06/03/2014: Caution still the overriding factor as we approach key rate decisions

Market Overview

As we move into what could be a significant couple of days for the markets, investors have become increasingly cautious. Wall Street paused for breath amid news from the Fed’s Beige Book that severe weather was having an impact on the economy with consumer and retails trends being hit. However this consolidation did not impact Asian markets too much, with the Japanese Nikkei 225 strongly higher on the back of the continued gains in Dollar/Yen. This also came despite news of what will be China’s first ever domestic bond default and the decision by the Peoples’ Bank of China to reduced excess liquidity by draining 70 billion yuan out of the economy.

As trading in Europe begins, stock markets are slightly higher and forex pairs are showing signs of picking up once more. The key factor to watch today will be the central bank decisions by the Bank of England 12:00GMT and the European Central Bank at 12:45GMT. Both banks are not expected to move on rates, but as often is the case, investors will be listening closely to what Mario Draghi has to say in his press conference at 13:30GMT. Despite Friday’s surprising beat on consumer prices index, there has subsequently been a muted figure on the producer price index which suggests that there are still difficult questions for the ECB President to answer. Expect currencies, especially the Euro to be volatile throughout the time Draghi is speaking.

Chart of the Day – EUR/GBP

On a day when both central banks give their monetary policy updates, it could be a volatile day for Euro/Sterling. The technical outlook for the daily chart continues to suggest that the chart continues with the bears (i.e. Euro bear, Sterling bull) with the rate once more tracking the falling 55 day moving average lower.  Momentum indicators remain in bearish configuration with RSI consistently falling over around 50 and the MACD lines having been camped below the zero neutral line for the past few months. Intraday moving averages have all just converged to turn lower in bearish sequence and the rate is finding resistance below the resistance around £0.8220 once more. Look to use any volatility today which pulls the rate higher as a chance to sell.

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EUR/USD

After two days of fluctuating fortunes, the euro traded in a tight range of just 40 pips yesterday against the dollar. Investors have apparently taken a step back to assess the situation in front of the ECB rate decision today and the key Non-farm Payrolls number tomorrow. Technical indicators on the daily chart continue to drift towards a neutral configuration as the rate consolidates above $1.3700. The intraday hourly chart shows a largely similar picture with moving averages flattening off and RSI and MACD indicators also very neutral. The initial levels that will be watched are yesterday’s low at $1.3706 and the high at $1.3746, however more importantly will be the support at $1.3692 and the reaction high at $1.3781. There promises to be increased volatility today around 12:45GMT with the ECB rate decision (of which no change is expected), but probably more so around 13:30GMT with Draghi’s press conference.

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GBP/USD

Although the consolidation on the daily chart continues, yesterday’s push higher is another attempt by the bulls to generate some upside impetus. Despite this the daily momentum indicators are still in consolidation mode and show little sign of any imminent breakout yet. On the intraday chart, $1.6700 continues to act as a pivot level and has seemingly once again been used overnight as a drift lower bounced off $1.6705 and is now looking to build once more. Finding support above this pivot level suggests that we should be looking for a move back higher to test yesterday’s high at $1.6741 and with the hourly momentum indicators (RSI and MACD) in bullish configuration the outlook is towards the positive side in early European trading.

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USD/JPY

The bulls are beginning to make a bit of a go of it. The recovery following Monday’s sell-off has continued overnight and the rate is back towards the 102.83 key resistance. The big question is whether this is the time at which we see the breakout. Certainly the momentum is currently to the upside, the daily RSI is now at a six week high and the highest since the consolidation under 102.83 began. Also, the Bollinger Bands are tightening which often is seen prior to a breakout. The intraday RSI is above 70 and Stochastics are stretched. However, a breakout should never be called until the price action says so, and the 102.83 resistance is still in place for now. Above 102.83 opens 103.44, but another failure is likely to result in a drift back towards the first key band of support around 102.20.

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Gold

Having unwound the excess of Monday’s strong move higher, the gold price has settled into a 48 hour consolidation phase. However, the daily chart continues to warn of waning upside momentum with the bearish divergences on the RSI and Stochastics. The key near term low on the daily chart that the bulls need to hold is at $1319.61. On the intraday chart the selling pressure has begun to build overnight and the bottom of the consolidation band above $1331 is being tested. The move under the 200 hour moving average which had acted as decent support is a concern, while other moving averages are also turning lower. Watch for the falling 55 hour moving average which has capped the latest reaction highs at $1338.56 below yesterday’s high at $1341.50. The intraday hourly momentum indicators are increasingly in bearish configuration and pressure is growing. A breach of $1331 would open the key low at $1319.61.

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