Market Overview
Risk appetite in forex markets is on a positive footing again today as expectation of further Japanese stimulus and the uncertainty over who will become the next UK Prime Minister has been removed (it will be 59 year old Theresa May). Sterling has reacted positively to this unexpected news, whilst Asian markets have also continued to jump on the expectation of a revamped stimulus package out of Japan. Safe haven assets are being shunned with the yen continuing yesterday’s decline and the US dollar is also now seeing a minor correction, whilst the gold rally has just been halted in its tracks and Treasury yields are also picking up. Equity markets have also been strong, with the S&P 500 yesterday closing at an all-time high and strong gains on European indices. However, the early moves on European markets today are a touch more cautious, unable to follow the strong lead from Asian where the Nikkei was another 2.5% higher.
In fore markets there is a positive outlook, with the euro and sterling performing well, the US dollar weaker across all major currencies other than the Japanese yen which remains the underperformer. Gold is managing to stabilise a touch after weakness yesterday, but the oil price remains a concern for traders with the bulls failing to make any substantial ground in a recovery.
Traders will be looking out for the comments of Bank of England Governor Mark Carny who is testifying to the Treasury Select Committee on financial stability in the UK. On the data front, again it is light with only the US JOLTS jobs openings at 1500BST which is expected to drop slightly to 5.74m (from 5.79m). There are also a couple of FOMC speakers today with Daniel Tarullo and James Bullard this afternoon.
Chart of the Day – EUR/GBP
After a strong run higher in the wake of Brexit, is the pair on the brink of a corrective move? The move to £0.8625 has been met with three days of consecutive closing negative candles, in a move which is pulling momentum indicators, with a bearish cross on the Stochastics (not yet a confirmed sell signal) and the RSI turning lower to be on the brink of a basic crossover sell signal today. The hourly chart shows a small top pattern has completed on a move below £0.8488 which implies £0.8350 as a near term target. Interestingly, as the drift lower has begun, the hourly momentum has become far more neutral and on the brink of being corrective too. If the hourly RSI goes below 30 it would be the first time since Brexit that this would have happened. This would be another sign of correction. The daily chart shows the initial support band comes between £0.8200/£0.8380 which was a post-Brexit brief consolidation and can be seen as a viable correction zone. Yesterday’s reaction high at £0.8580 is now the initial resistance.
The bulls are still hanging on as the support of the long term pivot band between $1.1050/$1.1100 once more holds firm. A second consecutive small bodied candle, closing just 4 pips up on the day, reflects an uncertainty with the outlook at the moment. The early reaction higher today adds to this outlook, but it will be interesting to see how the euro reacts around the top of the pivot at $1.1100, in addition to the resistance at $1.1110 which had capped the gains on three successive days last week. The momentum indicators are still retain a negative bias without being outright bearish and this reflects the drift lower but also the fact that the bulls are still in with a shout. The hourly chart now shows that the hourly momentum is now at a level at which the bears have tended to return and this could now be seen as a chance to sell again to retest $1.1000 prior to my preferred downside. The key resistance remains $1.1188.
Sell on May? It would appear, not for sterling, as cable has rallied on the back of an end to the uncertainty of who will be the next Prime Minister and when. This has now driven sterling higher and a minor recovery (which is still likely to be short term in nature) could now be on. A second bull close to a candle is threatening a third with another 80 pips today. This is doing little to sustainably improve momentum but there has been a minor uptick in RSI and Stochastics. The overnight gains have pulled Cable through the initial resistance at $1.3047 to complete a small base pattern on the hourly chart which implies around 200 pips of upside if the bulls can get behind it. However there is a large amount of overhead supply that starts with a low at $1.3118 but is more prominent around $1.3200. I still see rallies as a chance to sell and feel that there will be further downside in the weeks ahead. However for now this near term recovery is gathering pace. If the break can hold above $1.3000 support then there could be further run higher.
A strong bull candle posted a significant rebound yesterday. The bounce of almost 250 pips has continued today after suggestions that Shinzo Abe would now embark upon a reboot of his “three arrows” of Abenomics. However, on a technical basis this simply looks as though it could be an ideal opportunity to sell in the coming days. The move has now achieved the recovery target of around 103.00 from the hourly chart base pattern, whilst has also unwound back towards the resistance at 103.40/103.60 which marks the bottom of what I have been seeing as my ideal sell-zone. The RSI has unwound back towards 50 whilst the MACD lines and Stochastics are now crossing higher which suggests the near term improvement, however is the move sustainable. For now this is still just a near term bounce within a longer term downtrend channel and it would be wise for the bears to let this one run before jumping back in too early. The hourly chart shows strength in the rebound with positive momentum. Initial support is at 102.40, before the neckline of the near term base pattern around 101.50. Above 103.60 opens the next key resistance at 105.50.
Gold
There are still question marks over the run higher on gold as once more a corrective candle posted yesterday suggests that the bulls are struggling. The RSI has confirmed a cross back below 70 which is a near term basic sell signal (or in this instance, take profits signal). The Stochastics have also crossed lower (still to see the confirmation) and the MACD lines are losing impetus. I am looking at $1350 as the first real corrective signal as this had been supportive (until the Payrolls spike) and a breach of this would put the support band $1335/$1338 under pressure. For now this is still part of a near term consolidation, but a breach of $1335 would suggest a retreat back towards the medium to longer term breakout support around $1306. The hourly momentum indicators are interesting though as they look to still be rangebound and reflect a continued consolidation. Watch the hourly RSI going below 30 and the hourly Stochastics back below 20 to be early warning signs of continued correction. Key resistance remains around $1374 and the March 2014 high at $1391.
WTI Oil
The outlook changed to medium term negative on the breakdown below $45.83 last Thursday. Since then the market has made two intraday attempts to recover back above the breakdown level only for the bull recovery to be rebuffed. This failure, with the old support becoming a new basis of resistance is a concern for the bulls. The momentum indicators are increasingly negatively configured, with the MACD lines having gone negative (fallen below neutral) for the first time since early March, whilst the Stochastics are also in bearish decline. The final piece to confirm would be the RSI falling below 40 (not quite yet). This all now suggests that rallies should be seen as a chance to sell. The initial resistance is building between $45.75/$46.00, but the bears would now remain in control until a breach of the key reaction high at $48.25 (which is in an old near term pivot band too). With the corrective outlook growing, a break below the initial support at $44.50 would open the key May low at $43.03. If the recent breakdown below $45.83 is taken to be a completed top pattern, the downside target is $41.00 and possibly towards a bearish scenario corrective target of $40.00.
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