Market Overview
US bond yields continue to climb and with yield differentials a key factor once more driving forex markets, this is helping to underpin dollar strength. This is showing with the support for Dollar/Yen and the weakness on EUR/USD. However, another factor playing into the minds of euro traders has been the political risk created by the populist and inexperienced Italian coalition governing which is forming. Suggestions that draft coalition agreement between the 5-Star Movement and the anti-immigration League included the prospect of asking the ECB for €250bn of debt forgiveness is leaving traders a little nervous, and the euro is beginning to show signs of underperformance against its major peers. Added to this, is the continued rise in US yields, with the US 10-Year yield above 3.10% for the first time since July 2011.
With the steepening back of the US yield curve (2s/10s yield spread increasing back above 50 basis points again) this is also helping to support the dollar. Equities are into a bit of a consolidation phase in the last couple of days as a mixed series of factors balance out sentiment. However, one key theme that is playing out is higher yields driving a stronger dollar.
Wall Street closed slightly higher with a minor rebound following previous session weakness. The S&P 500 was +0.4% at 2722, whilst Wall Street futures are all but flat and Asian markets were a little mixed (Nikkei +0.5%) and European markets are ticking marginally higher today.
In forex, there is little real move, aside from a rebound on sterling on the back of newspaper reports in the UK that the government is set to make a decision to attempt to stay in the EU customs union beyond the end of the transition period in 2021. The Aussie is a mild outperformer on mixed Australian employment data where unemployment ticked higher to 5.6% (5.5% exp, 5.5% last) but full time employment improved better than expected at +22,600 (+20,000 exp, +4,900 last).
In commodities the consolidation on the dollar means consolidation on gold, whilst oil is again finding support as the bulls look once more at a potential upside break.
It is a quiet morning of economic data for European traders with the Philly Fed business index at 13:30 BST the first real announcement of interest. Consensus expects there to be a marginal dip to +21.0 (from +23.2 last month) although this would be the lowest since November 2016. Weekly jobless claims are also expected to increase slightly to 219,000 (from 211,000 last week) although this remains a strong number historically.
Bank of England chief economist Andy Haldane will also be speaking at 17:00 BST and could impact on sterling potentially.
Chart of the Day – EUR/AUD
The euro was hit hard across the major crosses yesterday but one of the biggest moves in both size but also technical importance came on Euro/Aussie. A huge bear candle yesterday was the largest down day since 26th January, but more importantly this included a downside break below the key medium term pivot at 1.5770. This effectively completes a 370 pip top pattern and implies potentially 1.5400 in the coming weeks. Momentum indicators confirm the breakdown with the RSI at a 10 month low and the MACD lines accelerating lower in negative configuration. An important test of the 14 month long term uptrend is underway and with today’s early weakness the trendline is being broken (would be confirmed by another negative close today). In the event of this, then the next key support at 1.5600 from the February lows comes into play. There is now a basis of resistance overhead with 1.5770 whilst a three week downtrend provides further resistance around 1.5850 today. Rallies remain a chance to sell.
EUR/USD
The pair has been sold off in recent days as pressure from a stronger dollar but also euro weakness have played out. Yesterday’s break below $1.1820 to a new low dating back to mid-December continued the corrective move and has opened $1.1715 as the next support. However, the sellers have not got it all their own way, and a late session rebound saw the price closing well off the day low (of $1.1760) and only a small negative bodied candlestick was the result. With today’s early bounce, this leaves us with the potential for a near term rebound today. Despite this though, momentum indicators on the daily chart remain negatively configured, whilst any recovery will likely struggle for traction before the selling pressure re-emerges. The hourly chart shows that this move is helping to unwind initial oversold momentum and should simply be renewing downside potential for a retest of the lows and likely still beyond. There is a band of resistance between $1.1820/$1.1855 now to watch initially.
The fact that sterling has held up in the face of broad dollar strength across the major pairs has been impressive. The support at $1.3455 may have been breached by a handful of pips before the support came back in, and yesterday this support again remained intact. It is interesting therefore to see a strong early rebound today which again helps to reinforce the support. Despite this though there is still a band of considerable overhead resistance at $1.3600/15 which has repeatedly seen rallies fail in the last two weeks. This needs to be overcome before the prospect of a serious Cable recovery is contemplated. Momentum indicators such as the MACD and Stochastics lines have plateaued, whilst the RSI has ticked back above 30. An improvement yes, but as yet nothing concrete. On the hourly chart, the indicators are still very rangebound and already the overnight bounce is being questioned as we move into the European session. With this 165 pip range, the market needs a close either above $1.3615 or below $1.3450 for a break. Inside that is just near term noise.
Having broken out above resistance on Tuesday the bulls are looking to consolidate their gains. Old resistance becomes new support and it is incredible to see that the 110.00 level which had previously been a barrier, has now become supportive, almost to the pip. The daily chart shows that the market has had a couple of goes at the new support only to bounce back again. There is also the rising support of the seven week uptrend to consider, whilst the rising 21 day moving average around 109.30 is also flanking the run higher. Initial resistance at 110.47 is a barrier to gains but if the market can breakout, then the next resistance is 111.50/112.00. Momentum indicators remain strongly configured, if perhaps a little subdued with the breakout. Corrections back into this confluence of support 109.80/110.00 would be a chance to buy.
Gold
With gold posting effectively a doji candlestick yesterday, the market seems to be confirming the breakdown below $1300. The deterioration in technical outlook also adds to the sense that gold has entered into a new phase. Previously the market had been very much rangebound, however the breakdown comes with a deterioration in moving averages and momentum indicators and the long term pivot which had been the old floor of the range between $1300/$1310 now becomes a band of overhead supply. Rallies are now a chance to sell. The market has ticked higher again this morning, as it did yesterday, and it will be interesting to see how far this move goes before it flounders. On the hourly chart, the indicators are configured to sell into strength, whilst the hourly RSI unwinds towards 50 and hourly MACD lines unwind towards neutral. Expect yesterday’s low at $1286.40 to come back under pressure.
WTI Oil
The market continues to consolidate the key breakout above $69.55 whilst the psychological $70 adds to the continued positive outlook. The support of a five week uptrend now comes in today at $69.50 to bolster this breakout support, whilst the rising 21 day moving average is also has supported recent corrections and comes in today around $69.40. Recent neutral daily candles with a mild bull bias reflect the consolidation and with momentum indicators retaining their positive configuration this reflects an outlook of buying into weakness for another impending upside break. This week’s low at $70.25 adds to support and with the strength of the momentum continues to drive an expectation that the next move is still likely to be higher despite two failed attempts to move above $71.90. Subsequent resistance is minor from a 2014 range $73.25/$77.85.
The reaction to Wednesday’s bear candle has been very muted. On the one hand there is a sense that the ship is being steadied after a choppy shock, however equally the bulls have failed to so far take up the correction as an opportunity to buy. Ultimately though the longer the market remains supported above the 24,500/24,580 breakout support band then the bulls will still be relatively happy. Despite this, momentum indicators need to be watched, with the bear cross on the Stochastics potentially becoming more of a problem if the move is confirmed (by a cross below 80). Holding on to Wednesday’s reaction low at 24,629 will be seen as playing out the near term consolidation, with the hourly momentum indicators looking to settle down again and still in positive configuration on the hourly RSI (above 40) and hourly MACD lines (above neutral). The gap at 24,862 is still unfilled and the longer the high at 24,997 remains in place the move the resistance will grow.
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