07/01/2015: Although the Eurozone could move into deflation, sentiment is showing signs of improvement

Market Overview

Despite an element of support yesterday in European equities, investors continued to prefer safer haven plays with sovereign bonds, gold and the Japanese yen more favoured. With Wall Street lower for a fifth consecutive day, a 6% jump in the VIX Index of S&P 500 options volatility reflects the concerns that investors still have, with a demand for portfolio protection clearly still present. However, there have been one or two signs overnight that perhaps there may be a slight improvement in sentiment, with Dollar/Yen bouncing, gold correcting lower and European equities are higher at the open. The price of oil has been a crucial aspect for traders in recent days, but despite the consistent decline (which continues), if European markets can buck the trend for a second day then perhaps the market can begin to settle.

In forex trading there is a broad level of dollar strength coming through, predominantly against the yen, but the euro is consolidating. This comes ahead of the key announcement of the day which is Eurozone CPI inflation which is announced at 10:00GMT. The consensus is looking for a move into negative inflation of -0.1% (i.e. deflation). This comes as the oil price has fallen over 50% in the last 6 months. This would put ever increasing pressure on the ECB to further ease monetary policy at its next meeting on 22nd January. The euro looks set to come under further pressure.

Other economic announcements today include the US ADP employment report at 13:15GMT which is expected to show a slight improvement to 227,000 jobs (from 208,000 last month) and would bode well for Non-farm Payrolls on Friday. There is also the US trade balance at 13:30GMT which is expected to come back slightly to -$42.3bn (-$43.4bn), whilst we also get the latest set of meeting minutes from the Federal Reserve at 19:00GMT.

Chart of the Day – Silver

The medium term bulls are fighting back. A move above resistance at $16.45 is a 3 week high and momentum indicators (RSI and Stochastics) suggest an improving outlook. However much as with gold (see below) there is plenty for the bulls still to do to suggest the outlook is improving on a sustainable basis. The December high at $17.33 is the obvious first hurdle, whilst the moving averages are all still in decline. For now this is merely a continuation of a 10 week consolidation pattern. Only on a move above $17.33 (to complete a base pattern) and above the reaction high at $17.80 (to confirm the move) can the bulls justifiably look seriously to the upside. Be careful becoming too bullish too soon.

Silver   07012015

EUR/USD

Once more we see the consolidations in the euro being sold into. Since the pair peaked at $1.2670 on 16th December there has been a consistent decline. However that is not to say that there are not opportunities to sell. There have been a series of intraday rallies of maybe 70 to 90 pips which have helped to unwind intraday oversold conditions and helped to renew downside potential. However there have been no key lower highs broken and the bears have remained in full control. The latest key resistance is at $1.1976 which I was ready to sell around yesterday (but never got the chance to) before the downside resumed once more. A push back below $1.1880 however has now breached the June 2010 key low at $1.1875 and if this move is confirmed today it would be the breaking of a crucial support with the euro back at levels not seen since late 2005. Momentum is oversold with the RSI at 23 but the selling pressure is so great that once this support is decisively broken there is little reason not to expect further losses.

EURUSD   07012015

GBP/USD

If the first few trading days of the year are anything to go by, Cable is in for a punishing year. The rate has lost over 450 pips in just 3 days and the bears are having a field day. Momentum indicators are strongly negative and Cable is within touching distance of the next key support from August 2013 at $1.5100. As I said yesterday, my feeling is that sterling will now come back to test the key low at $1.4810. The only caveat I can see is that on a near term basis the sell-off has been so severe in recent days that it leaves the pair open for a snap rally. The downtrend is at $1.5540 as is the 21 day moving average which has been a basis of resistance. Furthermore the daily range today is entirely outside the Bollinger Bands which suggests stretched trading conditions. This may mean that Cable could be ready at least for consolidation or even a minor rebound. The intraday hourly chart shows the first resistance band between $1,5200/$15270.

GBPUSD   07012015

USD/JPY

Dollar/Yen is turning into an interesting chart once more. The daily chart shows that around 119 is an old pivot level. It acts as the old high from mid-November, the 161.8% Fib projection level I have often focused on and also an area of support from late December. There was a decisive break down below 119 yesterday to put the bears in near term control (also completing a sort of range breakdown which implies 117). Also today we have seen a pullback to 119 again. This makes the price action today very interesting as if 119 once more acts as a basis of resistance it could be an interesting near term selling opportunity. The momentum indicators are all set in corrective configuration (within a medium term bullish outlook). This could mean that a move back towards 117.50 support area could easily be seen and possibly 117 (remember for Dollar/Yen, the bull market corrections tend to undershoot their downside targets). The caveat is that the move to 118.04 has already been the correction. That means that price action around 119 today will be key.

USDJPY   07012015

Gold

The flight to safety continues, or at least that is what the gold chart is telling us. The interesting aspect here is that gold is now seriously threatening its long term downtrend. From the low at $1168.25 a few days ago, gold has now added as much as $50 to move above the primary downtrend (which today comes in at $1215. Early trading in Asia has just taken some of the shine off the move and still the downtrend is being questioned without being breached. My feeling is that it is such a key development in the chart that there would need to be a move above the $1238.20 resistance in the least to contemplate a change of outlook and even then need a move above $1255.20 (November high) to confirm. Also the RSI is still only in the around 55 which does not reflect the strong momentum needed to suggest a bullish shift in sentiment. For now we must still wait. The psychological support at $1200 is again in play.

Gold   07122014

WTI Oil

The downside acceleration in the sell-off is becoming particularly concerning for WTI. The momentum is incredibly bearish now and looking at the intraday chart shows just consistent selling pressure is now in place and now the $50 support has been taken out it is difficult to see what is going to stop this decline now. The next support does not come in until the April 2009 support at $43.80 and even then that is fairly luke-warm as a level to rely on. The only real hope that the bulls can hang on to is the RSI which is now down at 20, around the level where the consolidations of the past few months have started to take hold. The resistance of an old downtrend channel does not come in until $54 so this does leave open the prospect of a sharp technical rally. Subsequently, chasing the oil price lower may not be the best approach currently. Selling into any intraday rallies would seem like a wiser move.

WTI   07012015

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