Market Overview
The signs are that talks between the US and China over their disputes on trade seem to be progressing. Although there is still clearly a long way to go yet, there is a suggestion that China will ease/remove tariffs on agricultural products such as soybeans in exchange for the US relief on China’s telecoms company ZTE (HK:0763). The fact that there is a willingness to meet in the middle ground on certain issues, helps to reduce the prospect of debilitating tit-for-tat sanctions between the two that everyone loses from.
This reduced risk of a US/China trade war has helped to boost US Treasury yields, with the US 10-Year yield back above 3.0% once more. With yield differentials a driver of forex, this is helping to pull USD/JPY higher as market sentiment improves. We also see the dollar strength and improved risk dragging gold back lower again as some of the safe haven demand reverses. Coming into today there is a raft of major economic releases to contend with.
Already the China economic data bundle has been mixed, with industrial production improving but retail sales missing. China Industrial Production jumped to +7.0% last month (+6.3% exp, +6.0% last), but this has been tempered by China Retail Sales missing at +9.4% (+10.0% exp, +10.1% last).
The dollar suffered last week as core CPI missed expectations, however if retail sales can improve as expected then this could help to boost the dollar once more.
Wall Street closed in positive territory again, but well off the day highs, with the S&P 500 +0.1% at 2730, whilst Asian indices ticked slightly lower (Nikkei -0.2%) and similar moves are seen in European markets early today.
In forex, there is a broadly stronger dollar, with continued underperformance of the yen.
In commodities, this dollar rebound is weighing slightly on gold, whilst oil is flat to slightly lower.
It is a packed economic calendar for traders to ponder today. Initially the UK labour market data at 09:30 BST with Unemployment expected to remain at 4.2% but the main focus here is the Average Weekly Earnings growth (ex-bonus) which is expected to improve to +2.9% (from +2.8% last month) which would suggest that real wages continue to pick up (even if it is only slightly).
The flash reading of Eurozone GDP at 10:00 BST is expected to re-iterate the +0.4% from the prelim reading, which would again be down from the +0.6% from Q4 2017.
Into the afternoon, the US data centres on US Retail Sales which is expected to show an improvement of ex-autos retail sales by +0.5% for the month (+0.2% last month) which would improve the year on year data to +4.5% (form +4.2%). New York Fed manufacturing is at 13:30 BST and is expected to slip a touch to +15.0 (from +15.8). Also look out for the FOMC’s John Williams (voter, centrist/hawk) who is speaking at 17:45 BST.
Chart of the Day – EUR/JPY
Although the euro may lost some of its impetus in a rally against the dollar, there is still a formation recovery against the yen. A run of three strong positive candlesticks has halted a run of bear candles throughout early May and is now completely changing the outlook around once more. Momentum indicators are taking this as a signal for recovery, with a buy signal confirmed on the Stochastics, but the RSI also ticking higher. The MACD lines showing a bull cross would be the final confirmation. The rebound has quickly unwound the market back towards the old pivot around 131.15 which would be overhead supply, so it will be interesting to see if the bulls can manage to sustain the momentum in the rally or whether this move begins to struggle. As yet the momentum in the move is strong, and although the market shied away from yesterday’s initial look at 131.15, the bulls are still in the market today. So a closing move above 131.15 would open the subsequent key resistance is at the next pivot at 132.00. The hourly chart shows a small head and shoulders base pattern completed above 130.50 to imply 131.75, whilst 130.50 is now a neckline and near term basis of support. Hourly indicators are now positively configured to suggest corrections are a chance to buy within this recovery.
The recent recovery in the euro has been called into question already as the dollar strengthened as the session went on yesterday to pull EUR/USD back again. It is certainly a dent to the prospects of a continued recovery, the fact that the market formed a bearish shooting star candlestick with the close at the low of the day. Although the daily momentum indicators have been ticking higher in recent days, this has stunted the recovery and could even turn it back lower again. We have been looking at the importance of the overhead resistance and it was the first real resistance at $1.2000 which caught yesterday’s high before the market fell over. The hourly chart shows a broken four day uptrend, whilst the hourly momentum has now lost its positive configuration. The previous near term pivot around $1.1940 has also taken on a role as resistance again. A move back below the reaction low at $1.1890 would certainly re-open the near term support at $1.1820 again.
With another small bodied candlestick formation yesterday, the market continues to consolidate sideways. In the past few sessions there has been a mild positive bias which has seen a push to test $1.3600/15 however, effectively this resistance has held firm for the past five sessions. Momentum indicators may have plateaued in recent days, but this is in keeping with a sideways trending market that has simply broken a downtrend but shown little appetite for embarking upon a sustained rally. The market has traded in a 160 pip range between $1.3455/$1.3615 for seven completed sessions now and the hourly chart momentum indicators have become very neutrally configured. A mini uptrend has broken overnight to scupper thoughts of a recovery and the market is trading around almost entirely flat moving averages. This is a jam packed day of data (UK wages and US Retail Sales especially in focus) and this could ramp up the volatility for a breakout of the 160 pip range. The market needs a catalyst.
USD/JPY
The near term slip back to the seven week uptrend has been bought into as a positive candlestick formed yesterday and the gains have continued into today’s session. The question is whether the bulls can now complete the breakout above 110.00 on the third time of asking. Momentum indicators have been teetering on the brink for a while as the market has consolidated in recent days, but on a medium term basis retain a positive configuration. The market formed a key low at 108.60 a couple of weeks ago and a breakout above 110.00 would complete a 140 pip upside range breakout and project higher. There would also be a higher low at 109.20 from yesterday to use as a higher basis of support near term. The hourly chart shows improving momentum once more, but also the role that 109.40 continues to play as a near term pivot. With weakness still being bought into pressure above 110.00 would initially open resistance at 110.47 but the resistance band 110.80/111.50 comes back into play.
Gold
At one stage during Friday’s session the bulls looked to be getting their control back of the range, however the mood of the market has been flipped on its head as a subsequent correction has now formed two consecutive bear candles with closes at the day low. Yesterday’s move would have been especially disappointing as another initial move above the pivot at $1321 was sold into. On a medium term basis the momentum indicators losing impetus and rolling over again whilst still in corrective territory will also be a concern. The important test for today will be the initial support around $1310. A close back under $1310 would suggest that the selling pressure is really mounting again. The hourly chart shows what had been developing as a recovery has left resistance once more around $1325/$1326 and momentum indicators are taking on more of a corrective configuration again. There is now resistance overhead $1317.50/$1319.
WTI Oil
A decent bull reaction came in yesterday with the buyers happy to support the market above the $69.55/$70 support area. With the strength of the technicals on the daily chart, the market continues to see corrections to be bought into. This is also now a sharper uptrend formation of the past five weeks which comes in at $69.15 today which is also flanked by the rising 21 day moving average which has caught some recent lows and comes in around $69. The hourly chart reflects all of this positivity with unwinding moves being used to renew upside potential. Yesterday’s low at $70.25 is initial support to watch now and adds to the breakout support. A retest of the $71.90 high from last week is preferred, with further moves into the mid-$70s likely. The 61.8% Fibonacci retracement of the huge bear market is around $76.50.
The Dow has joined the breakout of the S&P 500 that was seen last week, with a move above 24,859. This now clears the April high and takes the Dow to a new seven week uptrend. This comes with the RSI pushing into the low 60s (the highest since the early February sell-off) and the MACD lines above neutral. However the immediate exuberance of the bulls will have been tempered slightly as the market closed back off the day highs, whilst this move also threatens the support of a sharp eight session uptrend too. The next job is for the bulls to consolidate the breakout above 24,859, which would then allow expectation to grow for the next key high, the March high at 25,450. The hourly chart shows a continued position of strength in the outlook, with initial support now with the breakout at 24,859 whilst there is more considerable support around 24,500. Intraday corrections remain a chance to buy.
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