Market Overview
Markets are starting off a potentially pivotal week in a cautious approach as traders choose to keep their powder dry ahead of the key risk events later in the week. With economic growth data along with the Fed and the BoJ both announcing monetary policy in the coming days, it seems as though traders are currently reluctant to take too much of a view. There is a mixed outlook with no real direction on forex markets aside from mid gains on the Aussie. Commodities are mildly lower with precious metals off around half a percent, as is the oil price which is again drifting lower. Adding to the mixed sentiment, Treasury yields are mildly higher but also equities have also crept higher early on. Markets are clearly in need of a catalyst in order to provide with some direction.
There is little real economic data out today that could drive sentiment, aside from the German Ifo business Climate at 0900BST which is expected to drop slightly to 107.5 from 108.7 last month. It is interesting to see that the German Ifo tends to surprise with the trend, with a positive surprise as sentiment is improving, but missing when sentiment is waning. This could leave the indicator at risk of a miss should the German ZEW be anything to go by.
Chart of the Day – EUR/JPY
In a signal of how weak the euro has been (aside from the weakness of the yen), whilst Dollar/Yen briefly pushed above the Brexit-day key resistance (at 106.80) last week, on Euro/Yen this equivalent resistance at 121.98 is a long way higher still. With this in mind, the rally on Euro/Yen is already starting to roll over. A negative candle posted on Thursday left resistance at 118.45 but this now could prove to be a key level (coming just a handful of ticks above the prior resistance at 118.38. However, the momentum indicators look to be rolling over the with Stochastics starting to turn lower in what would be a sell signal that could be confirmed today, whilst the RSI unwound to 50 and is turning down. The support to watch is now a pivot band between 115.30/115.45 which has turned into a pivot level in the wake of Brexit (the hourly chart shows this well). A breach of this support would confirm a return of a bearish outlook and also complete a top pattern that would imply around 300 pips of further downside. The hourly chart shows moving averages flattening and momentum indicators more corrective. The initial support is at 116.10. A move above 117.45 would improve the near term outlook.
There has been the biggest indication yet during the recent slide in the euro that the bears are gathering momentum. The close below $1.1050 in the past week showed that the bears were in control but the decisive move was lacking. On Friday there was a bearish candle losing over 50 pips with a close below $1.1000 which had been a previous intraday support. With a breach of a minor intraday support at $1.0969 this leaves the way clear now for a test of $1.0909 which was the post-Brexit reaction low. Beyond that there is a possibility of $1.0800. The momentum is clearly negative now with the Stochastics making a decisive move into negative configuration and the RSI back below 40. There is a fairly quiet open to trading today but any intraday rallies should be seen as a chance to sell. The hourly chart shows a drift higher with initial resistance between $1.0980/$1.1000. There is also a downtrend channel that also comes in around $1.1020 this morning, whilst Thursday’s reaction high at $1.1058 is now key near term.
The near term momentum turned more negative again with the bearish candle on Friday. However the has been no decisive move quite yet as the near term support at $1.3060 remains intact. This has been a low for almost two weeks now and whilst it stays in place the bears will not have control. However, it does look as though it is only a matter of time as the momentum indicators all look merely to have unwound to renew downside potential with the Stochastics threatening to turn lower around neutral and the RSI stalling in its own recovery. There is a sense this morning that the market is still waiting for the next decisive push, with the hourly chart suggesting a bearish bias within a ranging period but without a decisive move seen. I still see rallies as a chance to sell, with the initial resistance around $1.3160. Friday’s reaction high at $1.3290 now protects $1.3310. I expect further pressure on $1.3060, below which is $1.3000 again but could also then be a quick descent back towards the 31 year lows at $1.2796.
After the bearish engulfing candle that looked to be changing the perspective of the chart on Thursday, the market has been far more reticent, with Friday’s 86 pip daily range the smallest in almost three weeks. However, the legacy of the bearish engulfing candle (leaving key resistance at 107.47) is still relevant with the bearish crossover on the Stochastics impacting (although still not quite yet confirmed). However with the RSI again below 60 and the medium to longer term downtrend channel still intact, I still see this as the next likely selling opportunity. The hourly chart is now more neutrally configured and there is now early resistance at 106.70 as the pair has drifted again back towards 106.00 which is becoming a near term pivot. Support is at 105.40 with 104.60 now key for the confirmation of the selling pressure re-asserting.
The corrective drift back towards the $1306 key medium/longer term breakout continues. Once more, the rebound higher from Thursday has failed to inspire the bulls and the drift has set in again. However I see this drift as a near term move which only comes as the move that will help to unwind and renew upside potential. The momentum indicators are gradually unwinding with the RSI back towards neutral and the Stochastics starting to level off. Thursday’s low at $1310.50 is initial support but $1306 is where the real support returns and this marks the beginning of a range that will be seen as a chance to buy. The hourly chart shows the growing importance of the $1335 pivot which is currently overhead resistance. Whilst this is in place the corrective move will still be in play.
The bear momentum has certainly returned and but for the rolling of the contract there would have already been a decisive breach of the support at $43.69 (the equivalent of which has already been seen on Brent Crude). Lower highs and lower lows suggests the bears remain in control and the concern for the bulls is that whilst there was an uptrend channel that was a feature of the rally for the first half of the year, but in the past seven weeks a downtrend channel has now formed, the bottom of which currently comes in at $43.25. Expect pressure on the $43.69 low and there is little reason to think that there will not be further downside, whilst a retest of the May low at $43.03 could easily be seen in the coming days. The rebound high at $46.09 has effectively just reinforced the resistance of the original breakdown at $45.83 and rallies are a chance to sell. The momentum indicators point towards further weakness and a closing RSI below 40 would really confirm the increasingly bearish outlook. The hourly chart shows that $45.00 is an area that is finding resistance near term.
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