05/06/2014: The calm before the storm as traders wait on ECB day

Market Overview

So finally the day arrives that the markets have seemingly spent much of the past fortnight waiting for. The ECB today announces its latest monetary policy and hopefully with it, the markets can find some much needed direction once again. All the while though, US equity markets continue to push (very slowly) higher as Wall Street fit further closing all-time highs once more last night. This move came after a mixed day of data which saw sluggish employment growth (ADP missed expectations) tempered by positive news on the service sector (ISM Non-manufacturing beat expectations). Asian markets however, failed to take this lead, with the Nikkei held back by a slight strengthening overnight of the yen. In front of the ECB announcement today, European markets are flitting between gains and losses.

On a day where such a huge fundamental event is anticipated, forex trading is understandably not showing any significant moves, however, the dollar is very slightly weaker against all the major pairs. There has been little to drive sentiment overnight with only the HSBC composite PMI for China that showed an improvement from 49.5 to 50.2 and back into expansion territory which could be adding to the improved sentiment.

At 12:45BST the ECB announces its decision on rates. There is a broad expectation of a lowering of the rates corridor, dropping both the main refinancing rate (expected to move to 0.1%) and the overnight deposit rate (move into negative from flat). The market by and large has priced this in to the Euro so there would probably be little real move on the back of this. However the real fun could be once more in Mario Draghi’s press conference at 13:30BST. Draghi could push further and talk about an extension to the Long Term Refinancing Operation and also possibly some sort of Funding For Lending scheme that is similar to what the Bank of England deployed. There is a feeling that there will need to be a lot more work done before the ECB can engage Quantitative Easing (asset purchases) so it is unlikely at this meeting.

Aside from the ECB there is also a rates decision from the Bank of England, which is not expected to show any change in policy. Furthermore there are the weekly jobless numbers that are announced at 13:30BST in the US, expected to be 313k up from 300k last week.

Chart of the Day – USD/CHF

As with many markets, Dollar/Swiss has been consolidating for the past few days. Having made the break above the key resistance around 0.8950 the dollar bulls have been pausing for breath. However, there is now the potential for a correction as the momentum indicators show a loss of impetus to the upside and show a series of corrective signals. The Stochastics have now confirmed a cross over sell signal while the MACD lines have also given a crossover sell signal for only the second time this year. This could put pressure on the near term support at 0.8947 with the key near term support at 0.8931. This could though be ready to move in tandem with the Euro should there be a rush to cover short positions in the single currency. This would help to drive a correction in Dollar/Swiss. Initial resistance is yesterday’s high at 0.8981 with key resistance at 0.8995.

USDCHF   05062014

EUR/USD

It is not a major surprise to say that as we approach a crucial decision by the ECB today, trading in the Euro has become stabilized. The daily chart shows the Euro into a seventh day of sideways trading in a 65 pip range between $1.3584/$1.3649, with that support being tested and held on four of the days. However it is likely that today will provide the market with some direction at least. The technical indicators remain bearish and pressure remains to the downside. I would not expect any real moves until 12:45BST at least when the rates decision is made. Even then the cuts are expected and now probably baked into the price. The real fun could be at 13:30BST when Draghi lets the market know of other policy responses. This is when the key levels could be tested. On the downside $1.3560 is key, with the neckline resistance of the double top at $1.3670 the key upside level. The near 400 pip move since Draghi suggested the likelihood of ECB action last month suggests that the market is already prepared for something significant. The risk is that Draghi under-delivers and there is a sizeable short squeeze resulting in a big rally on Euro/Dollar.

EURUSD   05062014

GBP/USD

Cable survived a test of the key levels just under $1.6700 yesterday morning as the UK services PMI beat expectations and sterling rallied. However the overhead resistance around $1.6780 held firm and the 90 pip consolidation range is now into a 6th day. The daily chart shows the medium to longer term outlook is increasingly under downside pressure as is the 89 day moving average which is still the basis of support for the corrections. Daily momentum indicators though remain in corrective configuration and reflect the downside pressure still on Cable. The intraday hourly chart shows that whilst Cable trades underneath the resistance band $1.6780/$1.6815 then the strategy will continue to be one of selling into strength.

GBPUSD   05062014

USD/JPY

Asian trading overnight suggests that the recent recovery in Dollar/Yen is just beginning to stall. The stalling of this move is also happening at the underside resistance of the old primary uptrend which is a slight concern for the bulls. However the improvement in the momentum indicators suggests that there is a depth to the rally and with the shorter moving averages beginning to turn positive the outlook is certainly improving. The intraday hourly chart suggests that the next bullish development in this recovery play would be for a second key higher low to be posted. If this were to be seen around 102.00/102.24 then this would be a positive. The drifting off of the pair overnight is helping to unwind overbought hourly momentum and so we now look for the next higher low. A breach of the support around 102 would now be a disappointment for the bulls.

USDJPY   05062014

Gold

Gold is another market that has moved into consolidation mode ahead of the ECB today. The downside target of $1240 from the symmetrical triangle has been all but achieved and the last four days has seen consolidation between $1240/$1250. The outlook remains bearish with all momentum indicators in negative configuration, although the RSI remains stretched under 30 which is a 12 month low. The outlook remains one to sell into any rallies, with a stepped decline noticeable on the intraday hourly chart. This means that a series of resistance levels are in place with $1251, then $1260 before the key old support now turned resistance at $1268.24 comes into play. Downside supports come in at $1237.94 and then $1231.36 before $1218.44, which I expect to be tested in due course. However there is certainly room for a technical rally before the selling pressure resumes.

Gold   05062014

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