A consolidation on the equity markets is beginning to turn into a correction as investors struggle to see the glass half full. A report from the San Francisco Fed has suggested that markets were perhaps being too dovish on when the Fed may begin to raise interest rates. This has caused a pick-up in Treasury yields and a slide in equities as Wall Street closed lower and dragged the S&P 500 decisively below 2000 to close at 1988. Asian markets were also weaker with only the Nikkei holding its ground as the yen remained under pressure. European markets have opened slightly lower today as traders struggle to see the positive catalysts.
The dollar strength is taking a pause for breath today, but it remains a feature of forex trading. The euro is basically flat, whilst the dollar strength against the yen and now the Aussie dollar continues, with the Aussie hit further this morning by deteriorating consumer confidence. However, there has though been some early signs of strength in sterling which continues to fight against the forces of Scottish independence. Bank of England governor Mark Carney will be the main focus today as he testifies to the Treasury Select Committee about the quarterly inflation report. His comments will certainly mean more volatility on Cable is likely this afternoon as the hearing begins at 14:45BST. The Reserve Bank of New Zealand gives its latest monetary policy update at 22:00BST, expected to hold steady at 3.5% on rates.
Chart of the Day – AUD/USD
After six months of trading in a sideways band the key support at 0.9200 appears to have broken down. After testing the key support throughout yesterday and closing bang on 0.9200, the support seems to have finally given way today and the Aussie dollar has finally succumbed to the strength of the US dollar. Tis breakdown gives us an implied range breakdown target of 0.8900. The RSI also now appears to be confirming the move, with a move back into the low 30s which is the lowest since January and suggests a change to a more negative momentum now. A close below 0.9200 is still yet to be seen (which would be absolute confirmation of the breakdown), but the 0.9200 old support now becomes new resistance. There is minor support around 0.9133, but the block of support does not appear until below 0.9100.
For several weeks any sign of consolidation has been seen as merely near term respite before another bout of selling pressure. With the RSI hitting record multi-year lows on Monday there has been a slight rebound which has posted the largest green candle (positive) on the chart since the beginning of August. The real question now is what can the bulls do to follow it up? Until there is a move above $1.2986 which was a reaction high from last Friday, there is still a sense that this will just be another consolidation that will be sold into. Already, on the hourly chart the momentum indicators are deteriorating again. There has been a sell signal on the hourly MACD lines and Stochastics, whilst the resistance around $1.2960 is also a barrier to the recovery. A strategy of selling into intraday rallies has been very successful in recent weeks, the bulls will need to do a lot more to convince there will be anything different this time around.
After such a huge sell-off on Monday, yesterday’s session was very much one of consolidation, characterised by a “doji” candlestick which denotes uncertainty with the prevailing trend. This move came with the RSI momentum at an extreme level of 12 which also suggests that the chances of a technical rally are increasingly likely. The problem is that a significant fundamental event is weighing on the chart and this could prevent Cable from rebounding near term. It may well be the case that there is now a form of consolidation that develops, although further news flow (regarding the prospects of Scottish independence) should be the driver, whilst Mark Carney will add to the mix with the Bank of England inflation report hearing today. The intraday chart shows support has formed at $1.6057 and a move above $1.6157 would actually complete a small base pattern and help a recovery. A move above the reaction high at $1.6186 would also be a positive signal.
Is there any stopping the rise of Dollar/Yen? At the moment, it seems as though there is a a consistent desire to stay long and push the rate into new multi-year highs. Ultimately there is little real resistance to point to until the high at 110.65. The bulls spent the day yesterday forging a new support at 106.00 with which to use as a floor, with 105.32 also an intraday breakout support. Sceptics may point to the RSI trading over 80 and being extreme, but this just means that any slight correction should be bought into as momentum remains incredibly strong still. There is little sign of any reversal setting in quite yet.
The gold price is not far off a test of the key June 2014 low at $1240.60 now as the downtrend channel continues to drag it lower. The momentum indicators are all in bearish configuration and suggest that any rebound remains a chance to sell. The first real band of resistance comes in between $1273/$1280 and there has been a slight pop to the upside today which could turn into the latest rebound that would give a selling opportunity. The outlook remains weak on gold on a technical basis at least until a breach of the $1296.50 reaction high.