04/09/2014: Expect a volatile day with traders poised for another ECB rollercoaster ride

Market Overview

Traders are preparing themselves for what could be a volatile day. If the equity markets are moving on swings in the Ukrainian geopolitics, the forex markets are fixated on what Mario Draghi and the ECB will do today. Wall Street closed with a slight consolidation (although the NASDAQ closed around 0.5% lower almost entirely due to a 4% decline in the shares of Apple), with the S&P 500 slightly lower but once again holding on to 2000. Asian markets were equally mixed overnight as the Bank of Japan sat on its hands on monetary policy. The European session has begun flat to slightly lower.

Markets are focusing on whether the ECB will engage further monetary easing. The recent declines in the euro and also the yields on sovereign debt from countries such as Germany and France suggest that markets are pricing in some sort of action. The trouble is that it is unlikely to be seen this month. It is possible that Draghi will announce the details of an asset backed securities purchase programme. However the size that it will be is unlikely to be deemed large enough to make a material difference to the market. Full blown Quantitative Easing (most likely through purchase of sovereign debt) is what the market is looking for and if Draghi does not speak seriously about it today there could be a significant reaction in the forex markets. This could mean a sizeable short squeeze on the euro as traders who have bet on QE are disappointment and look to unwind their positions. Any announcement will be during the press conference at 13:30BST.

Forex trading is fairly flat today with a slight dollar positive bias, but there is a lack of conviction behind the early moves. Expect this to be a feature of this morning’s price action in front of the ECB. There are other economic announcements that could also impact today. The Bank of England gives its latest monetary policy update, which includes a statement this time. In the last meeting there were two dissenting voices calling for a rate rise, but no change is expected to rates today. We also have the US weekly jobless claims at 13:30BST forecast at 300,000 up from last week’s 298,000 whist the ISM Non-manufacturing PMI is released at 15:00BST and is expected to show a slight decline to 57.7 from last month’s 58.7.

Chart of the Day – AUD/NZD

One of the ways to play the on-going weakness in NZD/USD and the consolidation in AUD/USD is to trade the Aussie/Kiwi cross. After trading in a broad sideways range throughout 2014 there has been a decisive breakout in the past couple of weeks with the Aussie strengthening significantly. A bull flag pattern completed a couple of weeks ago gave an upside breakout target of 1.1350 and since then the Aussie has been making a stepped progress towards the target. Yesterday saw the upside break from another period of consolidation and the bulls look to be in control. Momentum indicators are strongly bullish and suggest that any weakness in the price is a chance to buy the Aussie. There is now good support in the band 1.1117 to 1.1189 to use for any dips. There is little real resistance until 1.1490 and then the October 2013 peak at 1.1580.

AUDNZD   04092014

EUR/USD

Is the euro priced for ECB QE disappointment? The short answer is that it may well be, which is one of the reasons why there was a small rebound yesterday. Today’s price action will be governed in no small way by what the ECB does in its monthly meeting. That could mean a consolidation in the approach to the meeting followed by significant volatility possibly at 12:45BST when the rates decision comes (there could even be another rate cut, although unlikely) but the real action will come at 13:30BST during the Draghi press conference. I believe the euro is priced for further monetary easing and that the purchase of asset backed securities will not be enough. In this regard I think Draghi will do very well to prevent what could be a sizeable short squeeze (rally) on the euro. In this sense all technical levels go out the window. However, notable upside resistance comes at $1.3220, $1.3300 and $1.3330. If this is seen I would be looking to use a bounce as a chance to sell again once things calm down. The key near term support is the low at $1.3108 which was just above the September low at $1.3103.

EURUSD   04092014

GBP/USD

Cable was unable to gain any real traction in a rebound yesterday as the bears remain firmly in control. The big 7 week downtrend continues to pull sterling lower and with the March low at $1.6460 breached the downside is open once again. A strategy of selling rallies continues to be the safest option and with the next support not until we reach the 38.2% Fibonacci retracement of the 12 month bull run at $1.6280 there is further downside potential. Momentum indicators are extremely weak still on the daily chart. On the intraday hourly chart the attempted rally from yesterday could not even reach the resistance of the old support at $1.6525, which now leaves us with a band of resistance $1.6500/25 to look for another chance to sell. With the Bank of England (and also knock on reaction from the ECB and euro trading) today it could be a more volatile day, but look for any rebounds as a chance to sell. The resistance from the 7 week downtrend does not come in until $1.6590.

GBPUSD   04092014

USD/JPY

The immediate upside impetus has just been lost as a high at 105.30 has been posted along with a big red (negative) candlestick. However there does not appear to be any really strong desire to take profits and it looks to be a consolidation that is buiding. This could mean that there is a drift back towards the breakout support at 104.43 but I would look to use this as another chance to buy. Between 103.50 and 104.50 is now strong support and a good band to starting thinking about long positions again as I expect this is just a minor respite before further upside for the dollar. I see the momentum very strong and the newly bullish medium/longer term outlook (as shown by the configuration of the momentum indicators) suggests that corrections should be used as a chance to buy for a move above the 105.44 multi-year high.

USDJPY   04092014

Gold

As has so often been the case with gold in this past 8 weeks a sharp move subsequently undergoes a corrective phase. However with the downtrend channel that has formed, the bulls have been unable to fully retrace the sharp moves to the downside, and the rallies are simply seen as another chance to sell. This seems to be the case once more. The resistance band for this rally comes between $1273/$1280 and it is likely that this will be the limit to the recovery before posting another lower high (under $1296.50) and a further retreat towards the channel low is seen. Ultimately I see weakness towards the key June low around $1240. All momentum indicators are in bearish configuration now and back the view of selling into rallies.

Gold   04092014

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