Market Overview
After all the build-up the Bank of Japan has significantly disappointed the market, driving further yen strength again. The announcement of monetary policy could have included a further cut to the depot rate, further purchases of JGBs (Japanese Government Bonds), increased ETF purchases (all of which had been highly possible) and perhaps even the talk of helicopter money (hopeful but still highly unlikely).
In the event, the Bank of Japan pretty much did the minimum it could have been expected to do. The extension of ETF purchases from the current 3.3 trillion yen per year to 6 trillion along with no other easing measures will now drive yen strength again.
Asian markets have been flying around on the announcement and the Nikkei has actually managed to close higher by 0.6%, however whether this rebound lasts if the yen strength continues remains to be seen.
Aside from the yen strength there seems to be little real reaction across forex markets today, with European equities mildly higher after another small positive close on Wall Street (S&P 500 +0.2%). European markets will also be cautious for the announcement of the ECB banking stress tests which are this evening after the close, with the health of Italian banks especially in focus.
There are mild gains for the euro or sterling, whilst gold is flat, however there is little sign of any recovery on oil yet after six consecutive days of weakness has taken the commodity into a bear market.
Traders will be looking at growth and inflation data from the Eurozone this morning. Eurozone flash CPI for July is announced at 1000BST and is expected to stay at +0.1%, however with the German inflation coming in mildly ahead yesterday there is the potential for an upside surprise.
The first reading of Eurozone Q2 GDP is at 1000BST and is expected to come in at +0.3% for the quarter, which is down from the +0.6% in Q1.
Then in the afternoon there is the Advance reading of US Q2 GDP at 1330BST, which is expected to be an annualised +2.6%, up from the final reading of +1.1% in Q1. However, already there will be questions on this reading after the Atlanta Fed’s GDPNow indicator cut its estimate for Q2 growth to +1.8% from +2.3%.
The revised Michigan Sentiment is at 1500BST and is expected to be revised slightly higher to 90.2 (from 89.5).
Chart of the Day – DAX Xetra
I have been talking about the prospect of the DAX rally failing in the band of overhead supply between 10,120/10,474 however the past week has seen a continued grind higher. It is interesting therefore that there has been the double whammy of a bearish engulfing candle that is also a shooting star reversal formation posted yesterday, which changes the sentiment on the chart.
This has left a high at 10,381 right around the resistance of the May high (10,365) and the 50% Fibonacci retracement of the 8355/12390 resistance (at 10,373). The key Fibonacci retracements of the original QE generated bull run of 2014/2015 have long been regarded as key turning points for the DAX and this needs to be given regards again here.
There was a gap higher from 10,275 (possibly an exhaustion gap) that was also closed by yesterday’s correction. The RSI is just above the 60 level where recent rallies have been failing, however MACD lines and Stochastics are positive for now. However, the hourly chart has turned near-term corrective, with hourly RSI and Stochastics falling at a 7-day low, whilst the MAD lines have crossed lower.
The hourly chart also shows that an uptrend dating back to the beginning of July is beginning to breakdown as this rally has matured, and the concern for the bulls would be that some profit taking begins to set in.
There is a near-term band of support now at 10,150/10,264, and if this is broken it would confirm that a correction has again set in, with 9225 initially key support. The bulls will be eying a break above 10,474 resistance to open the upside.
EUR/USD
A second consecutive gain on the euro (on the back of the FOMC decision) has improved the near-term outlook, but already I see the move struggling with the overhead resistance. The long-term pivot band $1.1050/$1.1100 is acting as a barrier, and although yesterday’s move slightly breached the top at $1.1118 the move failed into the close. With the closing price back below the mid-point of the day the bulls will have finished the day rather deflated.
The euro is initially positive again today, but one more $1.1100 seems to be acting as a barrier. The momentum indicators have picked up near term but are merely unwinding within their medium-term trends lower, and this once more looks to be another chance to sell.
The hourly chart shows the near-term resistance band is strong between $1.1164/$1.1188 and there is plenty of overhead supply to prevent a sustainable rally. A move back below $1.1050 again today would reflect the loss of momentum in a rally. There is support at $1.1020 near term with more considerable support at $1.0950.
GBP/USD
Cable continues to settle its volatility as the sideways consolidation of the past couple of weeks continues. The support around $1.3060 is providing the floor whilst the 23.6% Fibonacci retracement of the Brexit sell-off from $1.5018 to $1.2796 at $1.3320 has capped the upside.
The momentum indicators continue to struggle in their unwind with the RSI stuck in the low 40s and the Stochastics plateauing around 50. I fully expect this move to resolve to the downside as the bears return.
The hourly chat reflects the consolidation with the hourly RSI oscillating between 30/70 and the price having posted a series of lower highs at $1.3310, $1.3290 and now $1.3247. For now there is little direction and perhaps the market will be waiting for next week’s PMI data, and if not then certainly the Bank of England monetary policy. Near-term support at $1.3115 is protecting the more significant support around $1.3060.
USD/JPY
The yen has strengthened again on the disappointment of the BoJ. The decision has been met with a sharp downside move on dollar/yen which is now at a two-week low and gaining traction. The momentum indicators are also now confirming the move, with the RSI falling sharply below 50, the Stochastics accelerating lower and the MACD lines crossing negatively.
The downtrend channel is reinstating and a move back towards 100 could now be seen if the bears really run with the disappointment. Interestingly, the hourly chart shows a volatile move on the BoJ but also one which has left resistance in the band 104.50/104.85. The deterioration in the momentum indicators suggests that any intraday rallies today are likely to be seen as a chance to sell.
The initial decline overnight has bounced from 102.85, but I would expect that once the dust settles there will be a retest of this level again. Initial resistance is with the old low at 104.00. The rally from 100 left a minor level of support at 102.40, but there is little real support other than that until a full retracement back towards 100.
Gold
The BoJ disappointment has mildly hit the gold price and it will be interesting to see if there is a near-term slide back again. If there were to be a rift lower I would be looking to use this as a chance to buy. Technically, gold has given only its third Stochastics buy signal this year and the previous two have been good harbingers for gains. The move above $1335 initial resistance was a signal of intent too.
Yesterday’s candle showed a day of consolidation and there may now be some room for a near-term correction as the disappointment of the BoJ not acting more decisively takes hold. The hourly chart shows a $10 band of support between $1325/$1335 to hold up any weakness today.
I now see corrections as a chance to buy gold with the support strong now above the old long-term breakout at $1306. Initial resistance is with yesterday’s high around $1345, which was just under the $1346.70 minor reaction high.
The sell-off in the past few weeks has now officially entered “bear market” territory with a correction of over 20%. Despite dollar weakness seen since the FOMC meeting, there seems to be little to stop the oil price from pushing ever lower.
A sixth consecutive bearish candle continues the bearish decline that is not stopping for support. The latest breach of support has been the 38.2% Fibonacci retracement of the big $26.05/$51.67 bull run at $41.88, and this has opened the 50% Fib level at $38.85. There is the potential that regard will be given to the psychological $40 level, but in terms of price support there is very little discernible support until the mid-April low at $37.60.
With momentum indicators increasingly bearish, any intraday rallies are being pounced upon now. The hourly chart shows initial resistance at $42.20 whilst there is more considerable resistance around $42.95/$43.40 should a rally reach that far. For now the bulls are really struggling to make any impact on this chart and further downside seems to be on.
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