Market Overview
Markets have moved into a fairly quiet stage of trading. With little real move on Wall Street, equities are drifting to an extent. However with the lack of tier one economic data, markets are focusing on political developments.
Focus is on US tax reform which is a drag for the US dollar, whilst sterling traders will be looking towards Brexit negotiations for a steer. The outlook for and progress of tax reform is an issue for traders which is just stemming the positive moves on the dollar. With traders questioning the longer term implications of the political struggles in Congress for tax reform, the US yield curve continues to flatten. With the Fed pushing ahead on short term interest rate hikes, shorter dated yields are climbing, but the same could not be said for the longer end which continues to struggle. This is hampering the advance of the dollar, which is broadly weaker in early moves today.
Traders will also be keeping an eye on developments in the latest round of Brexit negotiations between the UK’s David Davies and the EU’s Michel Barnier. Leaks and announcements will be a key driver of sterling in the coming days.
Overnight we saw Chinese inflation coming in slightly ahead of expectation with CPI improving to +1.9% (+1.8% YoY exp, +1.6% last), and PPI up to +6.9% (+6.6% exp, +6.9% last).
Wall Street saw a tepid close last night with the Dow just 6 points higher (yet another all-time high) and the S&P 500 +0.1% higher at 2594. Asian markets have been choppy, with the Nikkei closing -0.2% lower having been more than 2% higher and over 1% lower at stages during the session. European markets are mildly cautious in early moves.
The forex majors show the dollar under mild corrective pressure across the pairs, with sterling and the yen performing relatively well. The Kiwi is consolidating after decent gains last night on the RBNZ holding rates steady with a slight hawkish tilt.
In commodities the weaker dollar is helping gold higher by $3 (or c. +0.3%) whilst silver is around +0.7%. Oil is mildly higher, settling down after yesterday’s surprise EIA crude inventory build.
Once more it is a quiet day for economic announcements, with little of any note in the European morning session. As the US comes on line, the US Weekly Jobless Claims are at 13:30 GMT which are expected to tick slightly higher to 232,000 (up from 229,000), and is broadly the limit of the important US data. The SNB’s chairman Thomas Jordan speaks at 16:30 GMT and subsequently the Swissy may be impacted by this.
Chart of the Day – EUR/JPY
Is Euro/Yen finally ready to break down? After several weeks of ranging in a 280 pip band between the support of an old breakout at 131.70 and resistance formed at 134.50, the creaking support seems to be close to a decisive breach. After Monday’s bearish engulfing candle left resistance at a lower high of 133.10, yesterday’s intraday breach of the 131.70 support has seen a multi-week intraday low posted. This shows the bears are increasingly testing the waters for a sell-off now. This comes with the RSI consistently now around 45 (the range lows) whilst the MACD lines and Stochastics are both in decline too. Notably also the market has been supported by the rising 55 day moving average (currently 132.19) since August but the market is now closing below this basis of support. The downside pressure is growing and another bearish candle today could seal the breakdown. The hourly chart shows lower highs and negative configuration on hourly momentum now meaning the rallies are increasingly being sold into now. The hourly chart shows resistance at 132.15/132.40 initially being a chance to sell now. A closing break below 131.70 completes the top pattern and implies 280 pips of downside in the coming weeks. Subsequent support is initially at 130.60 and then 129.35.
Having completed the breakdown below $1.1660, rallies are now a chance to sell. The market has started to put together a tentative rally, with a move higher from Tuesday’s low at $1.1552, however the negative configuration on the momentum indicators and tepid nature of the drift higher suggests that the rally will not last long until the sellers resume control again. The hourly chart shows resistance between $1.1600/$1.1625 over the past few days has tended to cap the gains, whilst hourly momentum is also back around where the sellers have been returning. This is around 60 on the hourly RSI and around neutral on MACD lines. The resistance around $1.1660 is clearly the main basis to watch as this minor rebound takes hold but expect a retest of $1.1552 before further downside in due course.
The stability of UK politics (or lack thereof) certainly has a role to play in driving the day to day moves on sterling and once more yesterday this was a key factor in pulling sterling lower again. There is subsequently a more negative bias forming within the range between $1.3025/$1.3335 again. The neutrally configured momentum indicators have ticked back lower and the prospect of a further test of the long term uptrend (today c. $1.3080) has increased again. The near term drop back has now left resistance at $1.3175 which is now a mid-range reference point to see who is in control of the outlook. The early response to yesterday’s negative candle has been reasonably positive by the bulls as the choppy intraday moves, lacking any decisive trend, continue. Initial support is now at yesterday’s low of $1.3085, however unless the market can push above $1.3175 there will be a gradual ramping up of the negative pressure.
The solidly positive outlook for the dollar bulls is now breaking down as the uptrend of the past three and a half weeks is being breached. Yesterday saw a move to the downside that despite not decisively breaking the trend, has continued into today’s session and the bears are gradually gaining more of a foothold in the market. This is reflected in the momentum indicators which are now dropping away, with the RSI falling to three week lows, and the Stochastics also in decline. The configuration of the candlesticks in the past week also reflect this deterioration, with just one positive candle out of the last five completed sessions. This has also come as the market has failed consistently under the 114.50 old July key resistance. The support of the late October low at 112.95 takes on an increasingly important role now and a breach of this support would represent the market posting a lower low and decisively break the uptrend. However, whilst the support remains intact, the market needs to treat price moves as a consolidation range, which is reflected in the ranging look to the hourly RSI oscillations. Initial resistance is at the overnight high of 114.05, with yesterday’s low of 113.38 now supporting the key near term low of 112.95.
There has been a subtle near term shift in outlook in the past couple of days as the bulls have gradually found their feet again in the market. The pressure has been mounting steadily on the resistance around $1284 and now seems to be breaking to the upside. It has to be said that the move is very tentative though, and this is understandable with plenty of overhead supply lying in wait. A move to $1287 during yesterday’s session could not be sustained and It is also noticeable that the market finds it difficult to string a run of positive candles together and for now there is a lack of traction in the bull momentum. A close above $1284 would help but then there is resistance in the band $1290/$1291 whilst the long term pivot at $1300/$1310 is a formidable barrier too. The hourly chart shows more of a positive configuration on momentum indicators, with initial support at $1279.70 from overnight. There is also a run of higher lows forming, with $1271.60 also now taking on added importance.
WTI Oil
Having turned back from record stretched position on the RSI which peaked at over 79 (the highest since April 2006), a correction is beginning to take hold. Yesterday’s surprise increase in the EIA crude oil inventories helped to drive the price lower (despite some intraday volatility) and a negative candlestick formation was formed. Selling down from a new two year high at $57.92 a bearish key one day reversal was formed and adds to the corrective outlook that is growing. With corrective pressure growing, the unwinding move could now pull the market back to the previous breakout which is now supportive at $55.25 which is the first real support. This would be a healthy move from a medium term perspective. The hourly chart shows the slip back to be a fairly orderly for now, but the hourly RSI and MACD lines are back around levels where the buyers have previously resumed control That gives today’s session an added importance and an unwind towards $55.65 is open.
The market continues to threaten a corrective move as another tepid positive close was left yesterday which leaves the 8 week uptrend under pressure again. A significant breakdown is still not a major concern yet, but the momentum indicators are increasingly threatening a bout of profit-taking. A breach of the uptrend would suggest the bulls are increasingly losing their grip on the trend. This comes with a crossover sell signal already on the MACD lines, whilst the RSI is showing a mild negative divergence. Near term support comes in at 23,485 but it would be the reaction low at 23,251 which would signal a decisive downside break if breached. For now though this is still a way off, with the uptrend still intact at 23,480 going into today’s session. It is also interesting to see that volume has been falling for the past couple of weeks. Resistance remains with the all-time high now at 23,602
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