Market Overview
As traders return to their desks after the holiday period they are met with a dollar that has come under renewed selling pressure. A bout of selling hit the greenback to end 2017 on a sour note at its lowest level in over three months on the Trade Weighted Dollar Index. Markets seem to continue to look at the subdued outlook for inflation and question whether the Fed will achieve a further three rate hikes this year. With global economic indicators picking up the dollar seems to now have lost the first mover advantage of the Fed. Today’s China Caixin Manufacturing PMI beating expectations at 51.5 was a three month high and bucked a trend of deterioration. This will only add to the pressure for the dollar and so far today the trends of recent sessions seem to be being validated and continuing. The Christmas trading period is always a difficult one to gauge and there was a concerning correction on the final day of 2017 on Wall Street. The Asian session has been supportive in the way of the Caixin data, whilst the Manufacturing PMIs will also help to gauge sentiment today.
Wall Street was closed yesterday for New Year but markets were under pressure into the final day of 2017, with the S&P 500 -0.5%. Asian markets were broadly higher overnight however European markets seem to be a little more reticent today in early moves. In forex, the dollar remains under pressure across the majors, with a risk positive outlook from the China data helping to drive Aussie and Kiwi outperformance. The safe haven yen is finding less buying pressure. In commodities, the weaker dollar continues to help gold higher, whilst oil is again slightly higher.
The first trading day of 2018 and we have the PMIs to look at. The Eurozone Manufacturing PMI is at 0900GMT and is expected to remain at 60.6. The UK Manufacturing PMI is at 0930GMT and is expected to tick slightly lower to 58.0 (from 58.2 last month).
Chart of the Day – EUR/JPY
The pair had been trading in a sideways range for several months between 131.15/134.50 but the final trading days of 2017 saw a breakout. The move to close above 134.50 completed a bullish upside break of the consolidation range to now imply around 330 pips of further gains towards 137.80 in the next few months. The momentum indicators confirm the breakout with a three month high on the RSI and the MACD lines rising strongly. The breakout has now come to build as a basis of support around 134.50 and this means that there is a band of support between 133.90/134.50 which will be seen as a near term buy zone for any technical corrective slip. The market is now trading around levels not seen since October 2015 and the next resistance is no until 137.00/137.50 and corrections will be seen as a chance to buy.
The dollar came under greater selling pressure in the period between Christmas and the New Year and this has pushed EUR/USD back above $1.2000 and three month highs again. As markets get back up and running in 2018 the outlook is strong for the pair. Momentum indicators are strongly configured with the RSI rising around 70, whilst the MACD and Stochastics are also positively configured. The market is testing a minor resistance around $1.2030 this morning but the key September 2017 high at $1.2092 is well within striking distance. A breach of this resistance would also be a new three year high. The hourly chart shows that the bulls have come into today in positive fashion too and are looking to push higher whilst intraday corrections are being seen as a chance to buy. The support is at $1.2000 initially, before $1.1960 and $1.1900.
Cable may have consolidated in the final session of 2017 however a run of strong and positive candles in recent days has put the bulls in the driving seat. The resistance of the December high at $1.3550 is again being tested and it will be interesting to see if the bull move can be sustained for a successful challenge. The momentum indicators are positively configured with the RSI in the low 60s whilst the MACD and Stochastics are also positive. The bulls have come into today happy to support and as volume levels pick up after the Christmas lull, initial signs are that there is an acceptance of the current move. Holding above support at $1.3400/$1.3450 will be important for this to continue.
Having held up for much of the Christmas trading period, the dollar bulls looked to give way into the end of 2017 and have come into the new year with some questions to be answered. The four week uptrend was broken last week and momentum indicators are giving off some concerning signals. The MACD lines crossing lower are the main issue, whilst the RSI and Stochastics suggest that the support at 112.05 could come under some scrutiny. The last few months have seen the basis of a pivot around 113.00 and falling back once more below this level just adds a little more corrective pressure. There is initial support at 112.45 which is holding as the market is yet to take a view today, however if the underside of the old four week uptrend adds to resistance around 113.00 and means it could be a struggle to make headway in a recovery. The hourly chart shows the hourly RSI failing under 60 and hourly MACD lines failing under neutral, leading to a negative near term bias.
Gold
The rally on gold in the past few weeks has been incredible. The corrective outlook has been smashed out of the water by a near incessant run of positive candles. A solid three week uptrend has formed and the run higher has taken the market to the upper limit of the $1300/$1310 long term pivot band. Trading so strongly now and above all moving averages, a two day close above $1310 would give gold a bullish medium term outlook once more. The RSI is above 70 at its highest in almost four months but there is little reason to suggest that the market is above to lose steam. The opening moves of 2018 have shown the bulls are still there in force and a decisive close above $1310 would open $1334 and the major 2017 high of $1357.50. The bulls will now be looking to use the initial break above $1300 as a basis of support with the three week uptrend support coming in at $1295 today. The hourly chart shows trading throughout Christmas and the New Year above 60 on the hourly RSI, so this is an initial gauge of the strength of the continuation of the bull run.
WTI Oil
The market seems to have held on to the post-Christmas breakout above the $59.05 resistance as trading in recent days have appeared to show an acceptance of the new multi-year highs. The momentum indicators reflect a positive outlook with the MACD lines rising having recently crossed higher, whilst the RSI is strong in the high 60s. The breakout also continues the run higher within the uptrend channel which currently comes in around $62.00. Volume in the run up to the end of the year has been reduced and as such it will be interesting to see if these breakout levels will be sustained, however there is breakout support in the band $58.55/$59.05. The market once more pushed higher on the final session of 2017 and the mid-2015 resistance band $61.80/$62.60 is now open.
The opening sessions of 2018 will be very important for the longevity of the bull run on Wall Street after a bearish engulfing candlestick was posted on the final day of 2017. This came as the market failed to break above the mid-December all-time high of 24,876 only to then fall 130 ticks into the close. This now means that the support at 24,708 is key, being a two week low and a point that would open a top pattern and potential further correction of around 170 ticks. The near term corrective signals are racking up on the momentum indicators too, with the RSI crossing back below 70 in a classic sell signal, whilst the MACD lines have also crossed lower. The importance of the all-time high at 24,876 also grows as key resistance. The hourly chart reflects the deterioration on the daily chart, with the hourly RSI dropping to its lowest level since mid-November. The reaction of the bulls early in 2018 could be telling and initially it looks that the potential for a correction is growing.
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