and Stochastics lines are crossing back lower again. Intraday rallies remain a chance to sell and the market is now back on course for a test of the 105.50 support. This is also likely to be a minimum as on a longer term basis, the projected target remains 100, with the next real support below 105.50 at 102.50. The hourly chart shows negative configuration on momentum and that the old support at 106.35 is now a basis of resistance. It would need a rebound to break back above 107.20 to even have the bulls contemplating a rally of any substance now.
Gold
The support at $1306.80 was broken yesterday on an intraday basis but a sharp rebound from $1302.60 has once more sustained the view that the pivot band $1300/$1310 remains a key basis on a longer term outlook. The reaction from the bulls was positive into the close but the candlestick formed is still somewhat uncertain as it is not a decisive bull hammer and the reaction today has been simply one of consolidation. This suggests that there is still a degree of caution that needs to be taken and that the support at $1300/$1310 may still come under threat. Daily momentum indicators are still in decline and the hourly chart simply suggests that the market has unwound back towards the resistance band $1320/$1325. Furthermore, hourly momentum has also just unwound back to levels where the selling pressure has tended to resume in recent days. So more needs to be done by the bulls today to really suggest sustainable buying is once more underway. At least a move above $1325 is needed, whilst the recent two week downtrend comes in around $1327 today.
WTI Oil
With a third consecutive strong negative candle the sellers are increasingly in control. The recovery has been decisively broken now as the sellers have breached the support of the old pivot at $60.85 which opens initial support at $59.75. However the move could also now open a retreat back towards the key medium term support at $58.10. The momentum indicators have moved sharply into reverse now with a cross back lower on the MACD lines but also a sell signal on the Stochastics, whilst the RSI has dropped decisively below 50. The reaction of the bulls today could be key though as the market has not yet closed below $60.85 and there has been a mini rebound. The hourly chart now shows a series of lower highs resistance now at $61.55 and with intraday rallies seen as a chance to sell. Negative configuration is now in place on the hourly RSI (failing around 50/60) and the hourly MACD lines failing under neutral. Initial resistance at between $61.35/$61.85.
A third strong bear candle now really ramps up the pressure on the bulls and the recovery has decisively now been lost. This comes as the market has closed below the higher reaction low at 24,793 which shows it is now building a new downtrend phase. This comes with the momentum indicators now deteriorating, with the MACD lines threatening to cross lower under neutral being the main concern now. On the hourly chart the configuration is now negative with the falling MACD lines below neutral and negative configuration on hourly RSI and Stochastics. There is now a band of resistance 24,793/25,185 which the bulls will need to overcome to regain the impetus.
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