Market Overview
Markets have been on a huge roller coaster in the wake of the ECB monetary policy announcement has pulled them first one way and then the other. The positive reaction for risk assets this morning are a turnaround on the turnaround and would suggest that the dust is still yet to settle. The easing measures put in place by the European Central Bank were widely seen as being comprehensive and a positive move. The cuts too all three interest rates, a further €20bn of QE, expanding the availability of assets for purchase and introducing further Targeted Long Term Refinancing Operations really grabbed the market’s attention. Cue widespread euro sell off, flattening of bond yield curves and equities rallying. However in his press conference, Mario Draghi, perhaps in a way to settle nerves, subsequently suggested that he did not expect the need for further ECB actions. The reaction to this seems to be somewhat overdone though and already we are seeing the move beginning to unwind.
The sharp reverse course on the markets yesterday resulted in the euro soaring almost 400 pips from its day low and equity markets selling off. However, markets can often be over-excited in these situations and today we are seeing signs of a retracement of those moves again. European equity markets are trading positively, whilst the euro is weaker again. Risk appetite generally seems to be rather more positive than it was 12 hours ago, with the gains seen in oil helping to drive commodity currencies higher. Gold is beginning to retrace its gains from yesterday too.
After the early announcement of German final CPI, focus will be on UK trade Balance at 0930GMT which is expected to widen to -£10.3bn from -£9.9bn. Then into the afternoon there is Canadian unemployment at 1330GMT with an expectation that it will stay flat at 7.2%.
Chart of the Day – EUR/JPY
The market has been building an interesting consolidation support in the past couple of weeks, but it has taken the fallout from the ECB monetary policy announcement as a chance to deliver the completion of a near term base pattern. The move above 125.60 has completed a small head and shoulders bottom (with an upward sloping neckline which adds to the conviction). This now implies a recovery towards 129.10. The momentum indicators confirm the improvement, with the Stochastics rising strongly, the RSI also driving back above 50 and the MACD lines also having crossed bullishly. The move back above the old support around 126.00 also adds to the improving outlook. This old support has again come in to be supportive in the early moves today. The strategy would be to now look towards using a near term pullback towards the breakout support at 125.60 as a chance to buy for the recovery. The next near term resistance comes in at 128.15 which is a reaction high from mid-February. The intraday hourly chart shows the conviction behind the upside break yesterday and that there is a band of support between 125.00/125.60. A move back below the old pivot at 124.20 would abort the reversal.
An utterly incredible session yesterday for the euro has changed to outlook positive again. The huge volatility formed a daily candle with a 397 pip range and wild swings on the back of the ECB monetary policy. Weakness on the announcement of a swathe of monetary policy easing was sharply reversed on the suggestion during the press conference that the ECB’s easing could have its limits. This meant that the euro rebounded from $1.0820 bursting through the old pivot band at $1.1050/$1.1100 and above $1.1200.Techncially this has leaft a huge bullish candle and suffice it to say is a bullish engulfing pattern (bullish key one day reversal). Momentum indicators have ticked bullishly with the RSI an Stochastics rising into positive territory and the MACD lines turning up. The next day following such a strong move can often be corrective, so the bulls will now be looking to consolidate above $1.1100 today. This one could still have some volatility in it as the market looks to calm down but the upside break is bullish. If the price can now find support above $1.1100 then the bulls will look higher with confidence. The initial resistance is yesterday’s high at $1.1217.
The ECB meeting has had its legacy across the forex major pairs due to its knock-on impact on the US dollar. The move out of the dollar into the euro as the primary move has had a residual impact through a Cable rally (on the dollar weakness). This has left cable with a bullish engulfing candle which has put the 3 month downtrend under pressure today. The candle has also had a positive impact on momentum with the Stochastics rising again. I am still interested in the RSI which currently around 52 is still in the area between 50/55 which the selling pressure has resumed in recent months. I would also watch for yesterday’s high at $1.4317 which is an important initial marker post, as this was the reaction high in the reaction following the meeting and if the bulls can push back above it, then it would be a confirming move that there is some substance to the rally. A break above $1.4410 would really put the recovery bulls in the driving seat. The hourly chart shows that the momentum indicators have lost some of the impetus of the rally and the $1.4240/$1.4280 support band is already being tested. It is interesting that the hourly RSI did not go above 70 despite the sharp bull move, for me this suggests that there is as yet no real momentum strength to the breakout.
Whilst the ECB meeting has looked to drive a breakout on other pairs, on dollar/yen it has just served to muddy the waters further, and certainly adds little to the clarity for the chart. The volatility has formed the largest daily range for almost two weeks, but the very small negative body of the candle reflects once more a lack of certainty in the move. There is still a marginal positive bias to the way this range has been forming over the past few weeks, with the Stochastics also now crossing back higher again. However the market is still very choppy on a day to day basis and yesterday’s high coming in at 114.44 coming below the near term resistance at 114.55 simply adds to the overhead supply. The hourly chart shows a marginally positive start to today and trading back above the pivot line at 113.15 also gives a slightly positive slant. However moving averages are very neutral and hourly momentum indicators are giving little sustainable direction. Yesterday’s reaction low at 112.60 adds to support at 112.15, but until 114.55 is breached this will remain a choppy range play.
The impending dollar weakness in the wake of the ECB meeting yesterday drew a sharp rally on gold. The deteriorating outlook on the price has subsequently turned from what is now support at $1237.00. The bullish engulfing candle now adds a positive slant back to the outlook on the price. The uptrend that had been breaking yesterday arguably now remains intact and the price is looking to break above the resistance around $1280 again. However, I am going to continue to focus on the bearish divergences on the daily momentum indicators which despite yesterday’s late rally, continue to play out. The initial gains in the Asian session have just been pared as the Europeans are coming on-line today and this means that the momentum on the hourly chart has given some corrective signals. This would not be too uncommon in the wake of such a significant turnaround. The hourly chart shows the pivot around $1260.60 is again supportive today and a drift back below there would be a disappointment for the bulls. Resistance comes in near term at the overnight high of $1282.50, beyond which is $1285 from February last year.
WTI Oil
The oil price rally had another pause for breath yesterday as a small bearish candle just took some of the heat out of the rally. For now there is no reason to believe that this will be the end of the run higher, but it is just worth keeping an eye on the daily momentum indicators now as the Stochastics have been threatening to just roll over. However, other than that the uptrend remains strong with the RSI holding nicely in the high 60s. The resistance of the January highs at $38.40 has been breached decisively this morning and this now opens the next level $39/$40, beyond which is $42.00 and more importantly $43.50 which is not only the late November resistance but also the base pattern target. On the hourly chart I continue to be encouraged by the role that the rising 89 hour moving average (at $37.54) has been playing as a basis of support on this rally for the past 8 sessions. The four week uptrend today comes in to support on the daily chart at $37.10. The key near term support is at $36.10 below which would complete a small top pattern but the bulls are pulling away now.
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