Market Overview
Will today’s Non-farm Payrolls signal to the FOMC that it is time to hike again in September? That is the question that many traders will be asking when the most widely watched data point of the month is announced at 1330BST today. If the disappointment of the ISM Manufacturing from yesterday is anything to go by then the Fed may still have a few unanswered questions. A very weak ISM number helped to drive a dollar correction and pulled Treasury yields back lower again. It is probably not enough to derail talk of a rate hike completely but it does show that tier one data is still fairly mixed and could give any closet doves on the FOMC some lingering doubt. Markets are likely to be consolidating today in front of the report as the potential to drive interest rate expectations is elevated with the possibility of a September rate hike being on the table. For the payrolls report, a headline number of over 200,000 would be considered to be strong, and this would drive a strong dollar on talk that it would be a trigger for a Fed rate hike. However, also watch average hourly earnings which are forecast to be +0.2% but need to hit +0.4% for the year on year data to sustain at +2.7%.
Wall Street closed all but flat last night and Asian markets were also very mixed and lacking direction. The European markets have mild gains at the open but I would not expect this to turn into much and they are likely to also drift back towards flat in front of the payrolls report. Forex markets are also showing little real direction, however it is interesting that the yen is slightly underperforming, which reflects a marginally risk positive mood. This is also shown in the moves of commodities with gold slightly lower and oil slightly higher.
The US Employment Situation report is released at 1330BST and the headline Non-farm Payrolls is expected to be 180,000 (down from 255,000), whilst unemployment is forecast to drop to 4.8% (from 4.9%) and average hourly earnings are expected to be +0.2% for the month. In other data there is also the US international trade balance at 1330BST which is expected to fall slightly to $42.7bn. US Factory Orders are at 1500BST and are expected to be +2.0% for the month.
Chart of the Day – EUR/JPY
A rallying EUR/JPY should be considered to be generally risk positive for the markets and after several weeks of moribund price action, the bulls have started to find some traction once more. This is having a significant impact across momentum indicators, with the RSI above 60 and a highest level since March, whilst the Stochastics are also bullishly configured too. The price action in the past few days has formed a series of bullish candles, but also importantly pushed above the pivot around 114.80 which has been resistance. This pivot is now becoming supportive with the upside break now re-opening the July highs around 118.45 and also pushed above the falling 55 day moving average (at 114.57) which has capped the rallies consistently since May. The market now looks set to test the next key moving average which is the 89 day moving average (currently 117.43) which has capped the major rallies for the past 12 months. There is a definite improvement in momentum on the hourly chart with the hourly RSI unwinding to 40/50 consistently to find support in this rally. Below 113.80 would be a disappointment now for the bulls as the outlook is now far more positive than it has been for some time. Corrections are now being seen as a chance to buy.
The dollar is driving the market moves on the pair as a sharp bout of dollar weakness into yesterday afternoon formed a strong bull candle and threatens to turn the outlook once more. With a close of 40 pips up on the day towards the high of the day the bulls turned what was looking to be another negative session into a positive move. The result is a settling of momentum indicators with the Stochastics crossing higher and the RSI turning up towards 50 again. However there is overhead price resistance with a near term pivot band at $1.1233 which would need to be breached for the bulls to be back in any real sense of control near term. This is also all coming in front of today’s Non-farm Payrolls report which could drive some significant volatility. The hourly chart shows the one single bullish hourly candle (on the announcement of the worse than expected ISM Manufacturing number). However, since then there has been consolidation, so in effect the market has moved on and is now settling ahead of payrolls. The levels to watch are $1.1233 for resistance and $1.1120 for support. Breaking these levels could drive direction.
A sharp bullish candle has added to the argument that Sterling is actually a medium term range play now and the bears are no longer in control. Adding 130 pips on the day the move has gone through the downtrend resistance which has linked the previous lower highs and pushed above the resistance of the August high at $1.3280. Although the breakout could not be confirmed on a closing basis the bulls are still there today and have begun the day on the front foot again with further gains. It was interesting that the 23.6% Fibonacci retracement of the Brexit sell-off $1.5018/$1.2796 at $1.3221 was a basis of resistance and this could continue to be so today. A sustained break above $1.3280 re-opens $1.3370, the late July high. Momentum is increasingly positive with the RSI at its highest since Brexit. Also the support of the pivot at $1.3060 is growing. The hourly chart shows support around $1.3230 today but with Non-farm Payrolls likely to drive significant volatility it will be interesting to see how Cable holds up if the number is strong.
Yesterday’s negative candle has made this chart very interesting now as the move has just stunted the dollar bulls and will put doubt in the minds of those who see this as a continued recovery play. The downtrend channel seems to be once more an area of resistance and at 103.45 it will be interesting to see how limiting it is. The move is also coming with the RSI around 60 which is where the previous unwinding rallies have faltered. I spoke yesterday about the minor negative divergence on the hourly momentum indicators and this could be something to watch for. There is a basis of near term support between 102.85/103.00 and a downside break would complete a small top pattern that would imply a retreat towards 102.00 initially. I also spoke yesterday about the resistance around 104.00 and this capped yesterday’s gains to a pip and this is clearly a level the market is watching now. I remain a seller into strength but there will be some significant volatility from today’s payrolls.
Gold
I have been saying throughout the summer that the breakout above $1306 was long term bullish and this would now become the basis of key support. The recent correction on gold is now looking to build support in the band of support $1300/$1310 and yesterday’s bull candle is helping to build the expectations once more for the bulls. The market is likely to consolidate today with the potential volatility from the upcoming Non-farm Payrolls likely to prevent any real view being taken. The hourly chart shows a band of resistance between $1316/$1325 which is the initial barrier today that is preventing a drift higher, with the hourly chart showing the impetus from yesterday’s rebound has just been lost slightly. The support at $1301.90 is important as the $1300 level is largely psychological and a breach would then re-open the long term uptrend at $1295 and the old breakout highs of $1280/$1282.
WTI Oil
The acceleration lower on oil is becoming a concern now for general risk appetite. The selling pressure has ramped up in the past few days and there is a significant bear move now in motion. Rallies are being seen as a chance to sell and the momentum indicators have taken a significant turn for the worse. The Stochastics are accelerating lower with downside potential, the MACD lines have just completed a bearish cross lower, whilst the RSI is also dropping alarmingly below 50 now. A close clear of the 38.2% Fibonacci retracement of $51.67/$39.20 at $43.96 has opened the 23.6% Fib level at $42.14, whilst the bears will be eying a decisive breach of the support around $43.40 which would then open the next significant support of the mid-August low at $41.10. The hourly chart shows how the technical rebounds are getting pounded upon now with a resistance band now in the range between $44.50/$45.10. The hourly chart also shows the importance of an old pivot level at $43.40, which is this morning an area of consolidation. Hourly momentum indicators are decisively bearish now.
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