Market Overview
Sterling has shot higher after finally there seems to be some signs of potential agreement over the UK/EU negotiations on Brexit. The contentious divorce bill looks close to being agreed now with the UK increasing their offer to €50bn. Sterling has been very reactive to the prospects of a hard or soft Brexit and signs of positivity have been supportive once more.
After a corrective move in the past few weeks, could it be that the dollar is on the brink of another turnaround in fortunes? The strong economic data continues to flow, with Consumer Confidence yesterday storming to a 17 year high, backed up by extremely encouraging Richmond Fed manufacturing data too. Focus will be on the second reading of Q3 growth today, with an upward revision expected too. Jerome Powell’s first public grilling also seemed to reflect a steady hand on the monetary policy tiller whilst equity market bulls were also cheered to see his views on regulation of the banks suggest a lighter touch than current Fed chair Yellen. However the game changer this week is still likely to be tax reform, and there was good news there too.
The Senate Budget Committee passed through the tax reform bill last night to pave the way for debate on the floor of the Senate this week and possibly a vote as early as Thursday. This move does not guarantee a successful vote by any means but now gives Senate Republicans a huge decision to make. It was interesting though that despite a significant jump on Wall Street on the news of tax reform, there was little real move on Treasury yields. In fact the yield curve continues to flatten, suggesting that there is either still concern over tax reform passing, or over the potential for the bill to be a game changer at all. There has though been a rebound in the dollar, which has pulled higher against the euro and the yen. However, the reaction back lower this morning would suggest real progress has yet to be seen, for the currency markets anyway. We will have to wait some more for the dollar rally to take hold, it would seem.
Wall Street closed sharply higher on the news of progress on tax reform, with the S&P 500 over 1% higher. Asian markets have been a little less bullish though, with a more mixed look and the Nikkei +0.5% higher. European markets are mixed, with gains on the DAX, whilst FTSE 100 is suffering from the strength of sterling.
In forex markets, the dollar is giving back some of yesterday’s gains, whilst sterling remains strong.
For commodities, gold is consolidating with the news of another North Korean missile launch sure to help sustain the safe haven demand. Oil is consolidating ahead of OPEC.
With regards to economic data, the main focus will be on the second look at US third quarter growth today. However, first up we look at Germany inflation which is released throughout the morning at a state level with the countrywide reading at 13:00 GMT. Consensus expects German HICP to pick up slightly to +1.7% from +1.5% last month. US Q3 GDP (Prelim) is at 1330GMT and is expected to show an upward revision to 3.3% (from the Advance reading of +3.0%). This should confirm that US growth is chugging along very nicely now.
Pending Home Sales are at 15:00 GMT and are expected to improve by +1.1% on the month having been flat last month. The EIA oil inventories are at 15:30 GMT and are expected to show crude stocks drawdown by -3.1m barrels (-1.9m last week), distillates flat (+0.3m barrels last week) and gasoline stocks building by +1.4m barrels (last week +0.1m).
Aside from the data releases, Bank of England Governor Mark Carney is speaking at 14:00 GMT whilst outgoing Fed chair Janet Yellen testifies before the Joint Economic Committee at 15:00 GMT.
Chart of the Day – AUD/USD
Is the latest rally another chance to sell? Since the market began trending lower in September there has been a consistently corrective outlook forming. The support around $0.7620 had held for a few weeks towards the trend of October, however this downside break continued the move lower. Now the market has rebounded to the overhead supply of this old breakdown and the rebound is starting to roll over again. The fact that this is a confluence of resistance form the nine week downtrend adds to the potential to sell. Momentum indicators have been negatively configured to see rallies as an opportunity to sell for several weeks now but there is still a slightly mixed look to them now, with the RSI and Stochastics still trending lower, however the MACD lines have broken the downtrend. This would be a problem if the RSI also looked to break the downtrend, but for now the outlook is still negative on balance. The fact that the market has failed to close above $0.7620 on each of the occasions the resistance has been tested is interesting, whilst Monday’s high at 0.7645 also came within an old “sell zone of $0.7620/$0.7650. The hourly chart shows consolidation but the continued failure around $0.7620 is still in play. The likelihood remains for a retest of the recent low at $0.7530.
The outlook has been changed following the recent rally that has aborted the large head and shoulders top pattern. However following the breakout above $1.1880, the market has now posted two consecutive days of correction. The bottom of the trend channel comes in around $1.1800 today and there needs to be a degree of support forming now to prevent the recovery from losing shape. Yesterday’s low at $1.1825 has held so far this morning with mild gains and for now this still looks to be a correction to buy into. However the coming few days will be key as to whether the bulls can sustain control of the market. Momentum indicators broadly hold on to their improving configuration, however the Stochastics need to be watched after having ticked lower. The hourly chart shows near term support between $1.1805/$1.1825 now that will be key near term. Resistance is forming around $1.1880/$1.1920 below the $1.1960 key high now. This will be an interesting phase of trading to see who has the control. With the vote in the Senate on US tax reform likely on Thursday we should get some decisive outlook defining direction in the coming days.
It has looked at one stage yesterday that the sterling rally had been shot down but as the news broke of a potential breakthrough in the UK’s Brexit EU divorce bill negotiations, there was a sharp spike higher on Cable that has rallied the market over 150 pips from yesterday’s session low at $1.3220. This completely switched the outlook again and suddenly the bulls are back in the ascendency. The intraday gains today reflect an impending breakout above $1.3335, but as yet we still need confirmation of the move. Once more, the market did not see a closing breakout yesterday and although the early signs are positive, with the fundamental factors (Brexit and US tax reform) still key, yesterday’s trading shows that technicals can quickly be superseded. A closing breakout above $1.3335 opens $1.3450 as the next resistance. Momentum indicators are positively configured and the market is seemingly set to push higher. However Thursday’s tax reform vote in Congress could change all that, or a deterioration once more in Brexit negotiations.
The US dollar has been showing signs of stabilising in the past few sessions and the outlook is beginning to improve slightly. Posting a second positive candle in three sessions, the market is now breaking the accelerated downtrend of the past couple of weeks. This come as momentum indicators begin to show signs of near term improvement again, with the Stochastics ticking higher and RSI off its lows. The fact that this is all taking place with the support of the medium term pivot around 111.00 should also not be discounted. The hourly chart shows the potential for a small base pattern now forming, with a neckline at Monday’s high of 111.70. A move through this resistance would imply around 65 pips of recovery. The hourly momentum is also beginning to look less correctively configured. For now this is a consolidation between 111.00/111.70 but the bear control has been breached and the potential for a near term rebound has grown.
Gold
Tracking a bull run with higher lows and higher highs, the market is considering the potential for a push on the longer term pivot around $1300. Technical momentum is positive but still lacks a degree of conviction. This is reflected in yesterday’s very small bodied tight range candle. However there does still seem to be an appetite to buy into weakness on gold. A previous resistance around $1290/$1291 is supportive initially, with Fridays low at $1285.70 adding to near term support. There is a three week uptrend around $1280 which would be the acceptable limit of a drop back for the bulls to remain in control of this recovery now. The potential for a retest of $1300/$1310 grows but there is still the mi-October resistance at $1306 to consider too. The hourly chart shows intraday corrections remain a chance to buy.
WTI Oil
Moving towards tomorrow’s crucial and potential outlook defining OPEC meeting, the oil price has stabilised once more. Turning lower on Monday at to leave a high at $59.05, on a technical basis corrections within the multi-month uptrend channel remain a chance to buy. The momentum indicators remain positively configured on a longer term basis and although there is just the slightest hint of a negative divergence on RSI, MACD and Stochastics, the bulls remain in control. However there is the risk that a lot has been baked into the price ahead of the OPEC meeting and the potential for a “buy on rumour, sell on fact” move could easily materialise. Upside resistance to watch today will be at $59.05 initially with the $60 psychological level and then the $61.50 basis of resistance coming in from June 2015. Support is at yesterday’s low initially at $57.40, whilst a near term pivot sits around $56.70 before $55.50 and the key low at $54.80.
There seems to be little to stop the bulls once more as another push into all-time high ground was seen yesterday with a huge bull candle that added 1.1% into the close. The market is now acceleration higher once more and has pulled clear of not only the pivot support at 23,485 but also the old resistance at 23,602. Daily momentum studies are strongly configured with further upside potential as the RSI is rising into the low 70s (but still well below levels seen supportive throughout October and early November), whilst the MACD lines are threatening a new bull market buy signal. Intraday corrections remain a chance to buy, with the hourly chart showing strong momentum with the hourly RSI unwinding into 50 being a chance to buy now. There is now a near term support band 23,545/23,639. Taking the November trading range as a consolidation range breakout there is an upside projection towards 23,960 now, very close to the 24,000 mark.
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