Market Overview
With the political pressure mounting on Donald Trump, traders have made a slight shift away from the US dollar in the early part of the week. The US Trade Weighted Dollar Index breaking decisively above 94.14 last week completed a major base reversal pattern but we could now be seeing a pullback to the neckline of this breakout. The source of the correction has come with Treasury yields which have fallen sharply in the past couple of sessions.
Having broken out above the key 2.40% on the 10 year Treasury, since Friday’s peak of 2.477% the 10 year yield has dropped over 10 basis points. This has come with the suggestion that Trump is likely to pick Jerome Powell as his Fed chair (i.e. the continuity candidate and not the hawkish option that would have been John Taylor). However the move accelerated yesterday amid news of charges being brought against Donald Trump’s former campaign manager Paul Manafort over money laundering as part of Robert Meuller’s probe into Russian interference with the 2016 election. Trump’s team have gone into full on defence mode and on a week where the Republicans are set to announce the tax reform bill, this does not look great. However, this is still likely to be a brief distraction for the dollar bulls, ahead of some huge market moving events later in the week (ISM, the FOMC, tax reform, Fed chair and Non-farm Payrolls).
Wall Street continues to look unconvincing in its bull run higher as another slightly corrective session ended with the S&P 500 lower by -0.3% at 2573. Asian markets again very cautious (Nikkei flat) whilst European markets are also broadly flat in early moves, whilst the DAX is closed today for Reformation Day.
In forex the dollar has had a mixed open, with the euro back slightly lower, but the yen is very slightly higher. This comes after the Bank of Japan held monetary policy steady with rates at -0.1% and yield curve control at zero on the 10 year JGB. The BoJ did however it cut its 2017/2018 core inflation forecast to +0.8% from +1.1%, although there has been little real reaction on the yen. The New Zealand dollar is again underperforming early today.
In commodities, the correction on the dollar has helped to support gold, which is trading around flat today, whilst oil is marginally lower as the recent rally shows signs of stalling.
Eurozone inflation and growth will be key for traders today. The flash reading of Eurozone October CPI is at 10:00 GMT which is expected to remain at +1.5% headline and +1.1% on core. However after German CPI came in below expectations there could easily be a downside risk to the forecast.
Eurozone flash GDP for Q3 is also at 10:00 GMT and is expected to be +0.5% which would be slightly down from the final reading of +0.6% for Q2.
Canadian GDP for August is at 12:30 GMT and is expected to be +0.1% on the month.
The US Employment Cost Index is at 12:30 GMT and the Q3 data is expected to show an increase to +0.7% (from +0.5% in Q2).
The S&P Case Shiller House Price Index is at 13:00 GMT and is expected to remain at +5.8%. The Conference Board’s Consumer Confidence is at 14:00 GMT and is expected to rise back to 121.0 (from 119.8 last month) which would be the highest since April.
Chart of the Day – EUR/GBP
The euro is under pressure across major pairs and Euro/Sterling is another cross that has fallen away in the wake of the ECB monetary policy decision last week. The move is not yet a game changer but some key near term support has been breached and increasingly the technical studies are pointing towards a test of the key medium term support at £0.8740. A couple of weeks ago the near term pivot around £0.8880 was tested but held, only for support at £0.8855 to break down in the wake of the ECB last week. Primarily this formed a small top pattern that now implies a test of the £0.8740 key support, but the move has also now broken a long term uptrend that has underpinned the market since November 2015. The momentum indicators also confirm the recent deterioration with the RSI falling at a four week low, the Stochastics declining into bear configuration, and most decisively bearishly, the MACD lines posting a bear cross under neutral. There was an intraday pullback that found resistance at £0.8850 yesterday meaning that there is now a near term sell-zone between £0.8850/£0.8880 for a test of the key £0.8740 support. The hourly chart shows a succession of lower highs and lower lows now with hourly RSI failing around 50/60 with intraday rallies seen as a chance to sell now. A move above £0.8975 is needed to abort an increasingly corrective outlook now.
The overhead supply from the large three month top is prohibitive for the euro to rally now. The dollar has come under corrective pressure across the major forex pairs in the early part of this week and the euro has taken part in this move. However, the rebound which added around 40 pips yesterday is now bumping up against the ceiling of the big top pattern neckline at $1.1660. This will house a lot of stale bulls who bought during August and October and is a source of new sellers. There is a near term sell zone between $1.1660/$1..1730 now. The momentum indicators are negatively configured and suggest that rallies are a chance to sell. The hourly chart shows the rally having unwound on the technical studies, with the hourly MACD and Stochastics lines already beginning to lose steam. Expect the sellers to resume in due course for a retest of $1.1600 and the recent low around $1.1575 before further likely weakness.
The choppy sideways ranging phase that has been lacking any real direction over the past few weeks continued yesterday as the market continued the pick up from a three week low at $1.3068 and formed a strong bull candle that added almost 100 pips into the close. Another contradictory candle to add to the constant ebb and flow of Cable over recent weeks. Momentum indicators struggle in these circumstances with the RSI hovering around 50 and MACD lines almost entirely flat too. The support and resistance within this consolidation are tightening now, with $1.3068 on the downside and $1.3280 on the upside. The momentum on the hourly chart is much more useful here with yesterday’s rally now beginning to reach stretched limits which could begin to restrict the gains. The old pivot at $1.3230 is approaching now and could act as an area of resistance under $1.3280. The bulls will be looking to breakout above $1.3280, but the way the choppy nature of Cable has been recently, the market is likely to struggle. Initial support is at $1.3160.
The dollar has lost its way in the past couple of sessions and a second successive negative candle has broken below the pivot at 113.25 which completes a small top pattern and implies around 100 pips of correction. This means that there is a near term downside bias towards 112.25 now. With the momentum indicators rolling over there is the potential for this correction to take hold. However it is important to note that although the dollar bulls have taken a step back in the past couple of sessions, the near to medium term upside pressure is still present. A near term correction is still likely to merely be a correction within a dollar bull phase. Near term positions are still corrective though, with the hourly chart showing 113.25 acting as a basis of resistance now early this morning, meaning there is a near term resistance band 113.25/113.50. Support comes in around 113.35 for the correction and this is unlikely to be a correction that lasts to long before the bulls resume control.
The prospect of a near term rebound on gold was starting to come through yesterday morning and this prospect is growing now. A second completed positive candle in a row has not been seen for over two weeks, or since the latest move lower on gold began. Bull candles have invariably been followed by strong bear candles recently but this trend has been broken now and the support is beginning to take hold. A move above $1282.40 improves the near term outlook, confirmed above $1284. The hourly chart shows this near term rebound in better detail with the market moving above all the hourly moving averages and having previously found the 144 hour moving average (c. $1277) as resistance, it is now acting as a basis of support. However, this is early days for the recovery of gold and key resistance overhead remains intact. It is though interesting to see a higher low at $1268.40 above the recent low at $1263.40 (which in itself could be a higher low above the October low of $1260).
WTI Oil
The breakout above $53.75 has not come with a decisive move higher, however the bulls are still in control of the move higher. Corrections should be seen as a chance to buy now. The doji candle formed in yesterday’s session denotes uncertainty with the prevailing trend, and this is reflected in the early dip lower today. Coming at the confluence of two upper limits of uptrend channels, in addition to the RSI at 69, this could be the market beginning to take a breather. However, the outlook remains strong and corrections should still only be near term in duration. The bulls would be certainly looking to use old breakouts from September and earlier in October to be seen as underlying demand that will be supportive for corrections now. This is reflected with the positive momentum configuration on the hourly chart where unwinding moves on the hourly RSI find support around 40/50 and the hourly MACD lines turn up around neutral. Having broken out to multi-month highs there is still an expectation of further gains to test the $54.95/$55.25 resistance from earlier in 2017. Holding back above $53.75 would be bullish.
The corrective move on the Dow yesterday only adds to the consolidation and the concern that this could be a pause for breath that turns corrective. The support at 23,251 takes on an increasingly important role by the session now as this recent consolidation has built. The momentum indicators are losing their impetus with the RSI dropping back towards 70, and the MACD lines close to a crossover. It is though important not to get too far ahead though as the trend is your friend until it ends and this is a seven week uptrend that now comes in around 23,200. Until this trend is breached and/or the support at 23,251 is broken it is difficult to really get too corrective, especially considering the strength of the bull run (and given the all-time high the S&P 500 saw on Friday). This could still be simply part of a consolidation. Subsequently watch the resistance at 23,460 and the all-time high at 23,485. The hourly chart shows the negative divergence on the hourly RSI but until the RSI consistently fails below 40 and the hourly MAD lines drop below neutral, this is still a part of a bull market correction.
DISCLAIMER: This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such.
All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.