Market Overview
Politics continues to be a key factor to drive markets, but this time, it would seem in a positive way.
There seem to be moves towards a deal in the NAFTA renegotiations as talk is that Canada is close to an agreement with the US and Mexico over how their futures trade relationship will look. This is positive for risk appetite and has allowed US equities to continue to push higher. Despite this though, the emerging markets currencies continue to suffer, with the Turkish lira weakness resuming and the Chinese yuan again under pressure. However the big move in currency markets has been the announcement from the Brexit negotiations where the EU seem to be ready to offer the UK a deal.
The EU’s chief negotiator, Michel Barnier said that the EU and UK would have a post-Brexit partnership that likes of which has never been seen before. Quite what this means remains to be seen, and also other parts of what Barnier said suggested little real shift in stance. However, sterling traders jumped on his comments of a “deal”.
Sterling has been dogged for months by Brexit uncertainties and the pricing in of a hard withdrawal from the EU. Hence a short covering rally on the pound which has taken sterling back above $1.3000 and four week highs. The question that sterling traders will now be asking is whether this is a trigger for sustainable sterling recovery. It seems a little early still and many political bumps along the road.
The move hit the dollar index, which closed lower again despite the upward revision to US growth. However, today the focus turns to US inflation, and the Fed’s inflation measure, the core PCE which is expected to track back to 2% again.
Wall Street closed decisively higher once more with the S&P 500 +0.6% at 2914 with a fourth consecutive all-time closing high. However, with US futures dipping back -0.1% early today, Asian markets have been mixed overnight, with the Nikkei +0.1%, whilst European markets are lower in early moves.
In forex, there is a consolidation on USD on the G4 pairs (EUR, GBP, JPY all broadly flat) but the big mover has been decisive weakness of -1% on NZD on weaker than expected business confidence in New Zealand. Slipping business investment in Australia has also hit AUD.
In commodities the gold price continues to consolidate around the psychological $1200, whilst oil is again finding support in its recovery.
It is another quiet European morning for traders on the economic calendar, although German prelim inflation being released through the early morning could give a steer for the eurozone data on Friday. The individual states announce through the early morning , with the German prelim CPI released at 13:00 BST which is expected to remain at +2.0% (+2.0% in July.
Traders will then focus on the Fed’s preferred inflation gauge, the US core Personal Consumption Expenditure for July at 13:30 BST which is expected to be +0.2% for the month (a standard forecast, it would seem) with the year on year data improving to +2.0% (from +1.9% in June).
Chart of the Day – EUR/AUD
We focused on EUR/AUD last week as the market broke a four week downtrend and momentum indicators pulled strongly higher. This move has now smashed through the resistance of the 1.5885 July highs and is not looking back. The latest hugely strong bull candle, the fifth in the past seven sessions now means that the market is eying the April and March highs at 1.6140/1.6190 respectively. This comes with momentum indicators very strongly configured. The strength of the run suggests the RSI over 70 should not necessarily be restrictive as this is a strong trend move to be backed. The hourly chart shows that intraday dips are being bought into, with a strong near term pivot at 1.5950 now supportive and to be seen as a key near term gauge for the continuation of the bull run. Initial support is the overnight low of 1.6000.
The uptrend of the past two weeks remains intact but has looked a little uncertain following the moves of the past couple of sessions. Even though there have been another two positive sessions to add to strong recovery, the long shadows of the candles suggests that the bulls seem to have been less assertive through the sessions. This is resulting in a slowing of the positive momentum, as the RSI just begins to flatten off around 60 and Stochastics also threaten to roll over. The uptrend is still intact at $1.1645 today, which is above a pivot band $1.1610/$1.1630, but it is important that the bulls breakout above $1.1735 again (Tuesday’s high) in order to continue the momentum of the recovery. The support of the $1.1610/$1.1630 pivot is growing in importance now, whilst the hourly chart shows a pivot near term at $1.1650 too. A loss os these supports would question the recovery and open $1.1505 again.
Cable has been struggling recently, but that has all turned on its head again as positive newsflow surrounding Brexit has helped to boost sterling. Gaining over 130 pips on the day has taken Cable to a near four week high and shifted the near term outlook. The recovery uptrend having been pressured previously, now looks to be solid, along with the improvement in the momentum indicators. The RSI is at its highest since April, above 50; whilst the MACD and Stochastics are also accelerating higher. Can the sterling bulls now build on this move? There is a slight degree of slippage early today and the reaction could be telling, to see if the market trusts the move. Back above $1.3000 means that this is a psychological gauge once more, with $1.2955 again supportive. Initial resistance is at $1.3040 from this morning’s high, with $1.3080 where overhead supply ramps up.
The bulls are finally showing some signs of life again as the dollar pushed decisively higher yesterday on the release of an upward revision to US GDP data. A solid bull candle posted through the resistance of 111.40/50 has taken USD/JPY to its highest level for four weeks and re-opened the 112.15 August high. This move seems to be confirmed on the RSI which is at a six week high, whilst the MACD and Stochastics are beginning to gain some traction. The breakout means that 110.90/111.50 now becomes a near term basis of support to be bought into, and already this can be seen with a pivot forming on the hourly chart with the breakout.
Gold
The near term recovery breakout on gold has stumbled in the past few sessions as the market has retreated back from $1214 to below the $1204 key level once more. The mini trend channel is being tested as the market has slipped back and momentum in the rebound has begun to wane, with resistance found at $1214 is under the old $1217/$1220 barrier. This is subsequently a key test for the recovery. Holding on to the support at $1199 is key and a confirmed breakdown would shift the sentiment on gold once more. The near term outlook is becoming increasingly circumspect. However, the RSI has halted its recovery around 50, and the Stochastics are threatening to roll over too. The hourly chart shows the bulls having lost the impetus with the hourly RSI failing under 60 and MACD lines turning lower around neutral again. A close below $1199 opens $1183 as the higher reaction low.
WTI Oil
Although there may have been a mild disappointment in the EIA crude oil drawdown data which is a near term drag on oil, the recovery outlook on the technicals remains firmly on track. The move higher over the past two weeks has built an uptrend that is supportive around $68.00 today and corrections are being bought into. Yesterday’s decisive positive candle has once more re-affirmed the recovery meaning that Tuesday’s low at $68.20 is now initially supportive as a higher low. WIth momentum indicators continuing to pull higher in their recovery, there is a continued expectation that the market will move higher to a test of the resistance between $69.90/$71.10. Intraday corrections remain a chance to buy.
The market continues to push higher, but there is a sense that the threat of a near term corrective dip is growing. Although the market has made gains in the past two sessions, the candles have been a little unconvincing. With the RSI just stalling in the high 60s, this runs the risk of a rally that struggles and could begin to find some profit taking. In this situation an unwinding move would be a healthy development for the Dow, with the 76.4% Fib at 25,845 and the previous mini breakout at 25,888 seen as a basis of support. Momentum retains a strong medium term configuration and any corrective dip would still be considered a chance to buy once more for a retest of the January all-time high at 26,616. A close above Tuesday’s high at 26,122 re-open the push for the highs, but the hourly chart is beginning to hint at some negative divergences which could imply a near term slip is approaching. Only a corrective close below the higher lo at 25,608 change the strong near term outlook.
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