Market Overview
The Federal Reserve sees no compelling reason to move on rates in either direction for now. Jerome Powell sees the recent inflation decline as “transitory” and this has reduced expectation of a rate cut in December. However, with the market still pricing a 50% probability of a cut this year, there is still a way to go for this to be priced out. Subsequently, today’s Nonfarm Payrolls report could be key for the dollar. The greenback has been boosted again in the wake of the Fed. A corrective slip had been threatening to accelerate, but Powell use of the word “transitory” turned that on its head.
A strong payrolls report today could accelerate renewed vigour for the dollar. Whilst the headline number always gets the algos going, it is wage growth that is key. The expectation is that wages will improve once more to 3.3%. Given the Fed’s preferred inflation gauge (core PCE) just fell to 1.6%, this is positive for real wages, the US consumer and the economy. Further confirmation of decent wage growth will help to pull Treasury yields back higher and support the dollar. The problem comes in equities though, as investors had been getting used to a more cautious/dovish Fed. Another day of negative pressure yesterday could precipitate a corrective wave as good data helps to price out the prospect of an equities supportive Fed rate cut. Ahead of payrolls, markets are in their traditional settled state, with little real direction of note early in the European session.
Wall Street closed negative again with the S&P 500 -0.2% at 2924. US futures are ticking back higher again this morning by +0.2%. With little steer from Asian markets (Nikkei closed, Shanghai Composite +0.5%), European markets are edging slightly higher this morning.
In forex, there is a mixed look across major pairs, with a hint of continued dollar rebound.
In commodities, there is a degree of support for gold, whilst oil is once more lower after shedding almost 3% yesterday.
Today is a crucial day on the economic calendar, with a mix of PMIs, inflation and US payrolls data. The UK Services PMI kicks off the tier one data at 09:30 BST and is expected to recover to 50.5 from last month’s extremely disappointing 48.9 which was the lowest since July 2016. The Eurozone flash inflation for April is at 10:00 BST and is expected to show headline HICP improving to +1.6% (from +1.4% in March), whilst core HICP is expected to also tick higher to +1.0% (from March’s +0.8% which was an 11 month low). The main event of the day will be the US Employment Situation for April which is at 13:30 BST.
Headline Non-farm Payrolls are expected to slip back a touch to +185,000 (from last month’s +196,000). Given the focus on inflation in the recent FOMC meeting, the big focus will be on Average Hourly Earnings which are expected to grow by +0.3% on the month and to bring the year on year data to +3.3% (up from +3.2% in March). US Unemployment is expected to remain at 3.8% (3.8% in March). The US ISM Non-Manufacturing data at 15:00 BST is expected to improve to a strong 57.0 (from 56.1 in March).
Chart of the Day – NZD/USD
The outlook for the Kiwi has been deteriorating over recent weeks and is now looking increasingly negative. A break below the pivot band $0.6685/$0.6720 saw the outlook take a turn for the worse but now with this pivot becoming a basis of resistance, rallies are a chance to sell. There is a downtrend channel formation that has formed in the past six weeks and the market is now set up to put pressure on the key support of the December low at $0.6590. Although this support held towards the end of April, a closing breach would be a key downside break now. The outlook on momentum indicators is backing further downside. The RSI has formed a bearish configuration with further downside potential. MACD lines are also bear kissing lower, whilst the Stochastics form a bear cross. The downtrend channel comes in at $0.6665 today with. An initial tick higher today is likely to provide another chance to sell. The hourly chart shows a band of resistance $0.6640/$0.6665 is a near term sell zone. Resistance at $0.6685 is now key near term. Initial support at $0.6605.
In the wake of the Fed, the “shooting star” candle is a reversal signal. The selling pressure did not let up yesterday and another negative candle formed. The concern for the bulls is that the market is now pulling back below the old key low of $1.1175 which had become a pivot. Coming as momentum indicators all roll over in bearish sequence, the prospect of renewed downside is growing. Although this is not confirmed yet, the RSI below 40, MACD lines accelerating lower and negative traction on Stochastics would be bearish signals. A decisive close below $1.1175 opens the key April low at $1.1110 and likely beyond towards $1.1000. Key resistance seems to have formed at $1.1265 as another potential lower high. Initial resistance at yesterday’s rebound high of $1.1220. A strong payrolls report today could see new multi- month lows.
Cable has held up remarkably well considering the Fed was slightly more hawkish than expected and the Bank of England was cautious. What is the reason? Brexit anticipation of a political agreement between the Government and Labour. The market still sees this as a supportive factor and $1.3000 still seems to be a watershed. It was a relatively quiet session yesterday for Cable. Resistance is building at $1.3100/$1.3130 but for now the bulls are willing to defend $1.3000. Technically the momentum signals are settling down again. The RSI has spent much of the week stabilising around 50. Furthermore a recovery in Stochastics and MACD seems to be running out of steam. Whilst upside seems limited, so does downside. Moving averages are all flat on the daily chart too, reflecting a lack of real direction. Payrolls may give the market some legs today, but in the absence of newsflow on Brexit, it is unlikely to be a decisive move. Support at $1.2865 is key.
The ten day Japanese public holiday is really making Dollar/Yen a non-event. There is seemingly little incentive for traders to take a view. Technicals are increasingly benign. The small candlestick real bodies continue to reflect intraday indecision. Finding support at 111.00 in the wake of the Fed prevented a continued corrective slip from beaching a key higher low at 110.85. It also maintained the 4 month uptrend. Consolidation is therefore set to continue. Momentum signals are giving very little indication as the RSI hovers around 50, MACD lines flatten a shade above neutral and Stochastics look to be bottoming. The hourly chart shows near term resistance at 111.60/111.90 is restrictive below the key medium term pivot at 112.20.
Gold
Jerome Powell reassurance over declining inflation being “transitory” is putting gold under pressure. The formation of two decisively negative candles puts the bears back in control. It was interesting to see the support of $1266 and the 8 month uptrend (today around $1265.50) held initially yesterday. However, this is last chance saloon for the gold bulls in the prospect of a bullish long term outlook. A big breach of $1265 would be the final positive indicators being broken. Momentum indicators rolling over and giving an array of sell signals is certainly concerning now. The resistance at $1289 is growing ever more important and intraday rallies have to be seen as a chance to sell now. This is reflected in the hourly chart which is in increasingly corrective configuration. Initial resistance is at $1278 now.
WTI Oil
A decisive downside break with a huge bear candle puts WTI squarely into correction mode. First of all the support of the four month uptrend channel has been completely breached. Forming a lower high at $64.80 also means that for the first time since December the market is now forming lower highs and lower lows. This suggests that a new downtrend formation is building. A top completed below $62.30 to imply $4.30 of downside towards $58.00 as the first target. A retreat to the 50% Fibonacci retracement at $59.60 should be the next area of consolidation. Momentum indicators have turned sharply lower with the RSI below 50 for the first time in 2019. MACD lines are also accelerating lower following a recent bear cross, whilst Stochastics are also negatively configured. There is now a near term basis of overhead supply $62.30/$63.00 as a sell zone. Initial support at yesterday’s low at $60.95.
The bulls no longer appear to have control of the near term outlook. A second successive decisive decline has pulled the market to a three week low and below the 21 day moving average (at 26,415) for the first time in five weeks. A failure to break through resistance at 26,695 earlier in the week adds to concern that a near term correction is now forming. For this to take hold, a decisive break below the higher reaction low at 26,062 would be needed. Already we see momentum indicators pulling lower. The RSI is back to 50 (a 5 week low), whilst MACD and Stochastics lines are beginning to cross lower. The hourly chart shows initial resistance now between 26,310/26,420. The risk is now that with the corrective configuration on hourly momentum that a rally is seen as a chance to sell. A breach of 26,062 would open a more considerable correction potential.
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