Geopolitical tensions and China disappointment hits risk appetite

Market Overview

The bad news continues to flood the markets to dampen risk appetite amidst rising geopolitical tensions and more disappointment for the Chinese economy. To add to the diplomatic tensions between Saudi and Iran, there is now the added complication of geopolitical tensions rising between North and South Korea as the North successfully detonated a hydrogen bomb. Furthermore, there is further signs of concern for China as the Caixin services PMI comes in worse than expected at 50.2 (52.3 was expected) which is a 17 month low. This calls into question how successful China’s economic realignment towards a consumer driven economy is being. After a mixed session on Wall Street (S&P 500 up 0.2%), Asian markets have been weaker and the European session is also starting negatively.

In forex markets the recent moves have continued, with the euro and sterling weaker against the dollar, as are the commodity currencies. On the flipside, the relative safe haven of the Japanese yen is once more performing well. In line with the recent safe haven flows, gold continues to find support, whilst oil is trading mixed.

The services PMIs dominate the economic calendar today, with the Eurozone expected to show a slight deterioration to 53.9 at 0900GMT and the UK services (important to sterling as it accounts for around 80% of the UK economy) at 0930GMT (55.6 exp). The ISM Non-Manufacturing data is released at 1500GMT and is expected to improve slightly to 56.0 (from 55.9). Other data out today includes the ADP Employment report at 1315GMT (192,000 expected which is below the 217,000 of last month), and US factory orders at 1500GMT which are expected to show a -0.2% drop on the month. At 1530GMT the EIZ oil inventories is expected to show a small build of +0.75m.

Chart of the Day – EUR/GBP

The deterioration in the euro remains one of the big forex stories of the moment and the selling pressure is not just confined to the dollar or yen pairs. Even against sterling it is now beginning to look as though it is set for a negative shift in sentiment. In the past 6 weeks, EUR/GBP has been rallying off the £0.6980 key support, however once more the resistance seems to have come in around £0.7400 and the rangeplay is set to continue. The technical sell signals are now showing through which suggests that once more a retracement within the range is likely. Intraday failures above £0.7400 and an arguable bearish shooting star, have now been compounded by bearish crossover sell signals on the MACD and Stochastics lines, whilst the RSI is also falling below 60 (which has been supportive in recent weeks). The key support near term to watch is the old resistance which has become new support at £0.7300. A confirmed breach (ideally on a closing basis) would be a two week low, completing a small top pattern and implying an initial downside towards £0.7185. There is a mid-range pivot around £0.7220 which remains a key level to watch too. The intraday chart shows the need for the confirmation below £0.7300, however there is now a band of resistance £0.7340/£0.7350, whilst a move above £0.7380 would put off the bears in the meantime.

EURGBP   06012016


With the breakdown of key medium term support I am now changing my outlook on the euro to selling into strength. I have spoken on numerous occasions about the importance of the medium term support band at $1.0810 and yesterday we saw a decisive breach of the support. The sharp bearish candle continues the sequence of negative trading sessions for the euro which has seen a loss of over 200 pips in just over a week. The breakdown of support means that around the range $1.0795/$1.0810 there will now be a band of overhead supply which will now be seen as resistance and a chance to sell. The momentum indicators are increasingly corrective with the RSI and Stochastics also confirming the move, whilst the moving averages have also all turned negative. The hourly chart is a similar picture of bearishly configured indicators and this rebound in the past 12 hours should be seen as a selling opportunity. I would expect a retest of yesterday’s low at $1.0710, with a minor pivot line on the daily chart at $1.0690, but there is little reason why there will now not be a move back towards the December low at $1.0540.

EURUSD   06012016


Whilst I have only just turned negative on the euro, sterling has been a bearish chart for several weeks now. The selling pressure since the new year began has continued to drag Cable back towards what is increasingly likely to be a test of the key April low at $1.4563. Intraday rallies continue to be sold into and with momentum so negative there is little sign of any sustainable recovery. However, with the RSI below 30 and at its lowest since September, I am mindful that at some stage there is likely to be a technical rally that looks to unwind some of the oversold momentum, but it would simply serve once more to provide a chance to sell. The initial resistance is still the near term band around $1.4800/$1.4850. Perhaps look towards the intraday hourly chart to give some early clues of a technical rally, however for now there is not really anything other than continued bearish configuration across the indicators. The hourly MACD lines turning positive or the RSI above 70 would be a start, but in the meantime the outlook continues to point lower.

GBPUSD   06012016


The continued decline amidst strong bearish candles for Dollar/Yen does not bode well for risk appetite. After a couple of very negative trading sessions, the early signs today suggest a continuation of this move and a likely retest of the 118.04 key October low. Momentum indicators remain negatively configured and despite the RSI now on the daily chart around 25 this reflects the strength of the trend rather than the oversold position. This trend strength is also shown in the hourly chart which is also negatively configured. I am looking for signs of a divergence which may suggest a potential exhaustion move, but for now I will stick with the trend which is calling for a test of 118.04, a breach of which would open a test of the August spike low at 116.45. Initial resistance is around 119.20 and then 119.70.

USDJPY   06012016


The gold chart continues to toy with the prospect of a base pattern and in front of a closing breakout above the resistance at $1088.70, the overhead supply that comes in around $1077 is still key. Over the past few weeks any intraday moves above $1077 have been sold into and the market has failed. The past two days this has happened once more, but the bulls are still persevering, with today’s intraday move again into the overhead supply. I am heartened by the momentum indicators which continue to improve, with the RSI above 50 and at a 2 month high. The hourly chart shows another positive reaction over the past few hours which could put pressure on the near term resistance at $1083.30 but also reinforces a positive near term configuration. A third bullish candle completed today would be a real signal too as this would not have been seen since mid-October. Near term support remains at $1069.80 with $1058.00 key.

Gold   06012016


With the bulls unable to get a foothold in the market, after a second consecutive bearish candle, the prospect of a base pattern completing is rapidly diminishing. The intraday move to an 8 session low is also a concerning development for the bulls. The momentum indicators look to also be configured to suggest that the rally is being treated as a chance to sell, unless there is a sizeable improvement now. The RSI has again rolled over under 50, whilst the Stochastics are also deteriorating having given a bearish cross. A closing break below the $36.20 recent low now means that this is a small range breakdown and this implies a near term target of $34.00, which is also the support of the key 21st December low. The hourly chart shows initial resistance around $37.10, whilst $37.75 remains the basis of resistance and overhead supply on the daily chart.

WTI   06012016