Market Overview
Having navigated a way through a huge week of data and tier one economic announcements, forex markets are holding their recent trends and are still fairly stable. However, it is clear that the trade tariffs are the key factor to watch. Friday’s Non-farm Payrolls was basically a confirmation of what the market had factored in previously. However, to guide markets now seems likely to be the back and forth rally of rhetoric between the US and China over trade. Neither side seems ready to back down, with China preparing tariffs on $60bn of US imports, whilst President Trump’s triumphalist assessment of his policy seems unlikely to do little more than fan the flames. Treasury yields are falling back but the dollar is retaining its performance as the Chinese yuan remains under pressure. The People’s Bank of China has looked to defend its weakening yuan as it raised the reserve requirement ratio back to 20% on FX forwards. Watching the release of this month’s foreign exchange reserves will also be a key indicator of the pressure it is under.
Wall Street closed higher on Friday with the S&P 500 +0.5% at 2840 and futures around +0.1% higher today. Asian markets were mixed to mildly higher (Nikkei -0.1%) with European markets reacting slightly positively this morning. In forex, the marginal weakness of the dollar from Friday’s Non-farm Payrolls report has been seemingly forgotten today as the Chinese yuan slips further and allows the dollar some support across the majors. It is interesting though to see the yen continuing its attritional positive performance. In commodities, the dollar strength is driving a consolidation on gold after Friday’s rebound, whilst oil is finding a touch of support this morning.
There are no key economic releases today.
Chart of the Day – EUR/JPY
The weaker euro and strengthening yen have driven a decisive break lower on Euro/Yen. Since the key May low at 124.60 the market has been in recovery move back towards the pivot band 131/132 which has time and again over the past year been a crucial turning point on the pair. The July high was at 132.00 almost to the pip, before a lower high was then formed at 131. A renewed negative trend is now forming as the market on Friday broke below the reaction low at 129.10. The corrective outlook is building for rallies being sold into whilst the increasingly corrective outlook means that on a move below 128.50 the way is open for a retreat towards 127.00. RSI, MACD and Stochastics lines are all negatively configured and suggest rallies are a chance to sell. The old 10 week uptrend is now a basis of resistance for intraday rallies at 129.85 today, whilst the hourly chart shows resistance in the band 129.10/129.60.
The end of the consolidation has induced downside pressure on the pair that has now been pulled to a five week low and threatens the support of the medium term (11 week) trading range between $1.1505/$1.1850. The traction in the move has resulted in now four consecutive bear candles and the early move today suggests this is set to continue. The RSI is now falling below 40, whilst the MACD lines are beginning to track decisively lower and the Stochastics are falling fast. The market has now pulled clear below the previous key low at $1.1570 and the hourly chart shows a band of resistance now around $1.1610/$1.1620. This means there is a 50 pip band of overhead supply resistance now that has built up to act against a prospective recovery. The importance of the support at $1.1505 is huge as a decisive breach would mark a real outlook change.
The weight of selling pressure is mounting once more within the downtrend channel. Building on Thursday’s decisive bear candle (on the Bank of England), the market is trading back below the psychological $1.3000 level once more and the key July low at $1.2955 is once more within sight. Momentum indicators are calling or further downside too, with the RSI falling in the mid-30s, as throughout the bear channel of the past few months, the RSI has consistently gone to 30 and below during the selling phases. The channel low comes in around $1.2870 today, and below $1.2955 the next price support is around $1.2775. The hourly chart shows the negative momentum configuration now, with the hourly MACD lines failing under neutral and the hourly RSI failing around 50. There is a run of selling into intraday rallies now, with resistance $1.3040 and $1.3070.
The outperformance of the dollar has been fairly well set across the majors, but against the yen, the move is not so assured. Following the strong bull candle early last week (on the BoJ move), there has been a run of three negative candles and a retracement of the move. The four month uptrend was creaking a couple of weeks ago and managed to hang on, but this run of bear candles is once more really putting the pressure on. A retreat back into the 111.15/111.40 pivot band is again testing the positive outlook as the market again breaches the trend on an intraday basis this morning. Key near to medium term support is at 110.60 which is a reaction low that if breached would really suggest the dollar bulls having lost their way. For now the market is in the balance though as momentum indicators begin to drift again. The RSI below 45 remains a key signal to watch out for. Resistance is growing now at 112.15, but initially watch out for Friday’s reaction high at 111.80 as the hourly chart shows a more near term corrective outlook beginning to form.
Gold
For the past week and a half, the market has been hugging the resistance of what is now a seven week downtrend channel. It looked as though the sellers were ready to open the floodgates, but the support of the key December low around $1204 has held. Subsequently, Friday’s bull candle has induced another test of the trendline, which so far today is holding. All long term momentum indicators retain their bearish configuration, with the RSI stuck under 40 being a clear indication of this. However these indicators are also close to coming to a head again and with the key support under threat whilst the downtrend is also being tested, a near to medium term crossroads is close. The hourly chart shows the bulls are fighting (but is it a losing battle), and resistance at $1220 is a near term ceiling now. A move above $1228 at least is needed to suggest momentum is building for a serious attempt at a rally. Below $1204 opens $1194.50.
WTI Oil
Oil closed out a pretty hectic week on a subdued note on Friday. To an extent, this has helped to settle the outlook that is increasingly forming a consolidation above the key medium term pivot at $67. The momentum indicators are taking this view, with the RSI now between 40/55 for the past three weeks, whilst the Stochastics are stable and the MACD lines are shallowing. All of the momentum indicators do though have a mild negative bias which could see the market dragged back towards the $67 support once more. There is a run of slight lower highs in recent weeks, with $70.45 being the latest. This needs to be overcome for the bulls to regain some form of momentum, otherwise there will be continued testing of the $67.00 pivot and the long term uptrend which comes in today at just above $67.00. Initial resistance is at Friday’s high of $69.25.
The rebound from 25,120 that formed a bull hammer on Thursday helped the market into another positive move on payrolls Friday. Pulling back above the 61.8% Fib level at 25,367 helped to improve the outlook once more, whilst the move now threatens the near term resistance at 25,490/25,500. This means that if the bulls can overcome this resistance then renewed bull control will ensue for a test of the July high at 25,587. There is still a warning on the momentum indicators though as the Stochastics suggest that perhaps the sellers still have some unfinished business. However, whilst the RSI holds above 60 and the MACD lines prevent a decisive bear cross, then the prospect of multi-month highs being seen again will be high.
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