Market Overview
After the volatility in the wake of the unexpectedly dovish FOMC decision, the dollar is beginning to claw back some of the recent losses as markets look to settle down a touch. Significant losses on the dollar continued throughout yesterday but overnight we have seen a degree of retracement on some of these moves. With the dollar performing better, it will be interesting to see if there begins to develop any traction in this. The gains on Wall Street that have taken markets positive for the year have been helped higher by upside in the price of oil, but oil is beginning to consolidate a touch and we are seeing a knock-on theme through European markets today. Gold remains rather choppy and is again bucking the trend with some slight gains in the Asian session.
There is a light economic calendar to dive markets with Canadian CPI at 1230GMT (+1.5% expected) with the preliminary Michigan Sentiment the main focus for investors today at 1400GMT, with 92.2 expected which would be slightly up from last month’s revised 91.7.
Chart of the Day – EUR/JPY
All major currencies have been performing strongly against the US dollar, and with both central banks having now reported, it is interesting to see how the chart of EUR/JPY is developing. The movement over the past week has been slightly corrective following the completion of the base pattern, but there is still a feeling that this is just a pullback to the neckline of the base pattern. The higher lows during March reflect the positive move but the support band 125.00/125.60 has been holding up the recent dips. This is a neckline that has survived intraday tests over the past three consecutive days and this 60 pip band of support is now key. A close back below it would suggest the bears are winning control again. The sellers will point to the band of resistance 126.00/127.40 from the old lows in January that is also still having a legacy here, so this base pattern is still in the balance. The momentum indicators are reflective of the consolidation and are now giving too much signal for now. This is also a similar view to the hourly chart which is also rather neutral. The bulls are hanging on but the support at 125.00 is taking on increasing importance.
With a second day of strong gains confirming the dollar weakness in the wake of the Fed the upside targets can now be discussed for a bull flag breakout. The measurement of the flag “pole” from the ECB day last Thursday taken from the bottom of the consolidation gives an implied move to $1.1450. The next upside test is tough clearly the $1.1375 February high and with momentum indicators strong (and the US dollar trade weighted index already having broken the equivalent level) there is every chance that this level will at least be tested. The breakout level at $1.1217 (the high of the ECB day) is now supportive and with today’s minor correction could come into play, with possibly down to yesterday’s low at $1.1200. Minor dips in the price will also now be seen as a chance to buy. The intraday hourly chart shows a minor consolidation overnight which is helping the overbought hourly momentum to unwind and should help to renew near term appetite to buy.
Sterling was the biggest of the movers on the forex majors yesterday and perhaps this is because it has previously been one of the weakest performers over recent weeks. The bulls really took control and added over 220 pips on the day to majorly improve the outlook. The hugely strong bull candle has burst through the resistance based around $1.4410 to close at its highest level in over a month. The momentum indicators have reacted positively and are pushing a far more positive configuration now. To continue to gain traction in this move the bulls will be looking for the RSI to sustain a move into the 60s and the MACD lines move above neutral then this move could be held. They can then start looking up towards $1.4575/$1.4670. The early move today is slightly lower as some of the impetus of the gains begins to drift. The $1.4410/$1.4435 breakout level becomes supportive now, with support now down at $1.4250 now a level that needs to be held to maintain the near term bull outlook.
The range phase seems to be coming to an end with a downside break. The intraday breach of support at 110.98 was seen yesterday in addition to a close below 112.00 (which is the lowest close since October 2014. The bulls are hanging on by a final fingernail now and a close below 110.98 would be the final confirmation of the breakdown. This would then open several round number downside supports at 110 and 108. There could also be a downside protection target from the range breakdown at 107.10/107.50. The momentum indicators look to have dangerous downside potential if the break is fully confirmed. It was interesting to see an intraday rally finding resistance at 112.00 yesterday which shows that rally back to old support areas are seen as a chance to sell, with the stronger near term resistance at 112.15. Initial intraday support at yesterday’s low of 110.65.
Gold
My reticence to fully back the bulls on gold has been consistent over the recent weeks, and the lack on continuation on the Fed induced rally yesterday only serves to further fuel my belief. A bearish candle where gold closed lower on the day (just as major forex pairs made significant gains against the dollar) is a concern for the bulls. This comes as we still have the clear bearish divergences on the daily chart which suggest the medium term momentum is waning. The near term uptick may have pulled the RSI back into the 60s and the Stochastics turned higher, but the medium term perspective still concerns me for the bulls. The overnight reaction back higher reflects the uncertainty in this gold chart, and yesterday’s resistance at $1270.90 will now be watched. There has been more of a consolidation that has formed between $1253.90 and $1270.90 near term, whilst waning momentum in the hourly chart also questions how much control the bulls do truly have. The key resistance remains the high at $1282.50. Initial support is reaction low following the spike on the Fed at $1253.90 but then $1247.50.
WTI Oil
The strong breakout above $39.00 has been seen on a series of positive factors for oil (OPEC/Russia meeting agreed for 17th April, lower than expected EIA inventories and a dovish Fed). This is an important medium term breakout of resistance and re-opens the upside which has now seen oil above $40 and now towards the medium term base pattern target of $43.50. The daily momentum indicators look strong and there is a strong feeling of further gains. However, perhaps a touch of caution is showing in the hourly chart, which is showing a slight waning of the near term upside impetus as hourly momentum indicators reflect a slight bearish divergence. This could mean a near term pullback, with the support band at $38.50/$39.00 which could be helpful to also renew upside potential again on a minor correction. Further support comes in at $37.40. This is still though only likely to be a near term pullback which is seen as a chance to buy again as the medium term outlook remains strong.
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