After a brief pause, the run higher on equity markets has resumed with risk appetite once more improving which is driving safe havens such as the yen and gold lower. Expectation that the Japanese government was readying a 20 trillion yen fiscal stimulus package has driven Asian markets positive across the board following further gains on Wall Street last night. The Nikkei was 0.8% higher, although these gains seem to be passing by as the European markets are more cautious as traders look towards the European Central Bank monetary policy today, a meeting in which no formal action is expected.
Despite the dollar strength which retained a break to a four month high yesterday, there has been some pullback on sterling. Hawkish comments from the Bank of England’s Kristin Forbes suggested that there needs to be more evidence in order to cut rates and additional evidence of the impact of Brexit. She believes that, “Keep calm and carry on” should be the message whilst the BoE waited for “hard” figures to see the impact on the economy before moving. There were costs as well as benefits from loosening monetary policy according to Forbes and although she is historically one of the more hawkish members of the MPC, her comments less dovish members of the FOMC it has still driven sterling higher.
In forex markets there is more of a risk-on sentiment at the beginning to the European session, with the yen weakness continuing, the euro and sterling positive and commodity currencies such as the Aussie also positive. The only blot seems to be the Kiwi which is underperforming after further suggestions that the RBNZ is ready to cut the interest rate.
Traders will be watching out for UK retail sales at 0930BST which are expected to drop by -0.6% on the month on an ex-fuel basis which would be down to +4.8% for the year (from +5.6%) with the impact of Brexit being eyed. The main event of the day though is the ECB monetary policy decision which is at 1245BST. No change in the policy rates is expected with the deposit rate at -0.4% or the main refinancing rate at zero, however expectation is that the press conference at 1330BST could prepare the market for further action at the next meeting and this jawboning could impact negatively on the euro. There is also the weekly jobless claims at 1330BST with 265,000 expected (higher than 254,000 last week), whilst the Philly Fed Business Index is expected to remain around the levels of last month at 5.0. US Existing Home Sales are at 1500BST which are expected to fall slightly to 5.48m (from 5..53m).
Chart of the Day – Silver
Silver began to finally find some real traction in a correction yesterday as a strong bear candle completed. This now means that the support at $19.20 is under direct threat today and with the deterioration of the momentum indicators, the threat is significant. With the RSI at a six week low, the MACD lines giving a bearish cross and the Stochastics crossing also to a six week low the bears are gaining in strength near term. The support has already been tested in the Asian session (and held for now), however, a move below $19.20 would complete a small top pattern and imply around $1.45 of downside which would be c. $17.75. Interestingly, whilst the initial support beyond $19.20 is at $18.50, the support of a key breakout comes around $17.80 so this could be an interesting correction target which would allow some of the stretched momentum indicators to unwind. The hourly chart shows a resistance band now between $19.70/$20.00 which will now be eyed as a near term sell zone for a bounce.
Despite the overnight gains, the bears are gradually gaining more overall control. Not only was there a second consecutive close below $1.1050 but also there was a decisive intraday breach of the support at $1.1000. Rallies continue to be seen as a chance to sell and there is little reason to believe that today’s bounce will be deemed to be any different. Technically there is resistance between $1.1050/$1.1085 and with momentum indicators negatively configured the bears will be ready to pounce once more. Today’s ECB meeting will create volatility and if the market sees the Governing Council as preparing the market for further easing measures in September as is expected then a further drift lower is likely to continue. The technicals point towards a retest of yesterday’s low at $1.0979 and then the post-Brexit spike low at $1.0909.
Although the dollar has been breaking higher, Cable still managed a rally late yesterday on the back of comments from the BoE’s Kristin Forbes. The rebound has managed to stabilise what looked to be deteriorating technicals on the daily chart and it will be interesting to see how the European traders react today and whether the rebound can turn into a sustainable rally. However, the daily momentum indicators continue to suggest that rallies will struggle to gain any real traction before the sellers return. The hourly chart should be watched as this shows the near term resistance at $1.3310 is key and needs to be broken for the recovery to continue, whilst the hourly RSI, MACD lines and Stochastics are already beginning to lose impetus. The hourly chart also shows that $1.3130 has become a near term pivot level and is supportive now.
The rally of the past two weeks is now over 700 pips as the dollar strength continues to pull the pair higher. My expectation that the move would struggle below the 106.80 resistance has been broken and this means that Dollar/Yen is now above the high reached just prior to the Brexit related sell-off. The move is now also testing the resistance of the downtrend channel that has been pulling the pair lower throughout 2016. The RSI is moving above 60 which is beginning to suggest this could be something more than a bear market rally. The next resistance is between 107.67/107.90 and I would see a break above there as final confirmation of a material change to the medium term outlook. The hourly chart shows the breakout resistance at 106.30/106.50 turns supportive today, with 105.62 supportive below there.
After a period of consolidation between $1320/$1335 a downside break has continued the near term correction. The dollar strength yesterday resulted in the formation of a strong bearish candle of $23 from high to low and pulls gold ever closer towards the medium support area that starts around $1306. The momentum indicators continue to slide in their corrective state with the RSI now back towards 50 (the June correction reached 47 on the RSI) and the MACD lines are nearing neutral once more. The small $15 range breakdown implies a retest to $1305 so there is the prospect of further weakness today. The hourly chart shows how the breakdown around $1320 has now become a basis of near term resistance and that $1335 has become key resistance to the near term prospects.
The outlook for WTI remains corrective and after the intraday breach of the support at $44.42 which shows the continued appetite to sell. Despite the rally in the wake of the bigger than expected EIA inventory drawdown (and also the rolling of the front month contract that shows as an upside gap in the chart), I do not believe that this is due to the move below $44.42 being seen as a false downside break. The momentum indicators on both daily and hourly charts continue to suggest that rallies will still be seen as a chance to sell with the daily chart showing negative configuration on MACD and Stochastics. The late rally yesterday posted a bull hammer candle and means that today’s trading becomes interesting. If there is genuine appetite to buy then a continued rally may begin to question some of the downside impetus, but the hourly chart shows a series of resistance levels that need to be breached. The neckline resistance is still a barrier around $45.83 and this are needs to be decisively breached for the bulls to gain any sustainable traction in a recovery, whilst Friday’s high at $46.33 will also be watched as a resistance. Failure to breakout will simply find the overhead supply too great and re-engage the sellers for a retest of the low at $43.69 and subsequently $43.03.