Markets looking cautious ahead of Non-farm Payrolls

Market Overview

The dollar has come under some selling pressure in the past day and the move seems to have been data driven. The ISM Non-manufacturing data looked to have been slightly positive, but the employment component of the data dropped below 50 which suggested contraction and this hit the dollar. Traders are now looking ahead to the US Employment Situation report today to see if what impact this may have (if any) on the number of jobs created. Markets are seeing the usual cautious approach taking hold ahead of the key Non-farm Payrolls report, with traders unwilling to take a view ahead of such an important number. Aside from the headline consensus expectation of 190,000 jobs, there will also be attention paid to the average hourly earnings which are forecast to show a +0.2% month on month improvement and continued improvement in wage growth which is important as with inflation beginning to come through in the US, wages need to track that move. Unemployment is expected to stick at 4.9%.

Wall Street closed slightly higher yesterday with the S&P 500 up 0.4%, whilst Asian markets have also been trading around the flat-line today with the Nikkei +0.3% and European indices following Wall Street and are also trading mildly higher at the open. In forex trading we see a slight rebound from the dollar which is looking to claw back some of yesterday’s losses, although this is unlikely to amount to much in front of the big data release. In tune with this slight dollar rally, the gold price is marginally lower, whilst oil is showing slight gains.

Chart of the Day – USD/CAD

With the oil price rising the Loonie continues to strengthen in front of the Bank of Canada rates decision next week (in which they are expected to stand pat on rates). The large technical correction subsequently on USD/CAD continues as risk appetite improves. I spoke last week about the big downside break from the descending triangle below 1.3635, which has now hit the conservative target of 1.3380, whilst an aggressive downside target now comes in at 1.3170. As the market consolidated in front of the Payrolls report, rallies should be seen as a chance to sell. Having broken decisively below the support at 1.3455, the next band of support comes in at 1.3210/1.3280. The momentum indicators are certainly backing further weakness with the RSI towards 30 and the Stochastics especially bearish now. With even the intraday rallies being sold into, the resistance has been coming in throughout this week at lower levels, with the old support of 1.3500 from last week now the basis of resistance. Key near term resistance is now at 1.3585 and the old neckline support at 1.3635. A move below yesterday’s low at 1.3367 opens the next band of support 1.3240/1.3280.

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There was a sharp move against the dollar yesterday afternoon in the wake of the ISM Non-Manufacturing data and this has pulled EUR/USD strongly higher with its best day of gains since 9th February. Does this materially change the outlook for the chart though which had been a consistent bearish drift? I would need to see another day of gains today to suggest it is anything other than a move that is corrective to the bear phase. The trouble is that it is Non-farm Payrolls today and hence the early caution which is likely to continue to the data release at 1330GMT. Technically the rally is now hitting the underside of the old uptrend which is now a basis of resistance. I discussed yesterday of the resistance band around $1.0950/60 and this is around where the consolidation is taking place today after yesterday’s rally started to run out of steam around $1.0970. However, looking on the hourly RSI and MACD lines there may be something more to this rally as the hourly RSI is looking stronger than it has since the selling pressure resumed a few weeks ago. Another positive close today and this could change the outlook. The recent resistance at $1.0890/$1.0910 is now a basis of support.

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The dollar weakness from yesterday has accelerated the counter trend move for a second consecutive strong bullish candle on Cable. The bulls will now be eying the resistance at $1.4235, which interestingly is around where the falling 21 day moving average is today (an indicator which has previously been used as a basis of support and resistance). The RSI has unwound to the mid-40s and the Stochastics are rising now. I am getting ready now for what I expect to be the next sell signal within the downtrend since mid-December which today comes in at $1.4340. The market is slightly lower in the early moves today but it is unlikely that there will be too much direction in front of another important Payrolls report. The configuration on the hourly chart momentum looks positive although has just turned a little weaker as the overnight moves have drifted lower. The previous resistance around $1.4045 has now turned into the basis of support for Cable meaning that from yesterday’s trading there is now a 60 pip band of near term support $1.4045/$1.4105.

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Are the bulls running out of steam already? The last two candles seem to be knocking the wind out of their sales. After Wednesday’s negative candle the bulls could only muster very minor gains, a mood that has continued into today. Perhaps this cautious approach from the bulls can be excused in front of Non-farm Payrolls, however it is beginning to impact on the momentum. The RSI seems to be flattening off around the mid-40s, whilst the Stochastics are now threatening to roll over. However the consolidation is coming around the 23.6% Fibonacci retracement at 113.50, whilst looking on the intraday hourly chart the pivot at 113.15 seems to be continuing to provide the basis of support over the past few days. I am taking the recent consolidation as caution in front of Payrolls and we await the next catalyst. For now I am still looking at a continued recovery and a retest of 114.55 before the key overhead resistance starts coming in at 114.87. A move below 113.15 re-opens 112.15 support.

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Although my longer term belief is that I feel that gold has limited upside potential, the near term outlook has sharply improved following yesterday’s breakout. After the consolidation that has been seeing gold drift only mildly higher for the past three weeks, suddenly it was as though someone pressed the accelerator peddle and gold shot higher. The move has resulted in an upside break above $1261 resistance for levels not seen since February last year. Although there is minor resistance at $1285, the next real resistance comes in at $1306. Clearly the price is moving higher, but I am still a cautious bull. The momentum indicators are still not what I would expect to see from a market breaking to 13 month highs, with potential bearish divergence still on the RSI and MACD lines not especially strong either, however the sensitive Stochastics have reacted higher. The breakout resistances now become supportive with the market trading around $1261, but also with $1252.90 and $1248.60. Non-farm Payrolls will tend to have a significant impact on gold so expect elevated volatility in the wake of the data release today.

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Standing on the brink of completing a 2 month base pattern, it would appear that traders on WTI have become somewhat more circumspect. An inside day range was seen yesterday to reflect the uncertainty, whilst we have also seen another poke above the $34.80 resistance without the required closing breakout that would suggest the bulls are happy to make the move. Momentum indicators however remain bullish and suggest that it should only be a matter of time, but for now we still await the break. The uptrend since the February low at $26.05 remains intact and is supportive today at $34.20. I still see minor corrections as a chance to buy, with the hourly chart showing initial support at $33.35 and $32.30, whilst the rising 144 hour moving average is again still supportive, today at $33.65. A closing breakout completes the base to imply $43.50 in the coming weeks, whilst the initial key resistance is a band between $37.75/$38.40.

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