Over the summer months the equity markets were getting all the headlines, but since the beginning of September, the forex markets have just taken off in a huge way and now dominate. The euro has been hit by further ECB easing measures, and now significant uncertainty over the potential for Scottish independence from the UK has resulted in a sell-off in the pound, whilst positive economic data for the US has strengthened the dollar. Newsflow is dominating trading decisions now on sterling and after a second poll has suggested that Scotland is beginning to quite possibly leave the Union, this will heap on the uncertainty and the negative pressure on Cable.
Forex trading once more shows a dollar positive positioning across the majors, albeit only a slight one, however the euro, sterling and the yen all remain under pressure again today. Traders do not have a huge amount of data today, but sterling investors will hope that UK manufacturing production can give them something to cheer at 09:30BST, with the number expected to improve to 2.2%. There is also a speech by Bank of England Governor Mark Carney at 10:45BST which traders will look for clues of a rate hike.
In the absence of corporate earnings as a driving force, Wall Street has been drifting and the S&P 500 last night fell back below 2000. Asian markets were mixed overnight, although the continued weakness in the Japanese yen is helping to push the Nikkei higher. European indices are being dragged slightly lower at the open. The announcement of further economic sanctions on Russia will add uncertainty and are also likely to be met with retaliatory measures from Putin.
Chart of the Day – EUR/JPY
It has been a volatile few days on Euro/Yen. The rate backed away from a breach of the 138.00 key resistance last week as the euro weakened significantly. However the support of the key low at 135.68 held, almost to the pip with a low at 135.76. This comes in to continue to the trading range. Momentum indicators are still erring on the bearish side of neutral, with the rate also trading under the falling moving averages. Calling a rally is still very high risk at the moment, and with the 138.00 resistance growing in strength and significance, and selling into the rallies remains a good strategy. The intraday hourly chart shows resistance around 137.60.
Despite the deeply oversold position of the euro, the decline shows little sign of stopping. Even the consolidations are becoming ever more short-lived and give investors little respite before the next bout of downside pressure. Backing further weakness is a viable strategy, but there is a huge caveat. Keeping stops close is advisable as with momentum so extreme, the chances of a significant snap back rebound are growing ever stronger. Watching for upside resistances being broken for a potential trigger of a rally. Initial resistance on the intraday hourly chart comes in at $1.2920, then $1.2950 and $1.2986.
It goes without saying that Cable is under huge pressure. The bottom has fallen out of the market and compared to where we were just a matter of a few days ago is incredible. The last time the RSI was at these levels of bearish momentum, it was September 2008 and the height of the credit crisis. It is at times like these that technical support levels count for little as fear of uncertainty drives prices ever lower, however the 50% Fibonacci retracement of the big $1.4812/$1.7191 bull run comes in at $1.5999 therefore coinciding with a big psychological handle of $1.6600. Trading in times like these is almost an impossible task to get right with any degree of certainty, as overstretched momentum can make a significant snap back rally. Resistance is now at $1.6186 and $1.6233.
Another incredible day for the dollar, as the rate stormed higher and burst back through to a 6 year high. Posting almost one big figure higher on the day and the rate has continued higher overnight. Momentum remains extremely strong and any weakness is still being bought into. Over the past few weeks the RSI is tended to move between 70 and 80 and being up at the 80 level again it may just consolidate slightly in the near term. However the breakout target level on a longer term basis is around the 110 mark so there is further to play with the upside and corrections are a chance to buy. The initial support comes at the minor breakout level from yesterday at 105.70 an then 104.90.
The gold price is now firmly hugging the bottom of the downtrend channel as the bears retain control. Momentum indicators confirm the bearish outlook as the series of lower highs and lower lows on the price is also reflected on RSI, MACD and Stochastics. Using rallies as a chance to sell remains a viable strategy. The basis of resistance is still around $1280, but the previous rally high was at $1276.50. I continue to expect there to be a retest of the key June low at $1240.60 in due course. It would need a rebound above resistance at $1296.50 to defer the bearish outlook.