05/02/2015: The ECB cranks up the pressure on Greece but harms market sentiment

Market Overview

Newsflow regarding the renegotiation of Greece’s debt obligations had been fairly favourable in recent days. That is until the ECB fired what looks to be a rather an interesting politically motivated shot across the bows. The ECB has said that it will end the waiver of allowing Greek government debt, which is junk rated, as collateral for the repurchase agreements for Greek banks. The ECB only allows investment grade debt to be used as collateral but has previously made a special case for Greece. In what could amount to a show of strength against Greece the ECB has decided to stop this action. This move has resulted in a significant shift in market sentiment in the past 12 hours, with equities falling away and the Euro back under pressure. The biggest impact will be felt through Greek equities and bonds, however there is a sense that the debt negotiations are now impacting on the wider Eurozone instruments.

Wall Street had been strong yesterday up until the move by the ECB meaning that the S&P 500 closed 0.4% lower. Asian markets were mixed overnight, with Shanghai benefitting from the move by the People’s Bank of China to cut the reserve requirement ratio  on Chinese banks by 50 basis points. However the Nikkei 225 followed Wall Street lower, closing down by 1%. European indices are also weaker in early trading today.

In forex trading, in the wake of the actions by the ECB, there was a move towards safe haven plays, resulting in the yen strengthening along with the US dollar. This move appears to be fairly settled in early European trading today, with the euro and sterling slightly higher on the day. The Aussie and Kiwi dollar are also higher as the move by the PBOC has helped to support the commodity currencies. Gold continues to trade with a fair degree of uncertainty.

Traders will be watching out for the Bank of England monetary policy today at 1200GMT, but in front of the important Quarterly Inflation Report next week it is highly unlikely that anything interesting will come out of the release. The US weekly jobless claims at 1330GMT are forecast to increase to 290,000.

Chart of the Day – DAX Xetra

There was an interesting move yesterday on the DAX. Tuesday big jump to an all-time high had left a gap at 10,804, however the decline yesterday filled this gap. When a market fills a gap and then pushes back higher again this is usually seen as a bullish development. However I am mindful that the DAX has reached its 100% Fibonacci projection target at 10,957 and this may induce some consolidation. The momentum indicators do remain strong still though. The intraday hourly chart shows the filling of this gap excellently with the support clearly now around 10,800 in the near term. The early correction on the DAX could come back to test this level today, but hourly momentum remains in bullish configuration and for now we must retain an expectation that corrections are a chance to buy. The 55 hour moving average (at 10,765) is also supportive. The near term bulls remain in control until a breach of 10,552 support.

DAX   02022015

EUR/USD

The near term technical outlook has been significantly impacted by the actions of the ECB last night. The move to not accept Greek bonds as collateral resulted in a sharp drop on the euro of well over 100 pips and now means that what had looked like being a healthy mini correction within a recovery phase, has drawn questions over the recovery at all now. The daily chart shows the correction yesterday has brought the euro back to the former 6 week downtrend which is now supportive. The daily momentum indicators have also not really been too badly impacted yet and continue to improve. However it is on the intraday chart where the damage has been done. The hourly moves show a breach of the first support band $1.1360/$1.1420 which has taken the momentum indicators back into a more negative configuration. The old support band around $1.1295 has held overnight but looks to be under pressure now. If the European traders now come in and breach this support then the recovery will be all but finished. Further support comes in at $1.1260. For the bulls to regain the initiative now there needs to be a rally back above the resistance now in place at $1.1400.

EURUSD   05022015

GBP/USD

Throughout yesterday I was questioning whether the recovery in Cable that was building during the day would turn out to be a base pattern. The technical indicators were progressing nicely until the ECB action caused the dollar to strengthen and Cable then fell back through $1.5200 which had been building as a support. The daily chart shows that recovery is a possibility, but there is still work to be done. The RSI needs a close above 50 (preferably a two day close) which would be a 7 month high. Also the downtrend, intact since July needs to be broken, and this today comes in at $1.5285. Until these two events happen, I remain cautious on a Cable recovery. Unfortunately, yesterday’s candlestick which ended with a close only slightly above the day low, has not helped matters either. Looking at the intraday chart, the support around $1.5135 now needs to hold to prevent the loss of momentum (and a minor top pattern forming) which would signify the continuation of the consolidation range.

GBPUSD   05022015

USD/JPY

The daily chart shows no decisive more, but it is more of a war of attrition at the moment. There does seem to be a slightly bearish drift in Dollar/Yen currently which seems to now be pulling away from the 23.6% Fibonacci retracement (at 117.90) which should mean a move back towards the 38.2% Fibonacci level (at 115.50). Daily momentum indicators are also just now beginning to reflect this bearish drift. On the intraday hourly chart, I have been talking for a few days about the fact that the support at 117.20 had been compromised and was less relevant. Also that there was a new resistance in place at 118.00 which was a further lower high. Pressure does appear to be growing to the downside and now in the Asian session the sellers have started to accept trading below 117.20. I feel that this re-opens the 116.65 low, with moving averages all now in decline and momentum indicators taking on more of a negative correlation. There is a minor lower high at 117.65 that suggests selling into rallies is the way to play Dollar/Yen now.

USDJPY   05022015

Gold

The gold chart has been rather choppy in recent days making it rather more difficult to call on an intraday basis, but on the daily chart it continues to use the support of the 38.2% Fibonacci retracement (at $1254) and the old October high at $1255 to build a new floor. Whether this ends up being the new medium term support is unclear yet, however there is clearly an appetite for the buyers at this level at the moment. The issue is that gold is still in a short term corrective phase with the downtrend from the $1306 high intact and the momentum indicators still unwinding. However the fact that the RSI is still above 50 and the MACD lines are still in positive territory adds to the weight that this is a near term corrective move with the improving medium term outlook. The intraday chart shows that once again the crossover buy signal on the hourly MACD lines worked well and heralded another rebound. However the price is now encountering the downtrend resistance (c. $1274) and this means the bulls have got some work to do to improve the near term outlook. Key resistance remains the lower high at $1285.10 , with support at $1259.40, $1255.20 and the key level at $1251.90.

Gold   05022015

WTI Oil

After such a strong move higher in the past few days which saw the WTI price rallying by around 18%, there has been a remarkable change of sentiment and oil has just dropped almost like a stone. A decline of over 8% yesterday has completely flipped the market outlook which has significantly dented the prospects of a recovery, albeit not yet in a terminal way, yet. The daily chart now shows the 21 day moving average (flat at $47.37) is being tested as support. The hourly chart shows intraday support at $50, $49 and $48 have all been breached , whilst momentum indicators which had been showing a correction within a bull run have now turned more negative. The price is now trading around the 61.8% Fibonacci retracement of the $43.7/$54.24 bull run (at $47.65) and if this is decisively breached then the expectations of a full retracement will grow stronger.  The 50% retracement at $48.90 seems to be the basis of intraday resistance now.

WTI   05022015

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