Market Overview
They say a week is a long time in politics, well it took under 24 hours for UK Prime Minister Theresa May’s cabinet unity over Brexit that was proclaimed on Friday, to be smashed apart. The resignation of two key ministers, David Davis (Brexit Minister) and Boris Johnson (Foreign Secretary) has rocked the stability of Mrs May’s leadership.
Sterling has been an underperformer amid elevated Brexit risk anyway, but as it appeared that this could be the moment for the hard-line Brexiteers to strike at soft-Brexit leaning Mrs May, sterling has fallen sharply. However, for now Mrs May limps on (as she has done since the debacle of the 2017 General Election) as Prime Minister.
Perhaps the sell-off in sterling will be contained? A high-low range of around 175 pips yesterday has been the limit so far, but negative pressure remains on the pound this morning.
Any continued political meltdown would certainly risk what had been the increasingly likelihood of a Bank of England rate hike in August. If that is again put on ice, in a not dissimilar fashion to the prospective hike back in May, then sterling would really come under fire. With the sterling correction we have also seen a rebound on the dollar, most keenly seen on USD/JPY, with the Dollar Index back around the near term breakdown level at 94.20.
China inflation plays into this, with a higher than expected jump in the PPI. Although China CPI was in line at +1.9% (+1.9% exp, +1.8% last), there was an upside surprise in PPI to +4.7% (+4.5% exp, +4.1% last) which spells pricing pressures building across emerging markets suppliers into China.
Wall Street closed strongly higher last night with the S&P 500 +0.8% at 2784 and with further gains in futures today, Asian markets are also strong (Nikkei +1.0%). European markets are shading higher in early moves, but it will be interesting to see how FTSE 100 performs on the weaker sterling, given the tendency for a negative correlation to hold.
In forex, there is a continued weakness in sterling, whilst the dollar has mild broad strength. This has pulled gold back a touch more today, whilst oil is finding support again.
Traders will be on the lookout for the first monthly release of UK GDP for May is at 0930BST as the UK stats office, the ONS, changes its delivery of information.
The UK Industrial Production is also at 09:30 BST and is expected to show an improvement to +1.9% (from +1.8% last month). The German ZEW Economic Sentiment is at 10:00 BST and is expected to show a continued deterioration to -18.2 (from -16.1 last month). US JOLTS jobs openings are at 15:00 BST and are expected to show an improvement to 6.88m (from 6.70m last month).
Chart of the Day – Silver
With the dollar turning slightly corrective, there has been a rebound in precious metals. This is helping to improve the outlook for silver which is now building a technical recovery. For several months the old support around $16.16 had been a floor, but since being broken this has since become a key resistance with the built up overhead supply. This ceiling has been evident in that twice in the past two weeks, the market has tested but failed at the $16.16 resistance. However, yesterday the rebound pushed through the ceiling on an intraday basis to effectively complete a base pattern. Although the move could not be held into the close, a renewed push higher is being seen today, however needs to see a close above $16.16 in order to confirm the market being comfortable to break higher again. A closing breakout would then imply a rebound of $0.43 and a target of $16.59. This would be once more be back around the 144 day moving average which has been broadly flat throughout 2018 which ultimately reflects the lack of trend on silver over the medium term. Momentum indicators are ticking higher with the recovery, with the RSI rising above 40 and the Stochastics accelerating higher in the recovery. A bull cross on the MACD lines would also confirm the move. The hourly chart shows a more improved momentum building near term and minor corrections are seen as a chance to buy. There is a basis of support between $16.00/$16.10 which will now look to be used as a base for renewed buying. The higher low at $15.88 is now key support.
The recovery in the euro looked to be progressing well yesterday but the dollar bulls have tugged the market back to once more test the credentials of the euro strength. The mini uptrend of the past eight sessions is being tested as the market has pulled back from the high of $1.1790 and looks ready to test the confluence of the uptrend and breakout support at $1.1720 today. Added to this is the support of the 38.2% Fibonacci retracement of the big euro sell-off from $1.3990/$1.0340 at $1.1735 and the importance of this test becomes clearer. A decisive close below $1.1720 would be a disappointment for the bulls now. For now, momentum is still positive, with the RSI still above 50, MACD lines rising and Stochastics above 80. However if a run of negative candles are strung together then it would certainly change. A move below $1.1670 support would confirm the bears have resumed control.
What a day of volatility for sterling! The move yesterday just prove how important Brexit still is for sterling traders. Initially sterling bulls brushed off the resignation of David Davis to pull Cable strongly higher, but the mood dramatically shifted in the afternoon with Boris Johnson also quitting. This quickly reversed a technical breakout above $1.3315 to form a negative one day candle and with the market slipping further back today there is a serious questioning of the recovery uptrend again. In the very least, the pause button has been pressed on the improvement in momentum indicators. The old support at $1.3200 which had become a loose pivot once more will be seen as a gauge, with the market bouncing around $1.3190 yesterday. A close below $1.3200 would really suggest the bulls losing their grip and a retreat back to $1.3050 would be likely again. As the dust has settled on the political moves and Theresa May remains Prime Minister (for now) if Cable can survive this test of support then perhaps an improving picture can resume once more. Initial resistance at $1.3270.
USD/JPY
The market looked to be drifting before the dollar bulls jumped back in the driving seat yesterday to suddenly pull for a test of resistance again. A strong bull candle added 40 pips yesterday and another 30 pips early today to once more test the resistance at 111.15. The bullish bias on momentum continues and the RSI has jumped back above 60 again. There is also an argument to be made for a bull flag formation, should the market complete a breakout above 111.15. The implied target would then be 112.00. The May high of 111.40 is clearly still key resistance in the way, but from their slumber we suddenly have the bulls raring to go again, a move reflected in the hourly chart. How the market closes today will be key. There is now intraday support between 110.80/111.15.
Gold
As the dollar regained strength into the close yesterday, the gold price pulled back sharply from its high. This has left resistance at $1265.90 but also resulted in a close back under the $1261 resistance. This has seriously questioned the potential for a sustained recovery for gold. For now, momentum in the recovery is still present, with the MACD lines having crossed higher, however the sustainability is now more questionable. Watch the Stochastics, the most sensitive momentum indicator, as if this turns back lower then the bulls will be up against it again. The initial support to watch is again $1250 as a break below there would also suggest the recovery momentum having been reversed. In the Asian session, the initial reaction has been relatively solid, but on the hourly chart watch for the RSI moving below 40 and MACD lines moving decisively below neutral, which would be a concern. A close above $1261 would continue to be ta bullish signal for continued recovery.
WTI Oil
Posting a slightly negative candle on Monday, suggests that the consolidation below last week’s high around $75.25 continues. However, there is a slight bullish bias within the consolidation, amid the early gains today which are edging the market above yesterday’s high of $74.30. The positive bias is reflected in the bullish configuration that remains on the momentum indicators with the RSI still above 60, whilst the Stochastics are also holding above 80. A change to this would likely see the market putting pressure back on $72.85 and $72.15 again, but for now the sentiment remains positive. The hourly chart remains somewhat contained in a ranging scenario, but the support is now at $73.00. There is resistance of a lower high at $74.80.
Having broken out above the consolidation triangle, the outlook for the Dow has improved sharply. This has resulted in an extremely strong bull candle (the strongest in a month) and a move above key near term resistance at 24,569. A move above resistance of the 38.2% Fibonacci retracement at 24,594 also now leaves an improvement open for the 50% Fib level at 24,980 as the next target area. The momentum indicators are rising sharply now, with the RSI above 50 and Stochastics accelerating higher, with the MACD lines on the brink of crossing higher. The breakout means that there is support in the range 24,510/24,570 as source of near term underlying demand.
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.