Market Overview
Aside from a brief consolidation yesterday against the euro and sterling, the dollar remains a near term underperformer as traders take a positive view of the latest developments in the trade dispute.
An improved risk appetite has arisen from the escalation of US/China trade tariffs not being as punitive as previously expected. This is dollar negative, but Treasury yields moving strongly higher again should also be dollar supportive. It is interesting to see the dollar getting little, if any traction off the 10-Year yield decisively above 3% again. With yields dropping back today the dollar has also come off into the European session.
The big winner so far from the latest moves in the trade dispute seems to be equities, with Wall Street and Asian markets moving strongly higher in response, helping to also drag European markets higher with it. However, today is a big day potentially for sterling, as the EU Summit in Salzburg discusses key issues surrounding Brexit. The headlines seem set to determine the near term outlook for sterling.
It would appear that the first day of the summit did not go especially well, but for weeks there has been an air of positivity surrounding the direction of Brexit negotiations and there will be hope that something can be achieved today. The Northern Ireland border issue has always been the factor that could scupper progress, so watch for any movement there.
Any positive progress would be deemed sterling positive and continue the recent ally, but any setback would equally likely see a sharp drop. Hence why this morning we see a lack of real direction on sterling against the euro and dollar.
Wall Street closed higher again with the S&P 500 +0.1% at 2908 with futures just the slightest amount lower. Asian markets have taken this and were broadly mixed overnight (Nikkei +0.1%, Shanghai B all but flat). European indices are slightly higher in early moves.
In forex, there is a slight move against the dollar early today but little real conviction behind the move as yet. Sterling will be in focus with the EU summit. The weaker dollar is again helping commodities higher, with gold and oil higher, whilst the recent recovery in copper is also notable.
The Swiss National Bank monetary policy meeting decision at 08:30 BST is expected to show no change to rates, maintaining the -0.75%. Traders will be focusing on UK Retail Sales at 09:30 BST, interested to see how UK spending fared in August as inflation spiked surprisingly higher. The consensus expects ex-fuel sales to dip by -0.2% on the month (after a weather and World Cup fuelled improvement of +0.9% in July), which would drag year on year retail sales down to +2.5% (from +3.7% in July).
Into the afternoon, the Philly Fed Business index is expected to improve to +17.0 (from +11.9 in August). US Existing Home Sales are expected to improve by +0.3% to 5.35m (from 5.34m in July).
Chart of the Day – AUD/USD
We focused on the improved outlook for the risk appetite as we looked at the upside move on Aussie/Yen yesterday, but the pick-up in AUD/USD has also made some significant technical improvement. There has been a small base patter completed on a close above $0.7230 which implies a further 145 pips of recovery to $0.7375. This recovery markets the first tangible positive technical signal for a while and means that several other major technical barriers could now come under pressure. The important test would be a rally to the seven month downtrend which has capped the major lower highs throughout 2018 and comes in today at $0.7305. This also marks the old support of the old key July lows. Momentum indicators are certainly backing the rebound, with the Stochastics accelerating higher, MACD having posted a bull cross, but also the RSI is looking to push out to three month highs above 50. The hourly chart reflects the stronger near term momentum configuration and how the market reacts to weakness is now key. There is a higher low at $0.7140 but there is also a band of support (based on the neckline of the reversal pattern) between $0.7185/$0.7230. With an early drop back today if this is used as a chance to buy then the bulls will really start to gain traction in a recovery. The price resistance overhead comes in at $0.7310/$0.7380.
The dollar has been under pressure in the past week but the bulls continue to hang on. EUR/USD has drifted towards a test of the key near to medium term resistance band $1.1735/$1.1745 but as yet this has not been breached. For now, subsequently this remains a range play rather than a recovery. The outlook will continue to be one of consolidation whilst the resistance at $1.1745 remains intact. Candles over the past week have been contradictory as the market has traded for the past five sessions between $1.1605/$1.1720. Momentum has a mild positive bias but with the RSI still under 60 is not calling for an upside break. The hourly chart reflects this mild positive bias with an eight day uptrend still intact but is coming under increasing pressure as the impetus in the drift higher has seeped away. Initial support is the $1.1650 pivot. A breakout above $1.1745 opens $1.1790, but for now consolidation continues.
The uptrend of the past two weeks is being broken now as a consolidation has hit Cable. The EU Summit in Salzburg is a key factor as it has Brexit implications and sterling is very reactive (dropping sharply in yesterday’s session on negative Brexit news). An almost long legged doji candle reflects a market on edge over the EU summit. Technically (for now) Cable remains a recovery play which continues to develop, but the bulls will be tested should there be a negative outcome of the summit today. The breakout support at $1.3045 is a prime support area for a market that looks to continue to build a recovery. Momentum is positive and the bulls will see corrections as a chance to buy. A corrective move would also get to show what the bulls are made of in this recovery. Resistance is still strong at $1.3215 which is not only yesterday’s high but also the first lower reaction high of the old sell off. The hourly chart shows support of yesterday’s spike low at $1.3095 will be a key near term gauge for direction now.
The bulls are being tested as the market formed a mildly corrective candle yesterday and followed this up with a continued slip today back towards the mini to week uptrend support. It is an important test of this breakout above 112.15 as if the bulls come back in quickly then it will open the way for 113.15. However a breach of the uptrend would put pressure on the key higher low at 111.65. The hourly chart shows the importance of support around the 112.15 breakout, coming around the support of the uptrend channel today, but also this morning with the hourly RSI back around 40 and MACD lines around neutral. This would tend to be seen as a buying opportunity, and if not then this poses questions of the continued bull run. Initial resistance at 112.45.
Gold
Gold has started to build higher again within the range. This has come with the market posting higher lows in the last two sessions and leaving initial support at $1192.50. Trading back above $1200 also improves the look to the consolidation that continues between $1183/$1214. Momentum indicators are reflecting this ranging phase, with the RSI and Stochastics lines ticking back higher around 50, and MACD lines still edging higher. There is still very little to go on for gold until a closing break above $1217 for a continued recovery, or below $1183 for renewed selling pressure. The candles have tended to be minimal of direction and lacking a decisive view. The hourly chart shows a very mild positive bias within the range, but oscillating between 30/70 lacks conviction.
WTI Oil
With the EIA inventories still supportive for oil, WTI continues to build higher. There is now a small uptrend that links the lows over the past five weeks and with corrections seen as a chance to buy, the pressure on the resistance band $70.45/$71.65 that has been in place for the past two months is about to give way. Yesterday’s close at $71.10 was a two month closing high and the market is looking to decisively breakout above $71.40 today. A closing breakout above $71.65 would be a key bull break which would re-open the $75.25 highs again. Support of the trend comes in at $68.50 today but this is also now helping to build conditions for more positive momentum configuration. This RSI decisively above 60 and the MACD lines pulling higher above neutral confirms the bull move. The hourly chart shows positive momentum configuration with a band of support $69.35/$69.90, however the old $70.45 highs are now a source of underlying demand for any intraday weakness to be bought into.
Having regained the initiative on Tuesday, another strong session yesterday has pulled the market decisively clear into new eight month highs. Two strong bull candles in a row have really seen the bulls back in control of the market again. With the Average True Range of 188 ticks, the Dow is now just one strong session away from the all-time high of 26,616. Momentum indicators are strongly configured with the breakout which is confirmed with the RSI above 70 and MACD lines ticking higher. The hourly chart shows intraday corrections are a chance to buy, with initial support 26,210/26,245.
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