Market Overview
Financial markets will continue to digest the improvement in the Non-farm Payrolls report on Friday which drove a stronger dollar once more. The report will now stoke up the debate over the possibility of an October or even September rate hike. Equity markets are in a bit of a quandary now as the yields on Treasuries continue to push higher and the concerns over the shock of a potential rate hike, hold back some of the buyers. Markets were mixed into the close on Wall Street on Friday, mixed in Asian trading overnight and again there has been a mixed start to proceedings in Europe today.
In forex trading there has been a slight correction on the strong dollar trade that had proliferated since Friday’s payrolls, but as the European session has taken hold, the US Dollar has just started to correct a touch. The Japanese yen has been outperforming after Japanese GDP was revised higher to 3.9% (+1.0% for the quarter), which was way above the 2.4% suggested by the flash numbers.
There is very little in terms of economic announcements to drive markets today so once more the supranational developments can be a driver. News out of the G7 could be worth watching out for, whilst any developments over Greece could also be market moving.
Chart of the Day – EUR/JPY
The euro and the Japanese yen have been two forex majors that have suffered significantly as the dollar bulls have made a comeback in the past couple of sessions. The interesting development has been that the EUR/JPY pair has been sliding sharply higher in the past week and only now is beginning to show signs of potential profit-taking.
After 7 days of strong gains out of 8, the last two candles have been corrective. A shooting star candle on Thursday has been followed by a further slightly corrective candle on Friday. The interesting move has been seen on the Stochastics which have bearishly crossed (although they need to move below 80 now for the confirmation). I see this as part of what should be a pullback correction towards the breakout support around 137.00 (which starts a key band of support back to 135.25).
I therefore believe this will be a short lived, near term, correction, on which blows some of the froth off the top of the recent rally. A near term dip which should be used as a chance to buy. Resistance is at 140.70/141.
EUR/USD
In the wake of the “shooting star” candlestick from the $1.1380 high, the near term corrective outlook for the euro continued on Friday. The declining sentiment fell away further to suggest that the pressure is growing again to the downside.
I do not however see it as a straight forward decline now though and initially this morning the euro has found some support and engaged a bounce. The signals over the past few weeks have been very mixed and as a perceived trend has looked to be forming the turnaround has once more set in. This is reflected in a set of momentum indicators which are broadly neutral on the daily chart.
The hourly chart shows the importance of the old key support at $1.1065, which has held now since the initial selling reaction to Friday’s Payrolls data. This is now a key line in the sand near term as a breach would open key big figure pivots around $1.1000 and then $1.0900. The bulls will be eying up $1.1200 resistance for an improvement in sentiment. For now though the sentiment is suggests that rallies will be sold into.
GBP/USD
The Payrolls report has once more turned the sentiment for Cable on its head and the pressure is on the downside once more. However, the initial look at the key support at $1.5168 has held intact as the sellers seemed to lose a degree of control on Friday afternoon. However there needs to be a lot more done to suggest there is any recovery underway. The key reaction high that has been posted at $1.5440 was just a few ticks under the old key low at $1.5445 and this simply adds weight to the importance of this level. The momentum indicators remain in corrective medium term configuration and there is further downside potential.
The intraday hourly chart shows that there is a pivot around the $1.5300 level that would be considered a decent selling area today. The configuration of the hourly momentum studies also suggest rallies will be seen now as a chance to sell. Expect further pressure back on the $1.5168 low and on towards the key $1.5088 May low in due course.
USD/JPY
An incredible breakout on Friday after a period of several days of consolidation has now achieved the implied target at 125.70 from the move above 122.00. Since hitting the target there has been a slight consolidation that has set in, but as yet no real sign of any temptation to take profit (that is despite the upward revision in Japanese GDP), with all daily momentum indicators in positive configuration.
The intraday hourly chart shows the consolidation is again helping to unwind momentum indicators an once more this is what could be behind the next upside breakout. There is initial support of Friday’s breakout around 125.00 which can be seen as a support area and perhaps a chance for a near term buying opportunity. There is basically no resistance now for the chart as with such huge multi year highs the only meaningful level to speak of is the 135 highs from 2002.
Gold
I have been speaking of the increasing likelihood of the breakdown being seen and Friday’s trading day suggests now that the breakdown has been confirmed. In completing a two day close below $1178, there was also an intraday move below $1170 support (a move to an almost 3month low). This comes with confirmation moves on the RSI and Stochastics, both of which are at their lowest levels since mid-March. This breakdown should now result in a move back towards a test of the key $1142 March low, whilst the range break implies that the crucial November low back at $1132 is also possible.
Gold has not been a smooth ride for the past few months and it would not be a surprise to see a pullback and already today there has been a slight rebound.
However I would be looking to use these minor bounces as a chance to sell. The old support $1178/$1179 is the initial resistance and a push back into the range will find further resistance at $1185.
WTI Oil
Despite a large amount of intraday volatility on Friday (due to the OPEC meeting and Non-farm Payrolls), there was very little downside pressure on WTI, with the support at $56.50 remaining intact. This has kept the medium term trading range holding on for now. The hourly momentum remains corrective and this could weigh on the price still and add to the pressure on the key $56.50 low.
Selling into rallies for a near term test of the low is an option now and with the slight rebound on Friday towards$59 could be that opportunity. A move back above $59.05 (50% Fibonacci retracement of $56.50/$61.58) would change the outlook to continue the choppy range play once more.
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