Market Overview
The Federal Reserve held fire on a first interest rate hike in 9 years last night and traders will be asking themselves “where do we go from here?”. Markets have reacted with a degree of uncertainty and caution. The reason for the Fed’s decision was predominantly down to the uncertainties of the global conditions whilst Yellen also pointed to a slight decline in the inflation outlook.
The generally dovish outlook from the Fed had an impact mostly on the short dated end of the US yield curve, with the 2 year yield sharply declining back to 0.68% from where it had been prior to the announcement at over 0.80%. Fears over global growth also caused the US 10 year yield to fall sharply too. With only one member (Jeffrey Lacker) voting for a rate hike and now four of the committee not seeing a rate hike in 2015 at all, this calls into serious question not only an October hike, but also now December. Fed funds futures have pulled back sharply on the probability of a December hike from around 63% prior to the announcement to now at below 50%.
Equity markets do not quite know what to make of it because a dovish Fed should be bullish, but the concerns over global factors leaves a big element of uncertainty. Wall Street chopped around and finally closed mildly lower with the S&P 500 at 1990 and down 0.3% (it had been at 2001 in the minutes before the announcement). Asian markets were mixed to slightly higher overnight, but with the strength on the yen, the Nikkei 225 closed almost 2% lower. The European markets are a weaker at the open and sentiment looks to be on the back foot today.
In forex, unsurprisingly the dollar has come under pressure, but the sharp gains on the euro are now unwinding a touch today. Most of the other forex majors are still holding on to gains against the dollar though. The gold price is slightly giving back some of the gains from yesterday too, whilst the Oil price is mildly lower (again something that is not going to help equity markets such as the FTSE 100).
There is little data out today to drive sentiment, so today’s trading will be all about the legacy of that decision from the Fed and so far the reaction has not been especially positive.
Chart of the Day – USD/CAD
I have focused on the fact that the big uptrend seemed to have been slowing for a while now. The problem with trading via bearish divergences is that they can take a while to take effect. The RSI has been on a declining trajectory for a while, but only in the past few days has the price started to gain some downside traction. The RSI has fallen below 50 and is now at a near 3 month low, furthermore the Stochastics are also now falling sharply.
A close below the late August low at 1.1313 would now be a key signal as it would arguably complete a small top pattern now that would imply potential downside towards 1.2880 in the coming weeks. Subsequent support comes in at 1.3020 and the August low at 1.2950. The intraday hourly chart shows a more negative configuration also on hourly momentum indicators such as the RSI and MACD lines.
There was clearly some volatility around the FOMC announcement last night with a spike lower and then a quick retracement, and whilst some might say that it is a hammer candle on the daily chart, I am preferring to focus on the balance of the indicators which are on a bearish drift in the past few days. I now see rallies as a chance to sell. There is now resistance in place at 1.3200 and more importantly at 1.3280.
EUR/USD
With the FOMC standing pat on rates, the euro has rallied strongly as the carry trade of earlier in 2015 continues to unwind. The outlook suggests a move now towards the top of the old range which comes in around $1.1465, however there is little reason at the moment why the move could not continue towards the spike high of $1.1711. Technically the momentum indicators are on the positive side, whilst the price trading above all the moving averages is also positive (even though the longer term ones are basically flat to reflect the continuation of the medium to longer term ranging conditions).
Corrections now seem to be a chance to buy and that is what traders will be looking for today as the overnight Asian session has seen some of the gains pared. The intraday hourly chart shows a breakout support band now between $1.1330/$1.1370 and this is would be a good area to look for buying opportunities. An intraday low from yesterday just prior to the FOMC announcement at $1.1293 becomes a key level of support now near term.
GBP/USD
I have one main conclusion from the FOMC announcement, continue to play the big range $1.5170/$1.5928. Within that range there continue to be periods of bull control and period of bear control. Just now the bulls are in control so buying into any dips seems to be the way to play Cable. The momentum indicators are becoming increasingly positive near to medium term with both RSI and Stochastics showing further upside potential. Two strong bull candles reflects the strength of the buyers and having broken above the resistance around $1.5530 the next area the bulls will be targeting will be around $1.5690 which was the old resistance band from late July/early August.
The intraday hourly chart shows that Cable has had a strong push higher following the Fed which is just being unwound, but as the support forms again I expect another higher low to form around the support band $1.5480/$1.5550 before continuing higher. The hourly momentum indicator are all strongly configured and also point towards minor corrections being bought into. There is minor resistance from yesterday’s high around $1.5630 but this should not provide too much of a barrier. The near to medium term importance of the support at $1.5330 continues to grow.
USD/JPY
The range continues and following the Fed decision to stand pat this should ensure downside pressure. And so this is the reaction so far as the yen has strengthened once more. Again I will say that momentum indicators on the daily chart are fairly redundant for now. The first real signal to be garnered from this chart would be a breach of the 119.40 support. I have spoken previously about the pivot level at 119.60 which was minorly breached but I believe remains intact as a near to medium term gauge, and this is coming under pressure again today.
A daily close below the low at 119.40 would put the bears firmly in control for a test of not only the reaction low at 118.70 but also the key range low at 118.30 low once more. For now though Dollar/Yen remains a difficult play and although the bulls may be in control now, the outlook remains very uncertain. Resistance is now in at 121.00 and 121.30.
Gold
I spoke yesterday about the broken downtrend and the rebound has now continued with a second bull candle which has pushed through the next resistance at $1125.50 and is now at the resistance of the old key flor around $1132 again. I have said previously that I see near term rebounds on gold as a chance to sell, and it is with this that I would be looking for the next sell signal.
The big long term downtrend currently comes in around $1150 and with the next resistance at $1147, I would be loath to trade against the trend, instead looking once more to go short. The next sell signal I expect to see in the range $1132/$1147. I expect the move higher in the wake of the Fed to be a short-lived one and the reaction high to the news in the first hour after the announcement is the high at $1133. The intraday hourly chart shows a near term band of support $1115/$1124.
WTI Oil
After the huge upside move there was a remarkably restrained day’s trading yesterday, even in the wake of the FOMC’s decision to hold fire on a rate hike. The very neutral candle means that traders are consolidating the big jump in the earlier part of the week. The recent gains turned the outlook more positive within what now seems to be a trading range over the past 3 weeks. The resistance levels at $48.40 and $49.35 now become key overhead barriers. The RSI reflects this outlook of a slight bullish bias in a sideways range.
I spoke yesterday about the broken near term resistance levels at $46.00/$46.40 to be near term supportive and this is proving to be the case, although the early weakness today means that these levels will come under further scrutiny. However, this range could be seen as a level that provides a floor and with hourly momentum improving I remain hopeful that the support can hold. Below $46.00 opens another minor support band $45.00/$45.50.
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