Market Overview
Market sentiment is wary moving into the final day of the week, with safe haven flows again back in force as the oil price has fallen back lower overnight. Having looked to be bouncing yesterday morning the oil price has come back under pressure overnight. Another batch of disappointing data from China has certainly not helped, with New Yuan Loans growth (ie bank lending into the economy) significantly missing expectations and Money Supply growth also lower than expected. This hit what had been looking to be a more positive Asian session which subsequently closed mixed. This followed a mixed close on Wall Street, whilst the European session is also rather mixed early on.
The market is also still digesting the interesting comments from St Louis Fed President James Bullard, who is now a voting member of the FOMC this year. Bullard has historically been on the hawkish side in his argument for a rate hike, however he cautioned of the impact that a falling oil price would have on inflation expectations would have on possible monetary policy decisions. This questions the pace of the FOMC’s apparent preferred four rate hikes in 2016 argument.
Forex trading has shown another shift back into safe haven plays with the euro and yen stronger, sterling weaker, along with weakness in the commodity currencies. This is a trend of moves that is happening time and time again when the market takes on a safe haven preference. Additionally, perhaps unsurprisingly, gold is also higher and the oil price is strongly lower again.
Traders will now turn their attention to this afternoon’s US data which is split between consumer data and manufacturing signals. At 1330GMT a batch of data comes out with Retail Sales the most important. Expectations are for a +0.2% gain on the month which would be a positive move in the year on year data (although keep in mind that retail sales has a recent history of missing expectations). There is also the New York Fed manufacturing which is again expected to be negative at -4.0. There is also PPI inflation which is expected to pick up slightly to -1.0% from -1.2% for the year (with the core data at -0.3%). At 1415GMT the Industrial Production data is expected to again be a worrying -0.2% for the month with Capacity Utilization also dropping to 76.8 (77.0 last. Then at 1500GMT the preliminary Michigan Sentiment which is expected to improve slightly to 93.0 (from the revised 92.6 last month).
Chart of the Day – EUR/JPY
Is the pair set for a recovery from the bottom of the downtrend channel? The legacy of the bullish engulfing candle (bullish key one day reversal) is still intact with the low at 126.75 and the recent consolidation the stretched oversold position could be set to unwind for a rally. Momentum indicators are beginning to pick up with the rally. The RSI is now back above 30, whilst the Stochastics are also off their low point, whilst the improving momentum of the MACD histogram suggests and early pick up here too. The support at 127.30 above the 126.75 is now increasingly key as if the bulls can push above 129.10 then a first posting of a higher low will be in place. There is though much work to be done to improve the outlook as the last couple of candles show intraday profit taking coming in to prevent the bull control. This has left slightly positive but ultimately disappointing candles as the closing price has been back below the session mid-point. The hourly chart shows a slight positive bias but without the bulls managing to gain control. Early days for a recovery perhaps?
The consolidation on the euro continues as the market has traded in a tight range throughout this week. Finding support around the $1.0810 key medium to longer term pivot the market is struggling to break above the resistance around $1.0950. Again yesterday we see an intraday move towards the resistance rebuffed. This arguably maintains the downtrend channel of the past 4 weeks (although the downtrend line is being increasingly tested. Momentum indicators are increasingly neutral on the daily chart so we must look towards the hourly chart for signals. And here we see that the previously slight bearish bias has now turned neutral, with moving averages basically flat and hourly momentum oscillating within normal bounds. Until there is a breach of either $1.0810 on the downside or $1.0950 on the upside (both on a closing basis) it will be difficult to find direction and for that reason I am neutral.
There is still no real sign that the selling phase is ready to end. The concern is that the momentum indicators are configured in a way that would suggest extremely bearish momentum is continuing and this is a position that can be ongoing. The downtrend which is now 5 weeks in length is today providing resistance up at $1.4563 which coincidentally is the overhead supply from the old key April 2015 low. This means that there can be a technical rally of over 150 pips and still the chart is very bearishly configured. The counter argument is that the RSI is down at 21 and extremely oversold, meaning that at some stage there will be a technical rally. However it is not showing on the daily chart and it is not on the hourly chart either. The hourly just shows the continued stepped decline and in fact the latest mini unwind of yesterday afternoon has simply helped the renew downside potential on the hourly RSI and MACD lines. Expect a move back to test yesterday’s ow at $1.4360, but further weakness to $1.4230 is also not to be ruled out. The initial resistance is $1.4490 and then a key band at $1.4600/$1.4640.
There is an ongoing interesting consolidation on Dollar/Yen yesterday. I discussed in my daily video that the fact that the pair was no longer in bearish decline could be an interesting signal for the risk appetite of the market. Since making the low at 116.68 on Monday there has been a gradual improvement in sentiment which has seen the RSI turning higher (and crossing back above 30) and the Stochastics also crossing back above 20 for the first time in 3 weeks. Is this support that is now building? Yesterday’s bullish candle has helped to improve the outlook after a “gravestone doji” (which coming in the middle of a consolidation does not have the same influence as it does at the top of an uptrend). The hourly chart simply reflects the building consolidation with flat moving averages and neutral momentum indicators that are oscillating from one day to the next. We have the 117.20 support still in place and there is a new resistance at 118.35 which is now protecting the key 118.75 overhead pivot level. This is another pair that we await a breakout.
Gold
Do the bulls still have a base pattern to hang on to? Well it is looking ever more precarious as an intraday move below $1077 managed to close almost band on the old key pivot level. This sort of intraday move is in keeping with previous moves around this pivot but I am looking for a closing breach to change my outlook. The early support today means that the bulls are hanging on by their fingernails. The daily momentum indicators are not especially helpful currently, with the Stochastics falling away, whilst the gold price is also on the brink of falling back below all the moving averages. The hourly chart shows a sequence of lower highs is now in place with the latest at $1095.30, with the hourly moving averages all in bearish decline. The bulls will now do well to simply consolidate as the selling pressure is mounting. A closing breach of $1077 would turn the outlook negative for me and I would then be looking at the next support at $1058.
WTI Oil
The oil price has not fallen to new lows for the past two days. This is the first time this year that the oil price has managed to find some near term support, but can it last? The technical picture suggests that there is certainly some room for an unwinding move. Stretched momentum indicators are trying desperately to improve, with the RSI turning higher from below 30 this could be construed as a near term buy signal if it moves back above 30. With old supports turning into new resistance the potential is present for a rebound into the resistance band $34.00/$34.35, however the momentum indicators suggest this would be a counter trend move that should be sold into. The intraday hourly chart shows some consolidation but again, can this turn into a rebound of note? There needs to be a move back above the pivot level at $32.10 which would also be a near term base that would imply a move towards $34.00. The multi-year low remains at $29.93 and a breach would re-open the 100% Fib target around $27.15.
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