Markets looking cautious amidst continued payrolls legacy

Market Overview

Traders are treading cautiously this Monday morning after a rather clouding Non-farm Payrolls report and the Chinese National People’s Congress over the weekend set out a growth rate of 6.5% to 7.0% for the next year. Wall Street closing higher (S&P 500 up 0.3%) has driven a mixed response from Asian markets (Nikkei 225 down 0.6%) today, whilst there is a slight air of dollar strength across forex markets. The Non-farm payrolls report on Friday showed positive movement in jobs growth and labor force participation, but a disappointing decline in average hourly earnings, a report that should ensure no hike in March but could mean that June is still an option for the Fed now. The mixed response across markets shows the uncertainty of this report and we still have a continued cautious legacy of the payrolls  today. European markets are trading slightly lower in early moves.

In forex trading a stronger dollar is pulling the euro and sterling lower, whilst the commodity currencies are underperforming today after the China’s NPC meeting over the weekend shows the continued slowdown which could impact on metals demand. The oil price however continues to climb, whilst gold is looking to find support after a slight slip on Friday. There is very little on the economic calendar of any note today, which is unlikely to help drive market direction either.

Chart of the Day – AUD/USD

The Aussie dollar has broken out to its highest level since August 2015. The move has come as commodity prices have shot higher (with gold and base metals especially being a positive read through for the Aussie). The move has driven three incredibly bullish candles in the past three sessions. But can the bulls sustain the breakout? Momentum is strong with the RSI towards 70 but the October and April 2015 highs came with the RSI peaking at 70, so this is a level that the bulls need to burst through otherwise the profit takers could move in. Also, trading entirely outside the 2.0 standard deviation Bollinger Bands looks a touch excessive too. Today’s trading has seen some initial weakness and the first support at the old breakout resistance at $0.7385 is being tested. There is further support of the old January highs around $0.7300 to provide a floor for the bulls. A failure of these levels could drive a correction. For now though the bulls have not lost this run higher yet on the Aussie, but they will have to battle hard to prevent the profit-takers controlling. Friday’s high at $0.7445 is the initial resistance before the next barrier of $0.7500 from July last year comes in.

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The outlook for the euro has become far more mixed once again after a second consecutive positive candle on Friday. The Payrolls report created volatility and a two-way move with dollar strength initially (on the headline beat) only for the dollar to weaken again (EUR/USD rally) on the disappointment of the weak earnings growth. This has dragged the pair up to the old $1.1050 pivot once again, which has provided the basis of resistance. The near term technical indicators have ticked higher, but taking a step back the MACD lines are flattening around neutral, the RSI is also close to 50 and only really the Stochastics are rising. This would suggest that the medium term outlook remains a range between $1.0800/$1.1050. The volatility of the ECB meeting is on the horizon now this week and positioning will be interesting. The hourly chart shows a near term band of support $1.0925/$1.0970, with little sign of any direction in the Asian session. The most recent momentum is with the bulls but the overhead barrier now around $1.1050 is sizable.

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Can sterling continue to rally? The past three sessions have added 130, 100 and then on Friday there were 50 pips, so the pace of the advance is slowing. However each of the closes were towards the high of the day. Trading today is just beginning to consolidate slightly around the falling 21 day moving average (at $1.4220) which has been a basis of support previously and could now be resistance. I am also concentrating on the resistance of the downtrend that has been in place since mid-December (currently around 100 pips higher), whilst also the RSI has also unwound to around 50 which is where previous rallies have fallen over in the past few months. However, near term momentum is with the recovery and there could still be some upside to play out, with the hourly chart showing next resistance coming in at $1.4300 and $1.4410. Support at $1.4100 and more importantly at $1.4045.

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Fibonacci retracements can sometimes play out as pivot points and sometimes as consolidation areas, it would appear that this time for Dollar/Yen it is the latter. The last six completed sessions have all traded around the 23.6% Fibonacci retracement of 121.68/110.98 at 113.50, with the last three sessions closing the session very close to the Fib level. With the candles increasingly neutral and Friday’s candle a Doji (along with little real direction yet today) there is an uncertainty that has taken over the pair. Momentum indicators, having previously been in recovery mode, are now settling around neutral and the continued recovery is being called into question. The resistance at 114.55 has been in place for a few days now and the outlook on the hourly chart is also flattening. I have spoken several times about the increasing importance of the 113.15 pivot, and once again on Friday this came into play (this time to the pip), so the importance of this level continues to grow. The near term break of 113.15 or above 114.55 will provide the next direction, either downside back towards 112.15 or up towards the resistance around 115.

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I would love to be bullish on gold, but unfortunately there is doubt in my mind. The trend continues higher and in many ways that should be enough for me to be positive for further gains. Having broken out above $1260 the move opens the next key resistance at $1306. The recent uptrend that has been dragging gold higher comes in today at $1230 so on the surface I am positive. However I remain unimpressed by the divergence on all three of my momentum indicators. My main problem is though that momentum can bearishly diverge for a while and is not an immediate top indicator. So I must look for other signals. Friday’s slightly weak and negative candle is not that signal, at least not yet. There is a band of support around the $1260 breakout, with the hourly chart interestingly showing this is a neckline of a possible near term top at $1255.70 which would give an implied near term target of $1232 (a move that would be confirmed on a breach of Friday’s spike low at $1250).  A move above $1268 should re-engage the bulls once more for a retest of Friday’s high at $1279.60.

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With volatility clearly easing, the uptrend continues to grind out higher. This has been a slow yet considered push to the upside in the past few sessions and we have now seen the oil price closing out above $34.80 to completed the base pattern which implies $43.50 in the coming weeks. The recovery is also built on positive momentum with the RSI pushing decisively above 60 and the MACD lines now moving into positive territory above neutral for the first time since October. The sequence of higher lows continues with $33.35 being left behind and now the prospect of $34.20 being the latest support left on the intraday hourly chart, whilst the 89 hour moving average around $34.75 is a basis of support now. The momentum remains positively configured on the hourly chart too with the dips towards 40 being bought into over the past few days. Resistance to the upside comes with the 2016 high at $38.40. Initial support is now around $35.00/$35.30, whilst a key low comes in at $33.35.

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