Market Overview
Although the Fed raised rates by 25 basis points yesterday, along with a strengthening outlook on the FOMC statement, the reaction of the market seemed to suggest there was something missing.
The dollar and yields had been running higher in recent days, but have fallen back as the market has appeared a touch disappointed. There has been increased expectation that the Fed would signal an increase in the dot plots that would imply room for a fourth rate hike this year. In effect the aggregate of the dots show the average is just one dot away from that possibility in 2018 whilst 2019 and 2020 were raised. So what was the problem?
Once again, as will continue to be the case in 2018, it is a question of how inflation is progressing. A sizeable upgrade to GDP growth expectations and lower unemployment, but hardly any increase for inflation.
The FOMC is an advocate of the Phillips Curve, so why no inflation. It is a quandary certainly. Ultimately, it is going to be accelerated inflation that drives the Fed to be more aggressive on its tightening. Although longer term Fed Funds expectations are well above 3.0%, why is the 10 year Treasury yield not matching this? The lack of inflation remains a stumbling block and until there are real signs of a pick-up then the market does not seem to want to trust the Fed. Furthermore, new Fed chair Powell had to field questions about proposed trade tariffs, for which he noted that they had become a growing concern among Fed members. Donald Trump is expected to announce a raft of trade tariffs on China possibly as soon as today!
All this uncertainty has hit the dollar, which is under pressure again this morning, but also, that 3.0% barrier on the 10-Year yield has just grown that bit bigger. Market focus turns slightly more towards the UK this morning, with Retail Sales, the Bank of England but also the EU Summit where a transition deal is expected to be signed off.
Wall Street closed lower last night with the S&P 500 closing lower -0.2% at 2712, whilst Asian markets were also cautiously lower (although the Nikkei was +1.0% playing catch up after a public holiday yesterday). European markets are also weaker in early moves as markets respond to the prospect of Trump’s tariff on China.
In forex, the dollar again looks to be under pressure as the European traders have taken over, with no real standout.
Commodities seem to be consolidating yesterday’s strong moves, with gold and oil all but flat.
As markets continue to digest last night’s Fed announcement there is a jam-packed day of data to consider. Initially the Flash Eurozone PMIs are at 09:00 GMT with the Flash Manufacturing PMI expected to slip slightly for a third straight month back to 58.1 (from 58.6), whilst the Flash Services PMI is expected to slip back to 56.0 (from a downwardly revised 56.2 last month).
The UK Retail Sales are at 09:30 GMT which are expected to show ex-fuel sales rising by +0.4% on the month but that would be a slip to +1.2% for the year (+1.5% last month).
The Bank of England will give its latest monetary policy decision at 12:00 GMT however is not expected to make any change on rates at +0.50%. The BoE minutes will be interesting to see if the MPC is preparing for its next hike in May.
The US Weekly Jobless Claims are at 1230GMT and are expected to stay around last week’s level with 225,000. The US Flash PMIs are at 1345GMT with Flash Manufacturing expected to tick slightly higher to 55.5 (from 55.3 last month) whilst Flash Services are expected to tick mildly lower to 55.8 (from 55.9 last month).
Chart of the Day – EUR/CAD
The Canadian dollar has rallied strongly as the oil price has picked up sharply in the past couple of sessions. Traded against the euro, this means that EUR/CAD has dropped back again, however is this another chance to buy or the beginning of a corrective phase? The support of a ten week uptrend comes in at 1.5880 today and interestingly, yesterday’s low of EUR/CAD bounced almost perfectly off the trend support. Furthermore, this is also being flanked by the rising 21 day moving average which has caught the previous two corrective dips. However, as the market again formed a sharp bear candle, the reaction today could be key. The bulls need to stem the tide again. The important support to watch is the mid-March low at 1.5760 which would confirm the breach of the uptrend but also take the market back inside the old long term uptrend channel. There is some concern with a deterioration in momentum which looks to be beginning to roll over. With the market leaving a key high at 1.6150, a small negative divergence on the RSI has been seen as the RSI has also now dropped back to a nine week low. A bear cross on the MACD lines is also developing. Despite this though, the market reaction to the sharp drop back a couple of weeks ago was to use it as an opportunity to buy again. That means the reaction today will be key (especially if oil begins to unwind too).
The dollar weakness from the Fed announcement has helped to improve the near term outlook on EUR/USD but there is still more that needs to be done to reverse the recent corrective outlook. The strong bear candle of Tuesday saw an almost equal and opposite rebound candle yesterday to leave support at $1.2237 and drag the market back to the four week downtrend again. More importantly though, the support of the key low at $1.2155 remains intact along with the long term uptrend which is now rising at $1.2180 today. Effectively the reaction to the Fed has re-confirmed the growing medium term trading range on EUR/USD, with the rebound meaning the market is all but trading in the middle of the range once more. Add in the fact that there is still a real lack of direction on the momentum indicators, with the RSI hovering around 50 and MACD lines plateauing around neutral. The hourly chart shows the pivot around $1.2360 is still a basis of resistance, with the overnight high at $1.2370, but a move above the lower reaction high at $1.2412 would be needed to begin to generate upside traction, with another bull candle helping to drive momentum. Aside from that there is a loose pivot around $1.2300 as support.
The Cable bulls had a great day yesterday. Driven higher almost throughout the session, with the stronger UK wage data and then the reaction to the Fed announcement, adding around 140 pips into the close. The market is now beginning to really accelerate higher with a two out of three candles this week being very strong to the upside. The market is now also decisively clear of not only the old psychological pivot at $1.4000 but also above lower reaction highs of $1.4070 and $1.4145. The momentum indicators are also swinging decisively higher again, with the reaction to the bull cross on the MACD lines especially positive. Furthermore, the RSI is strong as it rises in the mid-60s but also has further upside momentum in the run (the bull move of January took the RSI into the 80s). The technicals on the hourly chart are slightly stretched and there could be a move to unwind some of the immediate overbought momentum. However there is a basis of support between $1.4040/$1.4090. Today could see another strong move with UK Retail Sales and the Bank of England, however near term corrections look to be a chance to buy again.
The prospects of a recovery have been put on hold once again as the dollar has slipped once more. Yesterday’s decisive negative candle has left initial resistance at 106.63 and again opens the potential for this to be another lower high. It seems to be false start after false start for the Dollar/Yen bulls right now, but equally, the sellers seem unable to grasp control of this market. In the past few weeks, every time the price drops towards 105.50 there is a reaction and the price rebounds. Once more this has happened this morning. A closing price below 105.50 would begin to suggest an acceptance of the move lower, whilst the key intraday low is at 105.23 still. For now, this ranging consolidation continues. The hourly chart shows the market picking up again following an early drop to 105.55 this morning. This seems to be a market uncertain of direction. The bulls need a break above 107.30 to find traction.
Gold
Gold was trading on a bid almost all day yesterday and gave a decisively strong response to the Fed meeting. A huge bull candle added $21 which was the strongest bull session since 14th February and has completely shifted the near term outlook again. From a longer term perspective though it is incredible to see that once more the long term pivot band $1300/$1310 playing a key role to encourage the buyers back in. The bull candle has also now broken a four week downtrend and a series of lower highs with a move above $1330. `There has been a notable improvement on momentum, but there is still work that needs to be done before the bulls can consider themselves in control again. Certainly the $1341 resistance needs to be broken for this to be the case. The early reaction this morning is seeing the price slipping a touch in consolidation but a close above the $1330 previous resistance would be a positive. The hourly chat shows a support band now between $1322/$1330 for an unwinding move and if there is a formation of new support here again then the bulls will begin to see this as a buying opportunity once more.
WTI Oil
The momentum in oil has really taken off again in the past few sessions. After a period of choppy consolidation for around two weeks, the bulls have really grasped control again this week, helped in yesterday’s session by a surprise EIA crude inventory drawdown. The big question is now where this can be sustained to retest the highs. Momentum indicators point towards a continuation of the move. This has helped to drive the market above resistance at $64.25 to open the key January/February highs between $66.25/$66.65. The RSI confirms the near term break with the RSI into the 60s whilst the MACD and Stochastics lines are accelerating higher. The hourly chart is extended and this means it is at risk of an unwinding move, something that is already threatening this morning. This means that the breakout at $64.25 is now a basis of support, with $64.25/$64.85 a near term buy zone on support.
Reaction on the Dow to the Fed meeting was interesting. Initial upside traction earlier in the session was lost after the announcement and a negative candle was formed with the market closing the session down on the day and less than 30 ticks from the day low. This will come as a disappointment for the bulls, but the market has struggled this week as it has broken below the old recovery uptrend channel. Momentum indicators have now got a negative bias (although the selling momentum has not developed into much yet). There is a run of lower highs in the past eight sessions, with the failure at 24,977 coming below resistance at 25,020/25,055. Today’s reaction will be important then, as if the bulls look to rebound but fail again then there will be a growing sense of concern. There is also a negative configuration on hourly momentum indicators with the RSI failing around 60 and the MACD under neutral. A break under support at 24,453 would re-open the corrective gates for further downside towards the March low at 24,217.
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