Market Overview
The dollar has turned another corner and taken a big recovery step in the wake of much better than expected US growth. Amid all the talk of patience from the Federal Reserve, there is a shift towards data dependence, and the data yesterday was strong. A big beat of consensus estimates in the Q4 Advance GDP reading has driven Treasury yields higher and the dollar stronger. The big move has come against the Japanese yen, but the Aussie and Kiwi also suffered amidst the less positive geopolitical outlook, tempered prospects for the US/China trade talks and weaker than expected China PMIs. The move is also not restricted to the forex space, with precious metals commodities also suffering, with gold and silver now threatening to reverse the strength of their recoveries of recent weeks. With a bullish key one day reversal technical pattern on the Dollar Index, it will be interesting to see if the dollar bulls now go on a run over the coming sessions. With markets such as EUR/USD and Gold teetering on the brink, today’s session could be key. With a lot of tier one data coming, with PMIs and inflation, will US relative economic performance continue to show through. Yield differentials are key right now, and they are looking better for the dollar suddenly.
Wall Street closed mildly lower last night with the S&P 500 -0.3% at 2784 but US futures are looking much better today around half a percent higher. Asian markets are responding higher with the Nikkei +1.0% and Shanghai Composite +1.5%, whilst European markets are also edging back higher, with the FTSE futures and DAX futures following the US lead and are around half a percent higher. In forex, the recovery in the dollar continues to show through, with the yen being the main underperformer this morning, not helped by better sentiment and dollar strength. In commodities, once more, the dollar recovery is key and is hitting gold which is back around $1310 today, whilst oil is taking the risk positive view, trading around a percent higher.
It is the first trading day of the month, a big day of tier one data and Manufacturing PMIs are in focus. Eurozone final Manufacturing PMI for February is at 0900GMT and is expected to be confirmed at 49.2 (49.2 flash, 50.5 final January). The UK Manufacturing PMI is expected to drop back to 52.0 (from 52.8), whilst the US ISM Manufacturing at 1500GMT is expected to show a slight drop to a far stronger 56.0 (from 56.6 in January). There is also key inflation data for the Eurozone and US also on the agenda. Flash Eurozone HICP at 1000GMT which is expected to show headline HICP ticking slightly higher to +1.5% (from +1.4% in January) whilst core HICP is expected to remain at +1.1% (+1.1% in January). The Federal Reserve’s preferred inflation gauge, the core Personal Consumption Expenditure for December at 1330GMT which is expected to be +0.2% on the month which would see the year on year reading remaining at +1.9% (+1.9% in November). Revised University of Michigan Sentiment for February is at 1500GMT and is expected to tick higher to 96.1 (from 95.5 prelim, 91.2 final January).
Chart of the Day – Silver
The recovery on precious metals has been a key move in recent weeks, however, looking at silver, this move is at increasing risk of topping out. Since the recovery really kicked off in late November, the recovery uptrend has been forming ever decreasing uptrends in a series of higher lows. Two strong negative candles in the past couple of sessions, have broken the latest uptrend, and now the corrective threat is increasing. Momentum indicators are slipping into corrective configuration now. The MACD lines have been negatively diverging over recent weeks and are now accelerating lower from a “bear kiss”; whilst the RSI is now decisively below 50 for a three month low. The key level to watch is now the pivot around $15.45 which held up the mid-February correction and a breach would be the first time a key higher low would have been broken within the recovery. Momentum indicators are suggesting this support will now come under increasing scrutiny. A close below $15.45 would be a significant breakdown and imply at least a test of the January low at $15.14. The hourly chart shows an increasingly corrective outlook with the hourly RSI failing under 60, hourly MACD lines failing under neutral and a lower high at $15.82 being initial resistance, under $16.00 and key $16.21.
EUR/USD
The near term outlook for the euro has reached a mini crossroads again. The rebound of the past couple of weeks hit the $1.1420 pivot to the pip yesterday before dropping back to form a second corrective candle. The move has also now broken a mini uptrend of the recovery. For now the move has not posted any decisive bearish signal that would suggest a move lower, but the negative hints are racking up. A negative candle today with a close back below $1.1345 would be a near term sell signal. The hourly chart should be watched now, with the hourly RSI consistently above 40 throughout the recovery and if this is breached then it would be a corrective signal. The hourly Stochastics also have not been below 20 since the rally kicked in. Resistance is now initially at $1.1395 under the key pivot at $1.1420.
The push higher on Cable has run out of steam, at least for now, as the market has turned back below $1.3300 to form a negative candle yesterday. After such a strong run higher, this is not to be unexpected and a drift back towards the breakout at $1.3215 is to be expected. It will be interesting how the bulls then look to play sterling because as political impetus just subsides in the next few sessions, profits could be taken on longs which drag the market lower. The RSI has turned back from 70 which could also be a corrective signal. Another breakout support is at $1.3110 and so there could be a position where an unwinding move into $1.3110/$1.3215 is seen. The resistance is heavy between $1.3300/$1.3350 so upside potential is limited around here in the absence of further softer Brexit moves.
The yen has really borne the brunt of the dollar strength. This comes as a second completed strong bull candle in a row was seen yesterday and threatens to be a third today. A close at a ten week high has been coupled with a move this morning above the medium term pivot at 111.35. This has been confirmed by a decisive move above 60 on the daily RSI, whilst MACD and Stochastics lines both turn higher. There is an uptrend channel of the past eight weeks, which this morning’s move is testing the upper band, so it will be interesting to see if the bulls can sustain this move higher. Breaking above 111.35 has opened 112.25 as the next resistance, being an old area of overhead supply. With the breakout, corrections are now certainly a chance to buy, and 111.35 is initially supportive. There is a near term buy zone between 111.00/111.35. The breakout also means that 110.25 is now a key higher low.
Gold
For anyone long of gold and with a bullish outlook, this could be the most important session for several weeks. After yesterday’s sharp intraday turn lower (in the wake of the positive surprise on US GDP and subsequent dollar strength) which left another lower high at $1327 (on the hourly chart), the market is now breaking the support of a 14 week uptrend. Daily momentum indicators are also on the brink of a significant shift towards a negative outlook, with the RSI just now edging below 50, as MACD lines pull lower and Stochastics also accelerate lower. The long term pivot band $1300/$1310 remains the crucial level to watch as a downside break would be a key outlook changer. The top of the pivot is being tested now, but a breakdown would mean a breach of the $1302 key higher low which would be the first time in the recovery that a key reaction low would have been broken. Initial resistance is at $1316, under $1327.
WTI Oil
The momentum of the recovery from $55.00 has been sustained with another strong bull candle. This puts the market on course for a retest of the recent high of $57.80 this morning and the medium term pivot at $58.00. Technical studies are positioned well with upside potential for the test, with the RSI positive above 60 and Stochastics again ticking higher. A breakout re-opens the way for the 50% Fibonacci retracement at $59.60. There is still an outlook of using weakness on oil as a chance to buy, with the hourly chat showing a near term pivot support at $56.40 above the $55.00 reaction low.
A third consecutive session is drifting lower on the Dow has now broken the support of an eight week uptrend. This comes as the market is gradually dropping back towards the consolidation support around the 76.4% Fibonacci retracement at 25,715. For now this is still just a move to unwind the run higher and the bulls will not be overly concerned quite yet. However a move to close below the Fib level will raise concern levels. Momentum indicators are positively configured still, and therefore corrections are a chance to buy. The RSI is in the mid-60s and anything that finds support above 60 would still be strong, whilst the MACD and Stochastics lines are also still positive. The hourly chart shows an unwinding move back towards 40 on hourly RSI and around neutral on MACD, areas where the buyers have previously supported. Above initial resistance at 26,040 would improve the outlook again, with the main resistance at 26,240.
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