The dollar continues to strengthen, as market sentiment surrounding China has taken a shot in the arm. The reason that the Fed has reduced the speed of its tightening of monetary policy has largely been due to the concerns over the impact of the slowdown in China. However the upside surprise in the China trade data yesterday has boosted support for the dollar bulls and the move has continued today. The strength of the safe haven Japanese yen is unwinding for the time being and we are seeing Treasury yields pulling higher and gold pulling lower. The trades that had been such a concern for risk appetite recently are unwinding. Equities are also stronger. However, how long will this run last? Although little regard was given to a stalling and disappointment of the US Retail Sales yesterday (which does little for Q1 GDP growth prospects) and there is another clutch of key China data out tomorrow which could easily scupper the rally again. Many of these unwinding moves in the key markets still look to be counter trend and there is a lot of work needed to be done yet.
Wall Street closed stronger again last night with the S&P 500 up 1.0%, whilst this also filtered into a broadly positive Asian session, which included the Nikkei up 3.2% on the back of the continued correction on the yen. European markets look to be a touch more cautious today, only showing mild gains around the open. Forex markets show that this dollar rally continues, with the habitually underperforming sterling again the brunt of the pressure. The Aussie dollar is notably sturdy today after the better than expected Australian employment data. Gold is off another $8 whilst it is also interesting that the oil price is over a percent lower, something that could be a curb on equities strength today.
Traders will be looking out for final Eurozone inflation for March at 1000BST which is expected to be confirmed at -0.1%. The Bank of England gives its latest monetary policy statement and minutes at 1200BST and whilst no change is expected on rates there is always the possibility of a change to the voting which currently is unanimous at keeping rates on hold. Ian McCafferty and Martin Weale are always the potential changes but there is no indication of any movement in this meeting, especially not with the EU referendum looming. The big focus though will be on US inflation data with the CPI announced at 1330BST. Whilst the headline year on year CPI is expected to rise slightly to 1.1% (from 1.0%) there is no change expected to the core year on year data at 2.3%. US weekly jobless claims are at 1330BST and are expected to show 270k from 267k last week.
Chart of the Day – EUR/GBP
With the correction of the past few days there are questions beginning to be asked of the continuation of the rally, with Euro/Sterling back towards a medium term crossroads. Following the recent peak at £0.8115 and a return to the support around £0.7930, the first real test of this correction is being seen, a test that is so far holding. The old breakout of £0.7930 is the beginning of a basis of support down to the latest reaction low at £0.7830, a 100 pip support band that needs to be maintained for the medium term bulls to remain in control. The RSI has unwound from 70 and is now back to around 50 where the previous corrections have begun to build support again. Furthermore, the rising 21 day moving average (currently around £0.7935) has often been used as a basis of support since the November rally began. The intraday hourly chart shows a corrective configuration with the hourly RSI finding sellers returning around 50/55. However, the concern is that the hourly chart shows a near term head & shoulders top pattern completed below £0.7955 which implies a correction back to £0.7800 and that today’s early bounce could just be a pullback to the neckline. The bulls will be holding that the supports on the daily chart will overlay this corrective pattern on the hourly chart. Still though this is a crossroads that is still to be negotiated and whilst I see this as a near term correction that gives another chance to buy, the downside pressure is growing. The hourly chart shows that above £0.8020 re-engages the bulls.
After a week and a half of uncertainty, with candles that have been extremely indecisive, the euro has finally found some direction, and it is the bears that look to have grabbed control. A decisive, bearish candle posted over 100 pips of downside yesterday and makes a real impression on this chart. The closing breach of the support at $1.1325, which has been the low of the recent consolidation band, has completed a downside break which now implies around 130 pips of downside, with a target back to around $1.1200. The momentum indicators have taken on a more corrective outlook as a result and a near term downside move is now on. For now, I would not see this as being the beginning of a bear phase as there is much support in place above $1.1100 which I feel will provide another chance to buy. It is interesting that the intraday chart shows a corrective outlook and that the old breakdown support became resistance yesterday. There are minor supports around $1.1240 and $1.1215.
The rallies continue to be seen as a chance to sell and once more we find that once the bounce begins to run out of steam the bears move back in rather quickly. The bearish candle formed yesterday of around 70 pips lower has been followed by further losses overnight. The momentum indicators have once more turned lower and are suggesting that the selling pressure has once more resumed. The RSI and Stochastics are the main concerns with the lower peaks and downward shifts that have only just got going again. This all plays in to my preferred outlook that there will be further pressure on the $1.4050. The intraday hourly chart shows that once the breakdown of the near term support at $1.4195 has been seen overnight this has re-opened the way lower again. This now means that $1.4170/$1.4195 becomes a basis of resistance today whilst the hourly momentum indicators suggest that pressure is mounting for a retest of $1.4050 and intraday rallies will be seen as a chance to sell. There is further resistance at $1.4260. A close below $1.4050 with an intraday breach of $1.4005 would open the multi-year February low at $1.3833.
The technical rally continues to develop on Dollar/Yen as a second strong bull candle completed yesterday. The near term momentum indicators are also reflecting a rebound with RSI crossing back above 30 and the Stochastics also close to a near term buy signal. However I continue to see this bounce as a counter-trend move which will be sold into. The intraday hourly chart shows the recovery through the resistance at 109.10 which completed a small base pattern and which implies around 150 pips of rebound towards 110.60. The next resistance is at 109.85/110.00 before a basis of resistance around 110.60 kicks in. We must also consider that bear market rallies will often undershoot their recovery targets before the sellers resume control again. I expect this rally to be short lived as I do not believe that that bears are finished quite yet.
I have discussed previously that I see the medium term outlook for gold increasingly choppy with little real traction able to take hold, and this seems to be the case. A second bearish candle, with around $13 of downside yesterday has been followed by further losses again today. The daily momentum indicators have once more turned lower and with the RSI falling back from 60 and the Stochastics crossing lower again the pressure has flipped round to the downside. The intraday hourly chart shows the small head & shoulders top pattern which has achieved its downside target of $1240, and whilst the sellers have not managed to break the next support around $1229, this could come under further pressure today. There is now a band of resistance $1240/$1245 for an intraday bounce today, but with gold trading below all of its intraday moving averages which are beginning to turn down in bearish sequence, the near term outlook is deteriorating. The next key supports come in around $1216.70 and $1208. There is now resistance at $1250.40.
The bigger picture trend higher remains intact despite a couple of bearish factors yesterday (Saudi Arabia claiming there would be no production cut and also the bigger than expected oil inventory increase in the EIA report), so the outlook for continued higher lows continues. The price in front of the Doha meeting remains strong above $$39.25/$40.90 and the bulls will continue to eye the upside target of $43.50 from the old base pattern, which is also the next overhead resistance. There is a minor bout of consolidation that has set in, with a neutral (almost doji) candle yesterday. However, with daily momentum indicators showing further upside potential and in strong configuration, continue to use intraday dips as a chance to buy. The caveat remains over the next couple of sessions the adverse comments over a production freeze agreement at the Doha meeting. For now there is little reason to believe that a Doha agreement has been fully priced in yet.