06/08/2014: Rising geopolitical tensions driving markets lower as the dollar gains further

Market Overview

As if we ever thought it was beginning to calm down, geopolitical risk is back and playing a major role in these markets once more. Suggestions from the Polish foreign minister that Russian troops were massing on the border with Ukraine has spooked the markets again. This news spooked Wall Street and resulted in the S&P 500 wiping out all of the gains from the previous day. The Asia markets felt the bear pressure over night, whilst the 1% decline on the S&P 500 should ensure that, newsflow surrounding Russia permitting, the European markets will have a sizeable down-day today. Already indices such as the DAX and FTSE 100 are trading significantly lower.

In recent weeks, in forex trading, it has been the dollar that has been the main currency to benefit from the stoking up of geopolitical tensions and this is a theme that is largely being followed today. Major currencies such as the euro, sterling and the Swissy are all under pressure. Sterling traders will be looking towards the UK Manufacturing Production to give Cable some added support today, although the forecast is for a fall in the year on year reading to 2.1% from 3.7% when the data is announced at 09:30BST. The US Trade Balance will also be of interest at 13:30BST, with a very slight deterioration to -$44.9gn expected.

Chart of the Day – DAX Xetra

The incredible selling pressure of the past few days looks set to continue today. Monday’s low at 9130 has been taken out at the open of the session and the downside pressure remains. All things remaining equal, I would say that the DAX is becoming increasingly stretched and ready for a rally. The fact that Monday’s session was entirely under the 2.0 Bollinger Bands suggests extreme trading conditions that tend to be followed by a retracement. However the geopolitical events playing out could well pull the DAX even lower in the near term. The crucial support is at 8913 which is the key March low and this could come under threat. The longer term implications of the sell-off of the past few weeks, I believe, are significant as a series of positive longer term technical indicators have been smashed. The DAX continues to badly underperform the FTSE 100 and perhaps this is something that can be played as a hedging trade there.

DAX   06082014

EUR/USD

The technical rally on the euro did not last long before we have seen the return of the selling pressure. Yesterday’s dip back below the low at $1.3365 suggests that the bears are waiting in the wings still and are able to quickly resume control. There is an element of geopolitical fears (ie. Ukraine) to contend with too, but it seems as though now is not the time to be betting on a recovery near term. Even though the RSI has already given one crossover buy signal and the Stochastics threatened a buy signal too, the downside momentum appears to be strong still. The next key low at $1.3295 should come under pressure now. The intraday hourly chart shows minor resistance now at $1.3400 and then at $1.3440.

EURUSD   06082014

GBP/USD

After gains in the past two sessions (something not seen since Cable topped out), the hints of a technical rally still remain. The early Asian session has been a touch disappointing, but the way that sterling battled throughout yesterday, when the euro was being hit, could be a telling signal if the near term geopolitics do not create too big a flight to the dollar. The intraday hourly chart shows a minor higher low at $1.6843 that now needs to be held to prevent a drift back to the $1.6810 low. The daily chart is also threatening a technical rally, with the RSI already having given a crossover signal as the first sign of a potential recovery, but also now the Stochastics are close to confirming a crossover buy signal. There is not enough yet in this chart to go long with conviction but the early signs are mounting. Key near term resistance comes in at $1.6900 and then $1.6930.

GBPUSD   06082014

USD/JPY

I commented intraday yesterday about yet another spike in Dollar/Yen above 102.80 and questioned whether the bulls could hold on. They could not. For the fourth time in five days this has now been seen and the bulls just cannot get traction on a sustained breakout. The number of long tailed doji  (uncertain) candlesticks are growing. It is difficult to know exactly what they mean at this stage, but something seems to be building up now. The series of higher daily lows over the past three days does not suggest that the downside pressure is mounting and on the intraday hourly chart the outlook is one of consolidation more than loss of momentum. The daily momentum indicators are just unwinding some strength. If the dollar can hold above the support at 102.30 (which seems to increasingly be the case) then the pressure will grow for an upside break. A close above 102.80 could be the catalyst for a sustained move towards a test of 104.12 the April high. A failure of the support at 102.30 would suggest a loss of upside impetus now and the continuation of the range.

USDJPY   06082014

Gold

With the downside pressure that gold has been under for the past few weeks it would not be prudent to call a technical rally, but with geopolitical tensions rising again, the chances are improving. On the technicals, yesterday’s doji candlestick denotes uncertainty with the prevailing trend, whilst also maintaining the support at $1280. There is no explicit buy signal on the momentum indicators, so for now the overnight gains in the gold price should be treated with caution. In reality, the series of lower highs in gold mean that much has to be done to justify being long now, however, the falling 21 day moving average which has been the basis of resistance recently is now at $1304.25 so there is certainly scope for a minor rally in the very near term. It does look as though gold is rallying once more with the geopolitical tensions and even though the technicals suggest that downside pressure is generally increasing, whilst the tensions continue, there should be an element of support to the price.

Gold   06082014

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