Market Overview
As market sentiment has looked to stabilise in recent sessions, the US dollar bulls have also looked to regain their footing as Treasury yields have looked to push higher again. With levels of fear reducing for traders, the (brief) dash back for US Treasuries has dissipated and concentration has now turned again to the fundamentals. That meant the FOMC minutes last night were key yesterday.
With the committee “generally” anticipating further gradual increases but also admitting also that there may need to be a situation where going beyond the normalisation of rates if necessary. This shows the FOMC’s concern of building inflationary forces (even if the hard data so far shows a bit of a spluttering start on that one). Treasury yields pulled higher again. Having unwound to 3.12% last week, the 10 year yield is back above 3.20% again. Traders will certainly be eyeing the 3.26% recent peak as a line in the sand. If this level is broken then pairs such as EUR/USD and USD/JPY will likely be pulling in decisive dollar favour on rate differentials.
Turning now to Brexit, there is a reason why this is not featuring more strongly today, and that is the latest fudge in the negotiations. Not so long ago, the October EU Summit was supposed to be where something concrete was agreed/announced. But, nothing again.
Brexit negotiations are to continue, with the potential for the transition period to be extended by a year to 2021, but for now the UK remains in limbo. Apparently Mrs May was more relaxed this time and perhaps this suggests better prospects of finding an agreement. However, quite how this can be done, with the issue of the Northern Ireland border seemingly impossible to solve, remains somewhat of a quandary still.
Just as in the wake of the September summit disappointment, sterling is back under pressure again, even if the selling pressure is a touch more restrained.
Wall Street clawed back earlier losses to leave the S&P 500 almost flat on the day -1 tick at 2809, but with futures around half a percent lower, Asian markets have dropped into the close (Nikkei -0.8%, China’s Shanghai Composite -2.2%). In Europe, indices are mixed to slightly lower but will do well to prevent selling pressure from building today.
In forex, there is a mixed outlook on the majors, with the euro (Italian yields higher) and sterling (Brexit woes) under pressure, but also the yen is rebounding.
The commodities show a corrective slip on gold and silver, whilst oil is consolidating after sharp losses on the back of the EIA inventory crude oil build yesterday.
The UK consumer may be able to take the emphasis off Brexit briefly this morning, with UK Retail Sales at 09:30 BST which on an adjusted ex-fuel basis is expected to fall by -0.4% in September (after a strong couple of months over the summer) which would actually mean the year on year data would show an uptick to +3.7% (from +3.5% in August).
The Philly Fed Business Index is at 13:30 BST and is expected to drop to +20.0 (from +22.9) whilst the US Weekly Jobless Claims at 13:30 BST are expected to drop to 212,000 (from 214,000). There will also be a focus on the FOMC’s Randall Quarles (permanent voter, centrist leans hawk) at 17:15 BST.
Chart of the Day – NZD/USD
The Kiwi has reached an important crossroads once more. The recovery over the past week and a half has seen the market rally once more within what is now a four month downtrend channel. Each time the momentum indicators have unwound from bearish near term configuration this has been used as a chance to sell. What is also interesting is that old support levels and pivots have consistently been used as another chance to sell. The latest rally may have made it through $0.6500/$0.6540 but the overhead barrier of the falling channel is now coming into play at $0.6620 today. Furthermore, the falling 55 day moving average (at $0.6600 today) is a basis of resistance, whilst a near term pivot at $0.6610/20 also looms overhead. Is this a chance to sell? With yesterday’s negative candle, the RSI is stalling around 50 and whilst the MACD lines have only just crossed higher, the Stochastics may also just lose their way too. Another negative candle today would see a deterioration build once more. This is already showing through on the hourly chart with a mini uptrend broken and momentum increasingly corrective. Initial support at $0.6530 but a breach of $0.6490 would signal a retreat to the $0.6420 low and the lows of the channel once more.
EUR/USD
The dollar bulls came forward with renewed vigour yesterday to drag EUR/USD lower once more as the technical outlook deteriorates again. An attempted recovery had been stuttering in recent sessions, failing at $1.1610 but with a decisive, solid bear candle that cut almost 75 pips from the price, the threat is growing to the downside. The old support around $1.1500 has again been breached and although not on a decisive basis, the momentum indicators are showing a worrying deterioration. The MACD lines look set for a “bear kiss”, whilst the Stochastics are also crossing back lower and RSI also tracking lower too. A failure to instantly get back above $1.1500 this morning would suggest the European traders are accepting this move and a test of $1.1430 would be highly likely. A breach of $1.1430 would also open $1.1300. The hourly chart shows the old neckline at $1.1550 is now a near term pivot resistance and it would need a move through $1.1530/$1.1550 (which is now a sell zone) to improve the immediate outlook of deterioration.
It was a double whammy of disappointing UK inflation and Brexit disappointment which has driven a resumption of selling pressure through sterling. This has pulled Cable lower and is now threatening the medium term improvement of the past nine weeks. The uptrend built throughout this period comes in at $1.3000 today and given the deterioration on momentum indicators, if the initial support at $1.3075 fails then the trend support will come under threat. A breach of the psychological $1.3000 level would certainly be a blow now and it will be interesting to see how Cable runs now. In the wake of the September EU Summit disappointment, Cable tracked lower over the next week and a half (aided by dollar strength too admittedly) to a low of $1.2920, which is now key support. This time there is renewed dollar strength too, so weakness could now be seen to test $1.2920 again. Resistance is growing overhead now with $1.3150 initially before $1.3260 and $1.3300.
USD/JPY
Two bull candles in a row has shifted the outlook again. A corrective downtrend has been decisively ended with the market having rebounded strongly from the six and a half month uptrend to leave another key low at 111.60. Momentum indicators are turning a corner at just the right levels for the medium term bulls to be happy this is another buy within the uptrend. Subsequently with a Stochastics buy signal, weakness is now a chance to buy again. The hourly chart shows that the mood changed on a push above 112.50 and there is now a basis of support between 112.00/112.50. The overnight unwind should also prove to be a chance to buy today. Initial resistance is 112.80/113.15 will likely come under renewed pressure.
Gold
The latest move to drive renewed dollar strength will be a test for the gold bulls (as gold has tended to be a negative correlation play to the dollar). This is shown with a couple of mild negative candles in the past two sessions as the dollar has rebounded. However, it is interesting to see that the breakout supports on gold remain intact, for now. The old pivot is at $1217, whilst the highs between $1208/$1214 of the old range should also be a source of underlying demand. For now this is a very orderly consolidation for the bullish breakout and nothing has been damaged in the outlook of improvement. Momentum indicators retain their positive configuration and there is little to suggest that gold is going to lose the recovery. The hourly chart shows consolidation with increasingly benign momentum. Given the moves on the dollar, the gold bulls are holding up well. Resistance is in place at $1233 under the key medium term pivot of $1236.
WTI Oil
Another surprisingly large EIA crude oil inventory build has put the oil bulls under pressure once more. The result has been a significant bear candle which has taken the market to a four week low. However more importantly, the move has broken a run of consolidation with a move below not only an eight week uptrend but also support at $70.50. Furthermore, a close below $70 is also a key psychological breakdown that signals a shift in sentiment. This comes with the RSI falling to an eight week low and the move now opens a retreat to $67.00. Momentum indicators are increasingly corrective, with the MACD and Stochastics accelerating lower. The previous consolidation now also adds to overhead supply, with a resistance band $70.50/$72.70 as near term rallies will find a chance to sell.
This is becoming a really difficult rally to trade. The market has picked up with higher lows in each of the past four sessions but the volatility remains high and the market is spiking around on a daily basis. Despite this though, progress is being made as an intraday correction was bought into to leave a doji candlestick. However, a doji (open and close at the same level) denotes uncertainty and reflects well the state of this rally so far. A string of wildly different candles in each of the past five sessions, whilst the Average true Range has increased sharply to 375 ticks (a six month high). The mini uptrend comes in at 25,525 today and the support of the strong bull candle from Tuesday at 25,350 is growing in importance. There is also increasing resistance now around 25,800/25,810 too which is now a near term line in the sand for a continued recovery.
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