08/05/2014: Traders to focus on whether Draghi can jawbone the Euro lower

Market Overview

A series of positive key macro news has given investor sentiment a lift in the past 24 hours, with supportive comments from Janet Yellen, a conciliatory tone from Putin and unexpectedly strong Chinese trade data. Wall Street indices turned early losses into good gains, whilst Asian trading was also positive. In forex trading, the gradual recovery for the dollar continued, whilst the weakening of both the yen and the gold price both reflected the improvement in risk appetite. European markets are also trading positively in early hours today.

Janet Yellen put across a slightly dovish tone in her testimony to Congress yesterday afternoon, suggesting that she is reverting to the sort of dovish stance that the market had been originally expecting her to be as Fed chair. Yellen warned that the US economy was still in need of support, whilst the housing slowdown was also a concern. Markets were also boosted by an announcement that Vladimir Putin had withdrawn Russian troops from the border with Ukraine.

Overnight there was also the Chinese trade data which showed exports unexpectedly rising by 0.9% and significantly better than the 6.6% decline in March, whilst imports were also 0.8% higher and up from an 11.3% decline a month ago. This data suggests a rebound for China in April which is good for commodities, good for commodity currencies and a positive for global growth.

On a day packed with economic announcements the key factor traders will be watching is the ECB rate announcement (12:45BST) and subsequent press conference by Mario Draghi (13:30BST). The ECB is not expected to move on rates, but the tone of Draghi is expected to be dovish in an attempt to talk down the Euro which he has already stated as a problem. In other announcements, the Bank of England is not expected to move on rates at 12:00BST, while US weekly jobless claims are expected to drop to 325k (previous 344k).

Chart of the Day – EUR/JPY

Two of the main beneficiary currencies of the recent dollar weakness have been the euro and the yen. It may come as little surprise therefore that Euro/Yen has been subsequently drifting sideways. This has actually now been the case for the past 10 weeks, where initially volatile moves have become ever more becalmed. The 13 month uptrend is now beginning to break by this sideways shift. The daily momentum indicators are increasingly neutral with RSI and MACD basically flat, only the Stochastics are showing any real signs of life and are in slight decline. The intraday hourly chart shows flat moving averages and shows a broad trading range between 140.94/142.46 and the rate currently trading just below mid-range. Nearer levels are 141.11 on the downside with resistance at 142.01. If ever there was a cross pair in need of a boost of energy then this was it. Perhaps Mario Draghi will be able to engage a burst of life this afternoon?

EURJPY   08052014

EUR/USD

I spoke yesterday about the Euro looking strong but near term overbought conditions may lead to a minor pullback. The trading over the past day or so seems to be playing this out as the Euro has unwound back towards the breakout support band $1.3890/$1.3905. If this now starts to form support this would look to be a very good opportunity to buy once more. The longer term outlook remains strong and a further test of the $1.3967 high is likely in due course. The intraday hourly chart shows the momentum indicators such as the hourly RSI and MACD have now nicely unwound from stretched positions and are ready to resume their bullish trends. The $1.3905 level has been hit almost to the tick in early hours today and the bulls look ready to retest the recent high at $1.3951 and then $1.3967. A breach of $1.3963 would begin to question the bullish near term outlook. The big factor waiting in the wings though is Mario Draghi and the ECB. The central bank delivers its latest rates decision today at 12:45BST with Draghi’s subsequent press conference at 13:30BST. He is likely to be trying to talk the Euro lower which could hamper this bullish Euro/Dollar technical view, at least near term.

EURUSD   08052014

GBP/USD

It looks like the unwinding of the strong breakout on Cable that I spoke about yesterday is underway. The daily chart shows the RSI which had reached over 73 and the highest since September, now beginning to unwind. Whilst the chart remains very bullish it also remains susceptible to a near term correction. The intraday hourly chart shows where this correction could come back to near term with the breakout support at $1.6900/$1.6918 awaiting. The chart also shows that this would still be a corrective move within the bullish trend. Already the hourly momentum indicators have unwound the overstretched position and look to have renewed upside potential. However, my feeling is that there is more to go in this near term correction before the bulls regain control. The major band of intraday support come in around $1.6860/$1.6880 so there is still plenty of corrective room. A move back above $1.6980 would reignite the buying pressure once more.

GBPUSD   08052014

USD/JPY

Yesterday Dollar/Yen traded the entire day below the 144 day moving average (currently 102.14) for the first time since September 2013. This is a warning shot for the dollar bulls. The uptrend channel managed to stay intact, but is being given a severe testing. Momentum indicators are in bearish configuration and suggest that this is not the end of the downside pressure quite yet. The intraday hourly chart shows the 102 big figure level acted as resistance yesterday as the sharp bounce (on news that Putin was ready to meet the regional leaders in Ukraine in an attempt to resolve the geopolitical tensions) hit 101.99. However this resistance remains intact and has repelled another rally overnight. The chart simply looks to have unwound an oversold position and looks ready for the next bout of selling pressure. Expect a retest of the low at 101.40, with a move above 102.18 being able to negate the near term pressure.

USDJPY   08052014

Gold

Pure technical traders of gold who do not follow the news flow must be bemoaning the erratic price movement in the yellow metal. However gold is not running on technical currently. Whilst there are aspects such as the support of the 144 day moving average at $1282.50 which can be pointed to, the fact is that gold is moving with the Ukraine story. Escalating tensions lead to a sharp moves higher (such as on Friday), whilst the news yesterday that Putin was apparently looking to diffuse the situation led to a $30 sell-off in a matter of hours. This now leaves gold trading around the support band above $1285 and some consolidation. Usually, when there has been little news, gold has tended to drift backwards again and this looks to be the more likely scenario again (at least until the next flare up). Expect a retest of the recent low at $1276.60. I still see $1300 as a bit of a watershed between the bulls and the bears.

Gold   08052014

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