Market Overview
It was a wild ride for major markets on the ECB meeting yesterday as traders were struggling to ascertain the signals from the Governing Council. Mixed messages from Draghi over the economic outlook, and lack of agreement on how to progress with easing measures.
The market has clearly been expecting more of a definitive message to come from Draghi. However, it seems as though for the first time in a while, he fluffed his lines. Could it be that the dithering will result in a less dovish ECB in the coming meetings? The knee jerk reaction suggests that traders are uncertain. A 9bps swing on Bund yields, an intraday rebound on the euro and the DAX sharply lower. However, we believe that the ECB will still engage a series of easing measures, with a cut to the deposit rate in September being the bare minimum. Markets will gradually see this and eye yesterday’s moves as an opportunity.
Interesting also was that whilst the ECB was flip flopping which sent the euro into a short covering rally, a huge Durable Goods number from the US has also seen the dollar holding strength. There are ongoing questions over whether the market is positioning too dovish for the Fed next week. This puts US growth at the forefront of traders’ minds today. The US remains the best of a bad bunch of the major economies, and equally the dollar remains the outperformer of major forex.
Wall Street closed lower yesterday with the S&P 500 -0.5% at 3003. However, US futures are giving a degree of stability today, currently around +0.2% higher. This is ensuring that the Asian markets are not too negative, with the Nikkei -0.5% and the Shanghai Composite +0.1%. European indices are also subsequently looking for a mixed open with FTSE futures -0.1% and DAX futures +0.2%.
In forex, the dollar has been an interesting winner out of the ECB meeting and continues to make ground today. JPY is also performing well.
In commodities, there is a degree of support coming back in for gold today, whilst oil is also holding ground in continued consolidation.
There is just one major economic release on the economic calendar today, but it is extremely important.US Advance Q2 GDP at 13;30 BST is the first look at growth and is expected to drop to +1.8% (from the final reading of +3.2% in Q1).
Chart of the Day – EUR/JPY
There was a big turnaround on the euro yesterday as Mario Draghi revealed a Governing Council seemingly dithering on easing. Subsequently a big rebound on Euro/Yen. Having dropped to a multi-year low earlier in the session, the euro rebounded form 120.03 into the close to form a big bullish engulfing candlestick (bullish key one day reversal). The prospect of short covering on the euro could now take the euro into recovery mode. The key today is how the market responds. Can the bulls back up the knee jerk reaction move? Momentum has picked up, with a bull cross on Stochastics and RSI higher. However, we still view this move as likely to be short term in nature, a move that will peter out before pulling back lower again. The daily chart shows the bounce is into resistance in the band 120.75/121.30 from a series of lows throughout June into July. If the market can decisively push through this resistance, then a short term technical rally could have the legs to sun towards 122.20/122.30 resistance. However momentum remains negative medium term configured as the RSI tends to struggle in the 50/55 region and this should limit the recovery again. The bulls ideally need another positive session today and will need to defend the 120.75 level (initial support) which has become pivotal and if is lost would question the longevity of even this near term bounce.
It was something of a wild ride on EUR/USD in the wake of the ECB meeting yesterday. Initial weakness was bought into, only to then slip back again. The net result was little overall change to the outlook. A small bodied candlestick around long upper and lower shadows implies significant uncertainty. That word uncertainty pretty much sums up the message out of the ECB yesterday. Taking a step back from yesterday’s volatility we continue to view the price action of the past week as being valid. A move lower that sees near term strength as a chance to sell on EUR/USD. Daily momentum indicators suggest that remains the strategy, with the RSI stuck under 40, MACD lines still accelerating lower and Stochastics holding bearish configuration. We noted recent that the breakdown of the old support band $1.1180/$1.1200 was a basis of resistance, and contained the session high yesterday (at $1.1187) before the late slip back lower. A resumption of negative candles today would re-open the support in the band $1.1100/$1.1110. A closing breach of $1.1110 would still open $1.1000 and the next key support at $1.0850.
With all of the volatility surrounding the ECB meeting yesterday, Cable was not a place for the action yesterday. A very quiet session which saw the market consolidating around the resistance of the four week downtrend. We continue to view near term sterling strength as a chance to sell as the resistance builds under $1.2560/$1.2580. It seems as though this morning, normal service has resumed with another drift lower. The resistance of the four week downtrend comes in at $1.2495 today, whilst the resistance of the past couple of sessions (at $1.2515) now risks becoming another lower high below the $1.2560/$1.2580 resistance of recent weeks. Momentum remains consistently negatively configured and suggests that rallies remain a chance to sell. Expect pressure on this week’s low of $1.2415 and then the recent key low at $1.2380. We still view the low $1.20s as viable on sterling.
The ripples of the ECB’s lack of consensus on easing have gone through markets. The reaction has been for a dollar positive rally on Dollar/Yen. The move has breached the lower high of 108.35 and the formation of a positive candle has seen the outlook within the 106.75/109.00 range improve once more. Having now built four successive higher lows, the bulls will have high confidence for a push on towards 109.00 now. Momentum indicators are ticking higher into a more positive configuration, but we still do not expect a decisive rally on the dollar to take hold from here. The RSI has risen above 50 but needs a move into the 60s to really suggest traction, whilst the MACD lines have also ticked higher but for now remain under neutral. The hourly chart reflects a near term positive bias, whilst the bulls need to defend initial support between 108.20/108.35 to continue to build. Key mid-range support is forming between 107.80/108.00. Above 108.60 the bulls are directly testing key resistance at 109.00. A decisive closing breakout above 109.00 opens 109.70/110.00.
Gold
The small 1% range on gold of recent sessions was tested on both side yesterday during a choppy session, but for now remains intact. A breakout above $1429 could not be sustained as gold turned sharply back on the ECB meeting yesterday. However, a minor intraday breach of the support at $1414 also could not be sustained and continues to hold this morning. However, the bulls will be concerned that the uptrend of the past six weeks has been breached and a near term slip is threatening. Another breach of $1414 opens the key near to medium term pivot of $1400 which is a key gauge now. The drift lower on the momentum continues and how the market responds to initially $1414 but more importantly $1400 will be crucial now as to whether this is a market playing out a range, or something more considerable to the downside. The hourly chart is still in a ranging configuration on a near term basis. The resistance at $1433 is now key though. Ultimately we continue to view near term corrections on gold to be a chance to buy. This would be questioned on a break below $1400 and change if $1181 support were to be breached.
WTI Oil
It is a real struggle for any traction on oil right now. The market has gone almost nowhere throughout this week. Any attempted rallies are quickly being snuffed out and this is a growing concern for the bulls. Technical momentum signals are mixed to mildly negative. RSI is flat a shade under 50, MACD lines are flat at neutral, whilst Stochastics are subdued around a negative configuration. The support at $54.70 has been holding and the 38.2% Fibonacci retracement is acting as a basis of support at $55.55. However, the bull failures are racking up under $57.65. For now this is a market in consolidation.
A second consecutive negative session is now testing the bull control. The uptrend support of the past six weeks has been breached and the bulls now have to respond quickly to prevent a reversal taking hold. Nothing overly bearish has been seen yet, but sell signals are threatening. Momentum indicators are now beginning to slip. The RSI closing below 60 is a six week low, whilst the MACD lines are also threatening a bear cross. The support band of around 100 ticks between 26,965/27,069 (the latest breakout and last week’s low) needs to hold. A breach would complete a mini top pattern and imply over 300 ticks of correction for c. 26,650. This would also imply a test of the early July reaction low. The hourly chart also shows a market on the brink of a corrective move, with the recent failure of hourly RSI around 60 whilst MACD lines are hovering around neutral threatening lower. Initial resistance now 27,370.
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