Market Overview
Forex markets have not been moving so much on the speech of Donald Trump this week, but concentrating more on what the Fed speakers have had to say. Subsequently, Janet Yellen could be key for market direction in the coming days. A week may be a long time in politics, but the complete change in market expectations for a March rate hike shows that this could also be said of the finance markets too.
The sharp move higher in the two year Treasury yield into multi year highs above 1.304% is a reflection of the market’s confidence that the Fed is ever more likely to move in March.
This puts the focus squarely on Janet Yellen who gives a speech this afternoon. Yellen has had a tendency of “crying wolf” in the past over Fed moves and is will be interesting to see if she is more reserved than many of her FOMC colleagues who have been steadily preparing the market at least for the potential of a March hike. So many time previously we have been told that all meetings are “live”. If Yellen subtly backs away from the hawkish comments of other Fed members there could be some key moves on the dollar.
Major markets have begun to suffer from the stronger dollar, with the bull trends on gold and now silver being questioned. Equities have also begun to come under pressure from some profit-taking, perhaps on the fear of underestimating the Fed’s tightening potential. Yellen is sure to set the market tone for the run up to the FOMC meeting.
Wall Street stuttered for the first time in a while yesterday, with the S&P 500 -0.6%, whilst Asian markets also followed suit with the Nikkei -0.5%, certainly not helped by a mild strengthening of the yen. European markets have also opened lower in early moves today. In forex markets show a mixed outlook, but the euro and the yen have both bounced against the dollar. Gold is lower again, but silver is managing to hold on to support for now, whilst oil is marginally higher.
Focus will be on the services PMIs and Fed speakers today. The final Eurozone Services PMI is announced at 0900GMT which is expected to be in line with the flash reading at 55.6. The UK Services PMI is at 0930GMT and is expected to dip slightly to 54.2 (from 54.5), whilst the US ISM Non-manufacturing PMI is at 1500GMT and is expected to stay at 56.5.
It is also a heavy day of Fed speakers with Charles Evans (at 1515GMT) and Jerome Powell (at 1715GMT) first up, whilst vice Fed chair Stanley Fischer is at 1800GMT. However the big focus will come with Janet Yellen who is also speaking at 1800GMT. With the extent of hawkishness coming from Fed speakers pushing the Fed Funds Futures way above 60%, how will Yellen approach things. Primarily she would want the option of a March rate hike, but without the prospect of a huge disappointment if the Fed does not deliver. It could be a fine balancing act and thus it is likely that she will be a touch more on the fence than some of her colleagues.
Chart of the Day – EUR/JPY
The sell-off on the yen in the past few days has driven a significant recovery on EUR/JPY. The market has been in corrective mode for the past few weeks, however a downtrend has now been broken by the rally. However, the recovery is now at a crossroads. The old key breakdown at 120.50 is an area of key overhead supply, meaning that a clutch of bulls are now sitting in a resistance band 120.50/121.35 which could become a key medium term “sell-zone”.
The RSI has unwound back towards 50 and is around where previous rallies (such as the February rebound) have failed, whilst the Stochastics and MACD lines are also close to turning more positive. The falling 21 day moving average (120.05) has tended to be a good gauge of direction in recent months and the rebound is now threatening to improve back above it. This recovery therefore has a sense of being at a pivotal moment.
The hourly chart shows momentum is positive but the slight drift off of the Stochastics and MACD lines could give the bulls pause for thought. Support initially in the range 119.40/119.80 is holding for now but a breach would question the recovery.
EUR/USD remains under pressure as the strength of the dollar continues to drag the pair lower. A test of the February low of $1.0490 held almost to the pip yesterday and is as yet to be breached. However the downtrend continues to be a strong indicators of intent and is now falling at around $1.0550 whilst the negative configuration of the momentum suggests that any strength is seen to be a chance to sell.
A closing breach of $1.0490 would re-open the spike low at $1.0450, however the real intent would be for the move towards a test of the key January low at $1.0340. The hourly chart shows the negative configuration is not just on the daily chart and there is a band of resistance now $1.0550/$1.0570.
A fifth consecutive bearish candle is adding to the negative pressure on cable and is a second closing level below the old support at $1.2345 which means that the market is confirming the breakdown. An implied measured breakdown target is around 240 pips which means that $1.2100 is a realistic target zone in the coming weeks. However, looking at the bearish configuration on the momentum indicators and the break below support at $12250, a retest of the key range low at $1.1980 should not be ruled out.
Rallies should now be seen as a chance to sell and there is a key band of overhead supply now $1.2345/$1.2380. The hourly chart shows a negative set up on the hourly RSI with any move to unwind into 50/60 seen as enough before the selling pressure resumes. Initial resistance is now $1.2305/$1.2325. Yesterday’s low at $1.2240 is initially supportive but there is scope for further downside in due course.
Dollar/yen remains firmly in its medium term 400 pip trading range 111.60/115.60. Within that there will be moves near term moves higher and near term moves lower. The current move is one of improvement as the strong near term bull run has now pushed decisively through the resistance at 113.75 which has re-opened 114.95. The momentum indicators have turned positive configured again to suggest that intraday corrections will be seen as a chance to buy.
There is now a near term “buy zone” between the initial breakout at 113.75 and the intra-range pivot at 114.00. The hourly chart shows that the recent bull run has just stalled at 114.60 but if the market can build from 113.75/114.00 support then the bulls will remain in control for a retest of 114.60 and then resistance at 114.95. Hourly indicators have now unwound so it will be interesting to see how strong the bulls have become in this recent move.
Gold
With the strength of yesterday’s bearish candle, the medium term uptrend is now coming under serious scrutiny. My expectation that this is simply a corrective move within the medium term uptrend is on the brink of breaking down. The daily chart shows that the first real reaction low is at $1225 and a breach would not only be below the uptrend (which today comes in at around $1233, but also the sequence of higher lows would be broken.
The RSI is now below 50 this morning and a closing breach of 50 would suggest the bulls have lost the control as this would also be a two month low. The hourly chart shows a configuration on momentum that is now far more corrective and it would need to MACD lines turning positive to drive an improvement now. It is interesting to see an old near term pivot at $1235 is now becoming a basis of resistance and will be watched today, whilst $1242/$1244 is further near term resistance. Initial support today comes in at $1230, above the $1225 key near term low.
WTI Oil
The corrective move has come more into play as a strong bear candle has pulled the market decisively lower. The move has broken below the support of Tuesday’s reaction low at $53.18 which now begins a sequence of lower highs and also lower lows. The bulls have been losing the impetus in the past few days and now the bears were beginning to grasp near term control. That seems now to be the case and with the deterioration in the momentum indicators, a correction within the trading range is growing.
The support of the pivot at $52.70 has now also been broken, a which is now a three week low that opens the February low at $51.22. The hourly chart shows the negative configuration of the near term outlook and that the bulls will struggle for now. The indicators are looking a touch stretched near term but near term rallies are likely to be seen as a chance to sell for further pressure on $51.22. Resistance is now between $53.20/$53.75.
The incredible move higher on the Dow remains on track despite the bear candle posted yesterday. However there will be a concern that the bulls have the big gap higher from Wednesday’s session still open at 20,840. The Dow does have a tendency to gap often, however usually these gaps will be filled during subsequent sessions. Yesterday’s move saw the Dow corrective for almost the entire session and there is scope for a near term corrective move.
The RSI could be interesting to watch as a move back below 70 would now be a near term profit taking signal. For now this near term dip lower is likely to be seen as blowing the froth off the top, but reaction at the gap could be key. Initial support is with Wednesday’s traded low at 20,957. Ultimately it is difficult to bat against the incredible run higher on the Dow at the moment and corrections should still be seen as a chance to buy. The hourly chart shows resistance is at 21,075 before 21,130 and the high at 21,169.
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