04/12/2014: All eyes on Draghi as forex majors consolidate in front of the ECB

Market Overview

As we begin trading on ECB day, all eyes are on Mario Draghi and whether he will announce the purchase of Eurozone sovereign debt in his press conference at 13:30GMT. General consensus suggests that the ECB will now this time around but the clock is ticking ever louder on the ECB to act. The actions of Draghi this afternoon are set to drive sentiment across the markets today. Sentiment is fairly positive across the equity markets but much of that is driven by another positive day on Wall Street which showed moves into further new all-time high on the S&P 500, helped higher by strong ISM Non-manufacturing data and a Fed Beige Book that suggested an increasingly encouraging economic outlook for the US. Asian markets showed solid gains overnight with the Nikkei again at record highs, buoyed by further weakness in the yen. European markets are showing mild gains at the open.

In forex trading, the major currencies are showing little real movement in front of the ECB as consolidation has taken hold after yesterday’s strong move by the US dollar. The notable mover is the weakness in the Aussie dollar which is falling again, despite a decent set of retail sales and improving trade balance.

After a quiet early morning, traders will be watching out for the Bank of England monetary policy decision at 12:00GMT. No change is expected but there are some BoE members such as Kristin Forbes who look to be preparing for a shift away from a dovish position on the committee (although we will not find this out today). The main event though comes with the ECB’s monetary policy and press conference. No change is expected on rates, and whilst Draghi is unlikely to be able to announce full blown QE today (the Germans still seem to be against) he will look to jawbone the euro lower once more. We also have US weekly jobless claims at 13:30GMT. The expectation is for 296k but the market might begin to be a little concerned for the Non-farm Payrolls tomorrow if there is another number above 300k.

Chart of the Day – NZD/USD

Although the Aussie/Dollar rate has been under bearish pressure in falling to multi year lows in recent days, the Kiwi had been holding up fairly well. However the pressure of the US dollar strength is now growing on the Kiwi too. With a series of lower highs in recent days, yesterday’s break of support at 0.7764 has now re-opened the 0.7658 November low which marks a critical floor for the Kiwi as below there the way is open towards the June 2012 lows at 0.7450. Daily momentum indicators remain in bearish configuration and the Stochastics are now accelerating lower, whilst the MACD lines have just given a bearish crossover just below neutral. Expect further weakness now in the coming days, with any rallies seen as a chance to sell. The reaction high at 0.7926 is key resistance near term, with the November high at 0.7973 an important medium term level.

NZDUSD   04122014

EUR/USD

As the crucial ECB monthly meeting approaches the euro is under significant pressure, falling to a 27 month low. The key floor in the price at $1.2357 gave way yesterday and this has completed a significant downside break. The move below $1.2357 can be interpreted in a variety of ways. It can be taken as a range breakdown (with a target of $1.2110) of a well-defined descending triangle pattern which implies a conservative downside target of $1.2070 (30 pips within the crucial July 2012 low at $1.2040). Either way the outlook remains negative for the euro. The momentum remains weak but there is further downside potential in the RSI. ECB day can be very volatile for the euro and pattern breaks will often see a pullback towards the breakdown level, in this case the resistance is now at $1.2357. I would use any euro rallies as a chance to sell. The downtrend resistance comes in at $1.2470 today so there is room in the event of a decent sized spike.

EURUSD   04122014

GBP/USD

The medium/long term outlook remains bearish, however sterling is holding up fairly well against the dollar in recent days as forex major peers have really struggled. Subsequently the range that has been in place now for 3 weeks continues. The intraday hourly chart shows the near term outlook is actually reasonably neutral with the hourly moving averages flat and momentum indicators largely rangebound. However following the peak at $1.5825, there have been a couple of lower highs that have formed (at $1.5763 and yesterday at $1.5718) which are looking to add to the pressure. I continue to expect that with the longer trends still bearish that the range will resolve to the downside and that the bears will prevail in the end. With rallies continues to be sold at lower levels, watch for the support around $1.5630 to come under scrutiny and then $1.5585.

GBPUSD   04122014

USD/JPY

The bulls are getting on another run. Having found a period of consolidation under the 161.8% Fibonacci projection level at 119.07, the rate is now looking to pull away and leave this level behind. There is very little real resistance on Dollar/Yen to work with as the last time it was around these highs was back in 2007. It could be argued that there is a minor resistance around 121 but in all honesty there is nothing major until the June 2007 high at 124.16. Momentum indicators remain incredibly strong and there is little stopping Dollar/Yen from moving significantly higher once more. The intraday hourly chart shows consistent gains with strong momentum. Using any dip as a chance to buy seems to be a fairly reasonable approach, with support coming fairly consistently around 119.50 and 119.00 before 118.50.

USDJPY   04122014

Gold

Since Monday’s spike higher the gold price has fallen into a period of consolidation. There was a minor element of strength again yesterday, but the drift back lower again suggests there is still a lack of certainty with how to move on gold. The price trading above $1200 psychological level will be a positive for the bulls, however, I am mindful that the longer term trends are still all negative and the daily momentum studies still suggest that near term rallies should be sold into. A continued failure to move back above Monday’s high at $1221 might begin to weigh on sentiment and put downside pressure back on. There is near term support at $1191.86, whilst yesterday’s peak at $1214.50 is also a barrier now.

Gold   04122014

WTI Oil

It seems as though after several days, the volatility is beginning to calm down. The resistance of the underside of the old downtrend channel has been capping the gains for a few days now and there has been an apparent reluctance to continue the rally and push back higher. The price resistance near term comes in at $69.60 and if the WTI price cannot push back above it soon anyone who has bought into the rebound is likely to begin to get nervous once again. Technically there is still room for further recovery, with the RSI just under 30, and a move above $69.60 could trigger further upside. Although Friday’s volume was the largest daily volume since June 2011 and could subsequently depict a selling climax, the outlook for oil remains deeply bearish for now and there is clearly an aversion to buying at the moment. I would not be surprised to see the bears remain in control and pull the price lower ultimately for a retest of the $63.70 low.

WTI   04122014

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