Market Overview
There is little real direction on markets as traders prepare for today’s monetary policy announcement from the Federal Reserve. The Fed is nailed on for a rate hike but it will be how it presents its forward guidance will be the swing factor for markets. As Donald Trump said to the UN General Assembly that the US would “no longer tolerate abuse” on trade, the dispute with its trading partners seems to be getting worse and not better.
How the FOMC deals with this prospect could be key today. Will it take note of this in growth projections pushing forward? Will The Fed ease its foot off the accelerator on the rate tightening? These would be dovish moves that could increase the corrective momentum on the dollar.
Major markets look to be relatively stable as we approach the Fed, with gold and EUR/USD both consolidating, however there is a feeling that the next move is coming. There is an added volatility factor for UK assets today, with the key note speech for the UK Labour Party conference by leader Jeremy Corbyn today. Brexit remains a massive issue in UK politics and the direction of sterling is intrinsically linked. How Corbyn addresses Brexit in his speech could be a volatility factor to consider.
The corrective slip of the past couple of sessions on Wall Street continued with the S&P 500 -0.1% at 2915, however futures are regaining this lost ground today and this has helped a positive session in Asia (Nikkei +0.4%, Shanghai B +0.6%) whilst European markets are very mildly supported today.
In forex, there is a mixed outlook for the dollar in front of the Fed, with a shade of strength versus the euro and sterling, whilst slipping against commodity currencies (Aussie and Kiwi) and a touch of yen outperformance.
In commodities there is almost no direction, with gold flat in reaction to this indecisive dollar move, whilst oil is also mixed.
There may be two central banks updating on monetary policy today, but of the key economic releases, the EIA oil inventories are first up at 1530BST. Consensus expects that the crude oil stocks will continue the run of five consecutive weeks of drawdown with a further -1.6m barrels (-2.1m barrels last week). Distillates are expected to build marginally by +0.1m (+0.8m last week), with gasoline stocks expected to build by +1.0m (-1.7m barrels last week).
The main focus for traders today will be the FOMC monetary policy meeting which has the statement at 19:00 BST where the Fed is fully expected to announce another +25 basis points increase in the Fed Funds rate range of 2.00%/2.25% (up from 1.75%/2.00% in August). The dot plots will also be of interest, with a further hike still likely in December (although only marginally according to the dots). How the FOMC projects for 2019 hikes will also be of interest, with the balance of the committee expecting a further three hikes in 2019. Any hawkish shift in these dots could help to drive a decisive breakout on the US 10 year yield and potentially a dollar rally.
The Reserve Bank of New Zealand announces its own rate decision at 22:00 BST with an overwhelming expectation for the RBNZ to stand pat at 1.75% but just how dovish will they convey that message of holding rates flat?
Chart of the Day – EUR/CHF
In the wake of Mario Draghi’s comments on underlying inflation being “relatively vigorous”, the euro has made some decent relative gains versus the G10 majors. This is reflected in the chart of Euro/Swiss which has now decisively broken a two month downtrend and completed a small base pattern which suggests further recovery is now set to be seen. The trend break is a key shift in sentiment, whilst a closing breakout above 1.1345 completed a base pattern implying around 160 pips of additional recovery towards 1.1500 and certainly suggests that a rebound to the old long term pivot at 1.1450 could be seen. The move includes a decisive recovery in momentum indicators with a bullish divergence on the RSI, whilst MACD lines are rising at one month highs and the Stochastics increasingly strong. This suggests that intraday corrections are now a chance to buy, with the neckline breakout at 1.1345 supportive initially, whilst the hourly chart shows 1.1310/1.1325 also near term supportive on this morning’s slip back.
EUR/USD
After a slightly disappointing couple of candles on Friday and Monday, yesterday’s gain of 25 pips will have helped to reassure the bulls to an extent. The uptrend of the past two weeks is intact and this move looks to simply have been a consolidation back to the breakout support at $1.1735/50. Momentum remains positively configured and the market looks well set for an attempt at the crucial medium term resistance of $1.1850. The big caveat will certainly be the FOMC announcement tonight. A more hawkish Fed should pull EUR/USD lower but it will be how the bulls respond will be key. The support at $1.1615/$1.1650 needs to remain intact to maintain the realistic prospects of this being a medium term base pattern. Above $1.1850 would be a crucial breakout.
The reaction of the bulls following on from Friday’s huge negative candle has been admirable. The outlook for sterling is shrouded in all things Brexit, but there is still an appetite to buy into weakness. The unwinding move on Friday has built support at the previous breakout at $1.3045 and looked to have the Cable bulls regain their poise with a couple of positive candles. The momentum indicators have been positively configured for several weeks now and with the Stochastics turning back up above 50 this is a real sign of continued strength. The initial move is mildly lower this morning and it may be a case of consolidation in front of the FOMC tonight (although domestic UK politics could also play a role with a speech from UK Labour Party leader Corbyn to factor in too). There is still a risk that a shift back lower again would actually complete a two week head and shoulders top pattern below $1.3045 support, but for now the technical momentum is still fairly encouraging on the hourly chart too. Above $1.3215 puts pressure on Thursday’s high of $1.3297 and continue the recovery.
The trend higher of the past two and a half weeks continues as the market pulls ever higher for a test of the July high of 113.15. This is a very orderly and almost serene pull higher on Dollar/Yen, with the momentum indicators ticking ever higher but currently still with further upside potential. There seems little reason why a serious look at 113.15 will not be seen, whilst a breakout opens 113.75 and 114.70 which were key highs from December and November last year. Adding to the calm nature of this rally, the hourly chart shows a well-defined uptrend channel with hourly momentum all positively configured to suggest that intraday corrections continue to be seen as a chance to buy. The trend channel comes in around 112.70 this morning, whilst breakout support is around 112.50 and key price support of a higher low is 112.15 (which is also a previous breakout support, so is a pivot). The FOMC decision is a caveat tonight, and a dovish disappointment of some degree may derail the channel. A close below 112.15 would change the near term outlook.
Gold
Perhaps we are finally going to get some direction off gold with the FOMC decision tonight? This rather dull chart outlook certainly needs it. It is very difficult to write something different every day for a chart that is going sideways but here goes. The pinched Bollinger Bands (which are currently just $17 apart) suggest something could be about to happen to change the outlook. Tight Bollinger Bands will often be seen before a subsequent breakout, and with the FOMC decision today, it could be close. A closing break of the range between $1183 support and $1217 resistance would be an outlook changer. For now though, momentum is being ever more neutralised and becalmed on the daily chart. Daily candlesticks are ever more neutral too. Initial resistance is at $1211 with initial support at $1191.50 but in truth the market is waiting for a catalyst. Will the Fed be it? A dovish Fed would be dollar negative and gold positive, whereas if the Fed is more hawkish than the market had been anticipating then we could be about to see gold breaking decisively lower.
WTI Oil
Another positive close on WTI above the $70.45/$71.65 resistance band helps to reinforce the continued positive outlook. This comes with momentum indicators still improving ever further into positive configuration. The RSI in the mid-60s suggests there is upside potential in the move (RSI went to 70 for the May and June rallies). Subsequently intraday corrections are a chance to buy. There may be another opportunity today, with yesterday’s doji candle hinting at a potential near term slip back. However, the $70.45/$71.40 old resistance band is now supportive and is now a near term buy zone, whilst Friday’s low at 70.00 is now a key reaction low. The uptrend comes in as support today at $69.25.
One bear candle has now become two in a row, as the market continues to pull lower within the uptrend channel. A basic sell signal on the RSI has also now been accompanied by a bear cross on the Stochastics (not yet confirmed as a sell signal) which suggests this correction is building momentum. The move is increasingly becoming a retracement of the recent sharp run higher and if corrective momentum continues, it means that the support band 26,030/26,167 could now come back into play. The hourly chart shows that this unwinding move has brought the hourly RSI into the 35/40 area where the bull moves have tended to resume in recent weeks. That means that today’s session could be pivotal. There is a gap still open at 26,411 and “filling” this gap (as opposed to “closing” the gap) today could actually be seen as a positive move. However, there is a small lower high at 26,635 under the 26,769 all-time high. Although this is turning into a near term correction, it should still provide another opportunity for a medium term buy.
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