Market Overview
Trading sentiment this morning seems to have changed once more as a more positive outlook is being taken to end the week. The hawkish Fed minutes on Wednesday were followed up by comments from FOMC’s Bill Dudley yesterday that June was a “live” meeting, but the dollar rally has just taken a pause for breath. Or is this a stalling, as Treasury yields have started to retrace a touch? Furthermore, the Fed Funds futures seem to also have pulled back with the CME FedWatch now saying around 30% probability for June (was 34% yesterday morning). Forex markets are showing a mixed picture this morning, whilst the oil price shooting back higher has also helped to settle the jitters on the equity markets. Maybe the market needs more convincing that a June rate hike will be seen? With the potential for a significant market shock with the UK’s EU referendum just after the FOMC in June, I know that I do.
Wall Street rallied into the close to unwind earlier losses and prevent the completion of a large top pattern on the S&P 500 (-0.4%). Asian markets ran with the late rebound and pushed broadly higher (Nikkei +0.5%) whilst European markets are also positive today. In the forex markets there is little real direction, although with the improved sentiment the yen is underperforming. The commodity currencies are also more positive today, helped by a strong rebound in oil that has continued. Gold and silver are trading around the flat line as they fight for support following their recent corrections.
On the economic data front there is little to trouble traders during the European session. At 1330BST the Canadian CPI is released with core CPI expected to be +0.1%. Then at 1500BST US Existing Home Sales are announced and are expected to improve to 5.40m (5.33m last).
Chart of the Day – USD/CAD
The technical rally on USD/CAD has come as fundamental factors such as the negative economic impact of the wildfires in Alberta, the recent strength of the US dollar and a possible oil correction have combined to drive an upside breakout above the key resistance around 1.3000 and change the medium term outlook. But will it last? The breakout above neckline resistance at 1.3015 has also completed a 5 week head and shoulders base pattern which implies a recovery target towards 1.3570. This neckline at 1.3015 will now be key for a pullback as it now becomes supportive. The improvement in the momentum indicators has been confirmed with the RSI bouncing higher from above 50, the Stochastics maintaining a bullish configuration and the MACD lines also on the brink of pulling higher on the MACD lines. Also, the 21 day moving average (1.2815) turning higher is a key for the outlook as this has previously formed the basis of resistance and is now the basis of support. Near term resistance is at 1.3215 and 1.3295. The old pivot around 1.2835 is also key support now for the bulls. The signs for a recovery are growing.
The price of EUR/USD has been in decline now for almost three weeks and has broken below the key April low at $1.1213. The outlook remains corrective and even though yesterday’s candle was very small (just around 50 pips high to low) with only minor losses into the close, as yet there is still no real sign of any recovery. The trend is your friend and at the moment, the trend is corrective. The breakdown of $1.1213 has opened $1.1142 which is the late March low, but more realistically the long term pivot band $1.1050/$1.1100 comes back into play. The momentum indicators remain corrective with the RSI below 40 (signalling increasingly negative momentum) and the lowest since early March, whilst the Stochastics are also now bearishly configured. Selling into rallies remains viable with $1.1230 capping yesterday’s upside, but stronger resistance coming in between $1.1255/$1.1290. The rally high at $1.1345 is still key.
After the strong gains seen on Wednesday (despite the hawkish Fed), cable had more of a consolidation session yesterday, with only marginal gains on the day. This cautious look to trading has continued into today’s session and although there is little significant sign that the rally has run out of steam, the volatile and choppy nature of sterling of late could mean that there is some temptation for some short term profit-taking. We must also bear in mind that the recent rally is once more back to the downtrend that dates back to August 2015. Whilst the downtrend was breached on an intraday basis during the April rally, it was never done so on a closing basis, and the same could be said about this latest move. The trend comes in today at $1.4600. Momentum is positively configured, but yesterday’s high at $1.4660 will certainly be watched today. A breach would re-open the early May high at $1.4770. The hourly chart shows that $1.4560 is initially supportive and a breach would actually confirm a small top pattern and a corrective move would be signalled towards $1.4460. Momentum on the hourly chart is still positive but I am increasingly cautious about this rally now.
Following from Wednesday’s breakout above 109.50 that implies upside towards 110.80, there has been a degree of consolidation as a series of overhead technical barriers come into play. The top of the three month downtrend channel comes in today around 110.70, whilst the falling 55 day moving average (c. 110.35) is also capping the gains, and the price is also close the resistance of the old floor of February/March between 110.65/111.00. Although momentum indicators are now more positive, the bulls will need to work hard to break through all this technical resistance overhead. The hourly chart shows positive configuration and that corrections are being bought into at higher levels, with the old resistance around 109.50/109.65 now a basis of support. There may be more in the bull run yet, but it will be a significant achievement to break through 111.00.
Gold
The bulls remain under big near term pressure as the price has confirmed the breakdown of the support around $1260 and there is increasing pressure being put on the support of the seven week uptrend. The intraday breach of the uptrend yesterday was not confirmed and the bulls continue to hang on by their fingernails with the trend line today around $1252, but the momentum indicators are looking increasingly corrective and bordering on negative now. A move to the low 40s on the RSI would be a 2016 low and suggest that the bulls have lost control, likely to also come with the further correction back to test at least $1227 support. The intraday hourly chart now shows that the old support band $1257.25/$1263.10 is now becoming a resistance band for the rallies and that the momentum indicators show that intraday rallies are seen as a chance to sell. Further resistance is around $1269/70. Initial support is $1237.60.
WTI Oil
If that was the correction, it was especially short lived. The daily chart shows yesterday’s intraday dip back to the breakout support at $46.80 only to rally all the way into the close, reversing all the previous losses and forming a bullish candle that in other circumstances would be called a bull hammer. This rebound subsequently strengthens the support at $46.80 and looks to test once more the resistance left from Wednesday’s peak at $48.95. The caveat is that, one more we find the RSI around 70 and this has tended to be a limit to the upside in previous rallies. The prospect of limited upside potential and a near term correction is still elevated, but for not the bulls have control and they will be thinking about the key October high at $50.92. The support band between $45.60/$46.80 has been bolstered by the recent moves.
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