Market Overview
There have been series of risk positive events in the past 24 hours that have resulted in big gains on equity markets and a significant move in forex. The main event that has driven the improvement in risk sentiment was the dovish press conference from the ECB and the very successful jawboning by Mario Draghi. The ECB president talking of the prospect of additional QE, a further cut in the deposit rate and talking about the need for a lower euro, is a fairly significant attempt to push the rate of EUR/USD lower.
Along with much better existing home sales in the US and a decent batch of earnings data from the likes of McDonald`s (N:MCD), Amazon (O:AMZN), and Alphabet (formerly Google (O:GOOGL)), have all boosted sentiment on Wall Street. The S&P 500 closing up 1.7% has boosted markets across the board in Asia, with the Nikkei 225 up 2.1%. European markets got their boost yesterday but have managed to continue today with another positive open.
Forex trading has shown a huge shift back towards the US dollar as the impact of the ECB has driven euro weakness and impacted across the majors. After earlier volatility in the Asian session the euro has started to stabilise and it will be interesting if the key pivot support at $1.1100 can hold. Incredibly, the Kiwi is up strongly again as yesterday’s rally has continued despite the huge dollar strength. The Aussie is also stronger. The commodities that had been under pressure in the earlier part of the week are now beginning to find some support with both Gold and oil higher.
The flash PMIs are out today and they have started off fairly positively with the Japanese data overnight which has shown an improvement to 52.5 (from 50.9 last month). The Eurozone countries announce their flash PMIs early in the European session with the Eurozone wide data at 0900BST and is expected to show a slight decline to 51.7 (from 52.0). The US flash manufacturing PMI is at 1445BST and is expected to also dip slightly to 52.8 (fro 53.0). We also have Canadian inflation today at 1330BST with the CP expected to slide to 1.1% on a year on year basis from 1.3% last month.
Chart of the Day – DAX Xetra
A huge rally has been induced by the dovish ECB meeting. The key move now means that the key resistance at 10,512 has been breached this morning as the rally has continued. The equivalent of this level has already been breached by the S&P 500 (at 2020), the FTSE 100 (at 6284) and the French CAC 40 (at 4733) and now it has been seemingly finally the turn of the DAX. Interestingly, the daily chart shows the RSI is now at the highest it has been since April whilst the Stochastics are also strong.
The big bullish candle now needs to be confirmed by a closing break above 10,512 with preferably another positive candle. If this were to be seen also it would open up a move back towards the 38.2% Fibonacci retracement of the big rally 8355/12390 at around 11,850. The recovery certainly looks to be continuing, however the near term momentum is becoming stretched and this may induce some near tem profit-taking. Yesterday’s close at 10,491 becomes immediately supportive, with the next level not until 10,278. Buying the dips on the DAX looks a good strategy if the bulls can sustain the momentum.
EUR/USD
The euro has been met with significant selling pressure in the wake of the ECB press conference which was more dovish than had been expected (including a discussion on further QE a the next meeting and a possible cut to the deposit rate). Although the market had been anticipating a dovish meeting, clearly there has been an underestimation over exactly how dovish it was. I have previously been looking for a buy signal in the $1.1200/$1.1300 (old support) range but the selling has just wiped straight that that band and there is now a serious test of the big pivot level (which is currently supportive) at $1.1100 once more.
Although the euro closed almost bang on the pivot, overnight there has been a further dip, however already there has been a rebound of over 50 pips, so the volatility clearly remains high. This is now a really important test for the euro, with this support holding through several tests during September. The big uptrend that links all the key lows throughout the year currently comes in around $1.1050, so the importance is ramped up even further. If the Europeans come back in to close below $1.1100 today this would suggest that the sellers are really getting control and maybe set to push it lower. A close below $1.1050 would be confirmation. Initial rebound resistance is not really until $1.1200 now.
GBP/USD
A huge intraday turnaround on Cable has resulted in a big bearish outside day which has breached the bottom of the consolidation range that had been in place between $1.5413/$1.5508. This break immediately implies a 95 pip downside target which projects to around $1.5320. Not only that, but there has been a deterioration in the Stochastics which have turned lower and now are looking increasingly corrective. The support band $1.5300/$1.5385 is now being tested. The intraday chart shows that the old support at $1.5413 now becomes the resistance and already it has been retested.
A second daily close below the range would be a confirmation of a corrective signal and point towards a continued drift lower. However if the bulls can muster a close back inside the range then it will muddy the waters somewhat, however thee does seem to be a corrective element to this chart now. Yesterday’s low at $1.5467 is now the immediate support.
USD/JPY
The dollar strength induced across the G3 majors has sent Dollar/Yen sharply higher. The break above the resistance of the lower reaction high at 120.35 is a key move and now with a push through 120.60 too this is a new high for October and now certainly confirms that the negative outlook for the pair has been aborted. It also suggests that the bulls are preparing for a test of the range highs at least at 121.30 and perhaps even at 121.70. This would suggest that the near term outlook is positive within the medium term range 118/121.70. The sharp dollar rally has also taken the RSI to a 10 week high and the Stochastics are much stronger too. The intraday chart shows a slight slowing of the buying momentum overnight and it will be interesting to see if the bulls make a serious test of the resistance that is already starting to come in. The immediate support comes in the band 120.30/120.60.
Gold
Despite the fact that there was little real reaction on gold to the ECB meeting, perhaps in itself, that is a very interesting reaction. The strong dollar should have put the gold price under pressure but there are conflicting forces with the prospect of further monetary easing from a major central bank this is supportive of gold. After a very slight slide (but a rather indecisive looking candle) the outlook is pretty much as it was yesterday morning. The near term outlook remains corrective (with the Stochastics still falling) but I am still looking for the price to forge support in the band $1156/$1170.
The early reaction higher on gold today is a positive and again interesting and my confidence is beginning to grow in gold that it will hold on to this support band. The intraday hourly chart shows the continued drift lower but watch for a move back above $1170 which is acting as a near term resistance. A move above $1180.30 would push the bulls back in the driving seat again.
WTI Oil
The support has begun to form again on WTI as the buyers have come in to leave a low at $44.85. However there is still much that needs to be done to suggest this is little more than a near term counter trend rebound. The momentum indicators still suggest there is likely to be downside pressure on $43.20, with the Stochastics still falling.
Also, looking at the hourly chart, the initial key near term resistance at $46.50 remains intact, whilst hourly technical look to have merely unwound from oversold. I see WTI as now being a chart to sell into intraday rallies as the outlook suggests a test of $43.20. Above $46.50 would improve the outlook with the bears being averted again on a move above $47.50.
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