Market Overview
Market sentiment remains positive today as the geopolitical situation surrounding the Korean peninsula continues to improve. Asian markets have been buoyed by news that Donald Trump will meet with North Korean leader Kim Jong Un in Singapore on 12th June in a signal that tensions continue to be diffused.
In the forex markets, the Bank of England has put sterling under renewed pressure as a meeting of mixed messages has seemingly added uncertainty over the timing of the next rate hike. The MPC cut forecasts for inflation and growth over the coming years, but Governor Carney seemed to suggest that all was still progressing fine in the recovery and that a rate hike would come this year.
There has also been a slight miss on US core CPI inflation which has just curbed the near term strength of the dollar. However, is core CPI remaining flat at +2.1% (which is above the Fed’s 2.0% target) enough to curtail the dollar rally? For now, dollar corrections remain a chance to buy and already the dollar looks to be steadying again.
The 10-Year Treasury yield has dropped back slightly to 2.96% and with yield differentials driving forex majors of late, the move on yields will be key. Euro traders will also be looking at developments over a potential anti-EU populist government forming in Italy which has driven Italian yields higher with the core/periphery spread widening again. Much to ponder for traders as the weekend approaches.
On Wall Street, another positive session sees traction building in the S&P 500 (+2723) which is now the highest since mid-March. Asian markets were also positive (Nikkei +1.2%) whilst European markets also take a positive bias into today’s session.
In forex, there is little real direction overnight to speak of but the euro is a slight underperformer, whilst in commodities there is a similar consolidation with gold -$1 and oil around 0.2% lower.
The week ends on a little bit of a quiet note for the economic calendar, with nothing for the European morning until Canadian Unemployment at 13:30 BST which is expected to remain at 5.8%.
The prelim reading of the University of Michigan Sentiment is at 15:00 BST and is the main focus for the day. Sentiment is expected to slip marginally lower to 98.5 from an upwardly revised 98.8 last month. However, traders will also be looking out for a speech by Mario Draghi where traders will be looking for any hints of how the ECB will progress towards exiting its asset purchase programme (although this is highly unlikely).
Chart of the Day – AUD/JPY
With risk appetite picking up once more across the market, we look towards a classic signal in the forex markets, the cross of the higher risk Aussie against the classic safe haven yen. It is interesting therefore to see Aussie/Yen picking up strongly in the past couple of sessions from a twin session low around 81.15 with a strong bull candles that have now broken a two week corrective move. The move has captured the momentum indicators which are all ticking higher now, with a confirmed near term buy signal on the Stochastics the highlight (the last confirmed buy signal called the bottom back in March). The old pivot through March/April at 82.65 is now the key indicators overhead and a break back through this pivot would suggest the bulls were gaining real traction in a recovery. It would then open the key resistance band 84.00/84.40. The hourly chart shows a recovery uptrend developing whilst momentum indicators are the strongest configured since early April where corrections are being bought into. The bulls will now be keen to hang on to a near term pivot at 82.00 whilst a move back below 81.70 would re-open the downside.
The strongest positive candlestick since late March has now broken the corrective downtrend of the past few weeks. The question is whether this is the beginning of a sustained recovery, or simply part of a consolidation that is the inevitable breaking of a steep downtrend. For now it is the latter. The slight miss on US inflation yesterday helped to drive a minor dollar correction and subsequently EUR/USD rebounded yesterday. There has been a slight tick higher on momentum indicators, but nothing yet that would suggest the bulls are mobilising. The hourly chart shows a rebound that rolled over around $1.1945 yesterday, whilst initial pivot resistance at $1.1940 seems to have played a role in capping the recovery. The significant selling pressure of late April could easily see some unwind but there is now plenty of overhead supply to prevent a sustained recovery. Initially the old January low at $1.1915 whilst $1.2000 psychological and then $1.2090/$1.2155 are all preventative from a medium term perspective. The hourly chart has improved and the bulls need to post another strong candle today to develop momentum in a recovery. Initial support is around $1.1900 whilst the key low at $1.1820 is likely to be retested once the bulls run out of steam.
Given the context of disappointment and downward revisions to growth and inflation outlook from the Bank of England, posting a negative close of less than 30 pips probably can be considered to be a positive result for the Cable bulls. However this comes with the dollar having been under pressure across the majors yesterday, so on a relative basis, perhaps not so much. However in isolation, the buyers need to use the low at $1.3457 as a base to build from. The downtrend has been broken by a run of neutral candles and after yesterday’s negative close, the bulls need to regather themselves and post a positive session. Momentum indicators are still though very negatively configured and this remains a consolidation. Although there seemed to be a growing appetite to buy prior to the Bank of England, it will be interesting to see how this appetite now changes. Yesterday’s high at $1.3915 will now be a key near term resistance. The hourly indicators are still rather neutrally configured and this is a consolidation. Today’s reaction will be interesting and could begin to see what the bulls are made of.
A mildly corrective 35 pip negative candlestick close has dragged the pair back to the support of the uptrend once more. This leaves the market on the brink again as the momentum indicators begin to tail off again. The uptrend has held firm during previous consolidations and although is coming under pressure again, it is still in place. The key to the outlook is the reaction low at 108.60 as a breach would now complete a 140 pip top pattern. The consolidation could easily break the uptrend, but for now the sell signals are still not present on momentum and corrections remain a chance to buy. The hourly chart shows the market picking up from 109.20 overnight whilst hourly momentum indicators are improving and giving intraday buy signals early this morning. This suggests that the buyers are ready once more for a renewed test of 110.00. Subsequent resistance is 110.47.
Gold
With the dollar weakness in the wake of the slight miss on US core CPI yesterday, gold posted a gain of $9 on the day and the strongest bull candle since mid-April. Is this the return of the bulls once more within the range? Although the market has struggled for traction in recent sessions, the momentum indicators have been quietly building in the background. Now we see the Stochastics rising (arguably with a buy signal) and the MACD lines on the brink of a bull cross. However, it is notable that the daily chart shows the market pulling back from around the old $1321 April lows which are now a basis of resistance. The hourly chart also shows a loss of the momentum overnight. The resistance at $1325 is key on the hourly chart and a closing breakout today would be another bull candle and begin to develop traction. If this can be seen the then prospect of a sustained rebound within the medium term range is on. Failure to do so would suggest that gold remains stuck around the range lows. It would also be a disappointment for the bulls. Yesterday’s low at $1310 is now initially supportive.
WTI Oil
With the strength of the breakout, the oil bulls will now look to form a new base of support with the range of the old highs at $69.55 and the psychological $70. The strength of momentum indicators suggest that corrections remain a chance to buy and yesterday’s mildly corrective move could give an opportunity. The hourly chart shows that yesterday’s intraday slip back found support around $70.50 and has allowed the hourly momentum indicators to renew upside potential around levels that the bulls have previously come in to support the market. Initial resistance is now $71.80 but beyond there is multi-year high territory once more and a range $73.25/$76.85 from 2014. There is little reason to think at the moment that corrections will not be supported.
The bulls are gathering confidence now that the market has broken the run of lower highs within the late April correction. Another positive move yesterday has pushed above 24,580 and the market is now eyeing a test of the April high at 24,859. How the market reacts to the first key lower high following the moves since the big February sell-off would be a significant factor for the medium term outlook. Currently this is another near term rally in a somewhat mixed medium term sideways trending market. However a confirmed breakout above 24,859 would take the market above all the moving averages and even be considered to be a multi-week base pattern. The momentum indicators are also on the brink of a key move, with the RSI again approaching 60 and MACD lines back to neutral. Already the intraday gap higher yesterday has been filled and this will also increase the bull confidence. There is a near term trend higher that is forming too (today just over 24,700), whilst hourly momentum indicators are increasingly positively configured, suggesting that corrections are a chance to buy. Key near term support is at 24,200 with breakout support now around 24,500.
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