Financial markets are getting worked up into a frenzy over the timing of the next Fed rate hike. Forex majors, Treasuries, commodities and equities are all reacting with expectation of the Federal Reserve’s next move, this time dovish comments from the FOMC’s Brainard. Will they, won’t they go in September? The final Fed speaker before the FOMC goes into close period in the run up to the meeting, could have been seen as a mouthpiece for the committee to prepare the markets for a significant move in September. Lael Brainard, who is on the FOMC board of governors and therefore a voting member, has been dovish historically and if she had leaned hawkish, as Eric Rosengren had done so on Friday, then the market would have had to seriously contemplate a September hike as probable. However Brainard said last night that she felt that raising rates too quickly to have a negative impact on the economy. The impact has been for Fed Funds futures to drop back again, now back to 15% for September according to CME Group FedWatch. Across the markets, the dollar reversed some of its previous gains, equity markets reacted well with a positive close on Wall Street and Treasury yields dropped. There are still some key data points between now and the FOMC next week (ie. US CPI and Retail Sales), but Brainard seems to have calmed the nerves for what is likely to be the Fed preparing the market for a December rate hike but to stand pat in September.
Wall Street closed strongly higher with the S&P 500 +1.5% and whilst Asian markets were mixed (Nikkei +0.3%), markets in Europe are seeing decent recovery gains in early moves. The economic data out of China has also been supportive for risk overnight with Industrial Production mildly better than expected at +6.3% (6.1% exp), Retail Sales better than expected at +10.6% (10.3% exp) and fixed asset investment of 8.1% (8.0% exp). In forex there has been little real move on the key major forex currencies, with euro (again) very flat, whilst the dollar is taking back a little of yesterday’s losses against sterling and the yen. The dollar is performing better against the Aussie and Kiwi this morning despite the better than expected Chinese data which should be supportive for risk. In commodities it is a mixed story with gold and silver holding on to the recovery from late yesterday whilst oil is slightly lower.
Markets will be looking towards the next piece of UK data which will see the impact of Brexit today, with inflation this morning. UK CPI is announced at 0930BST and is expected to pick up to +0.7% (from +0.6%) for the headline and +1.4% (from +1.3%) for the core CPI. The German ZEW Economic Sentiment is at 1000BST and is expected to improve slightly to +2.5 (from +0.5).
Chart of the Day – AUD/USD
The Aussie dollar is a key barometer for risk appetite in major currencies. The recent sell-off following a shooting star candle (tht eft resistance at $0.7732) seemed to be accelerating lower for what could have been a key break. In fact, the Aussie was breaking key technical levels and forming top patterns against several forex major crosses. However against the US dollar, the Aussie has held on by its fingernails to the support of the late August low at $0.7488 and this has held off the completion of a six week top pattern. A bull hammer candle was also posted, but would need to be followed by a positive candle today for confirmation of a near term turnaround. Currently today’s session is lower and the bulls are being put under pressure again. Looking at the corrective outlook on the momentum indicators, the threat would be that the bears continue to control this and there could be further testing of this key near to medium term support today. The Stochastics having crossed lower are still showing downside potential, whilst the RSI dropping away again. Concern would grow if the RSI dropped below 40 whilst the MACD lines are already turning lower around neutral and are also threatening a continued corrective move. The hourly chart shows $0.7580 is an important pivot but with a nearer term pivot at $0.7560 catching yesterday’s highs. This means that a resistance band $0.7560/$0.7580 is growing.
Given the lack of certainty that the markets are facing over the prospect of the Fed’s next rate hike, it is reasonable to assume that EUR/USD would be developing into a chart full of uncertainty and lacking conviction. And you would be right. Yesterday’s candle was effectively a doji (with only 3 pips gain on the day) where the market tested both higher and lower but could find no solid direction. The market has now closed for the past five sessions all within 30 pips and the outlook is increasingly neutral. The RSI has almost completely plateaued around neutral, as have the MACD lines and Stochastics. This is a market in need of direction but after the volatility of the past few days in the markets, it is likely that unless something drastic happens (perhaps US inflation or retail sales significantly surprise) then the market could already be setting for the FOMC next week. Even the hourly chart is becoming neutralised across the technical indicators. For a breakout, the support at $1.1197 would need to be decisively breached, or resistance at $1.1285.
Sterling rallied yesterday to curb the selling intent and halt a run of three consecutive bear candles from turning into a more significant corrective move. The outlook remains rangebound and so we must look closer in at the hourly chart to try to decipher the nearer term signals. The hourly chart shows that the support around $1.3250 remains intact (although the support was breached on a couple of times the moves were not decisive). The rally yesterday has also broken the corrective downtrend and helped to improve the outlook. However there is now an important resistance that is overhead. The old highs between $1.3350/$1.3375 from early September have already come in as a basis of resistance during the recent decline, and could again be seen as a barrier to gains today. The momentum indicators have taken on more of a near term rangebound look to them, so Cable looks to be forming a range of 100/125 pips. The caveat to this near term outlook is this morning’s UK inflation data which is expected to pick up. An upside surprise would burst sterling through the $1.3375 resistance and open a retest of the high at $1.3445.
The pair came under selling pressure on two counts yesterday, firstly with the risk off sentiment in the morning which led to yen outperformance and then with the dovish comments from FOMC member Lael Brainard. A bear candle of over 80 pips closing loss has subsequently been posted and resistance at 103.05 has been left. The daily momentum indicators suggest that the market is in the process of leaving this as a lower high below 104.30 and again within the downtrend channel for the next leg lower. The RSI has turned lower back below 50, whilst the MACD lines are still in the process of possibly turning lower, but also the sensitive Stochastics look to be forming a “bear kiss” to turn lower again. The support at 101.18 is now important for the next move as a breach (especially a closing breach) would open the downside once more. The hourly chart shows a mild pick up overnight which has rallied from 101.40 but rallies continue to look ready to be sold into, allowing the hourly momentum indicators a chance to renew downside potential. There is initial resistance 102.25/102.65.
Gold continues to trade within its medium term trading range between $1300/$1375 and has gravitated back towards a pivot band around $1330, meaning that the outlook is increasingly neutral within the range. The daily momentum indicators are losing their direction with the RSI flattening around neutral and the MACD lines having plateaued. The doji candle from yesterday’s session also reflects this lack of conviction that is developing too. The hourly chart shows that the support at $1325 was briefly breached yesterday which threatened a bearish break but the pivot around $1330 was again attractive in the wake of FOMC Brainard’s comments. There is still the legacy of a mildly corrective and negative move within the near term outlook, and a drift back towards support at $1320 cannot be ruled out. The bulls need to break above $1340 to rekindle expectation of an upside break.
Volatility remains high as WTI oil rebounded strongly after initial weakness yesterday to close impressively higher on the day. This means that support has been left at $44.72 to stop the recent sell-off in its tracks. The support has now interestingly held on to an uptrend that can be derived from 1st September and is most prominent on the hourly chart and this morning comes in around $45. The hourly MACD lines have crossed higher with a buy signal and the outlook has flipped once more. This just adds to the near to medium term volatility and lack of reliability in the recent market moves. Support is now in the range $44.55/$44.72, whilst the old pivot at $46.50 is again overhead resistance, having capped yesterday’s move before a drift back lower overnight. Thursday’s high at $47.75 is the main resistance to watch.