As we move into the new week there are several key conflicting events that are driving sentiment. UK assets have been boosted by the return of a majority Conservative government (probably the most market friendly result). Friday’s Non-farm Payrolls was a mixed bag (in line payrolls, last month revised down, dropping unemployment but also languishing earnings growth) which has failed to ignite much direction to markets. However over the weekend, China cut its interest rate by a further 25 basis points to 5.1%, a third cut in six months, which has boosted sentiment in Asia. However this sentiment has been tempered in the European session with further discussions in the Eurogroup of Eurozone finance ministers over Greece’s economic reform proposals a day before the due payment of around €745m to the IMF.
The payrolls data suggests that an imminent rate hike is not really feasible by the Fed and so Wall Street reacted strongly on Friday and the S&P 500 jumped by 1.4%. Asian markets were also buoyed by the Chinese rate cut, with the Japanese Nikkei 225 1.3% higher. European markets are however more muted in their response, instead looking towards caution that continues to come with the uncertainty of how events will play out over Greece’s debt repayments.
In forex trading, the US dollar is stronger across the board, with the euro a notable underperformer. However the biggest faller on the day is the Kiwi, which has been hit overnight by speculation of further rate cuts.
Other than the Eurogroup meeting today, forex traders will be looking at the Bank of England’s monetary policy decision at 1200BST. As per usual there is nothing interesting expected from the BoE, with the Quarterly Inflation Report out this week too which will contain detail of key forecasts and projections.
There is a consolidation that has set in on Dollar/Loonie in the past couple of weeks. This has interestingly come around the support of the uptrend that has been in place since September (at very similar uptrend to that of the Dollar Index in fact). This would suggest that the dollar bulls are fighting to maintain the medium to longer term control. Momentum indicators are now reflecting the consolidation too and the moves on RSI and Stochastics look to be reflective of a move neutral outlook now. The interesting chart event will be the occurrence of one of two key levels being breached. As can be seen on the intraday hourly chart the levels to watch for are either the support at 1.1940 being breached (dollar bulls losing control) or a decisive break back above 1.2200 which has become a key near term resistance. The hourly moving averages are fairly neutral and momentum indicators are reflective of the fact that the resistance is a closer test.
The deterioration in the euro over the past few sessions is beginning to eat significantly into the bull argument. As the price continues to drift further lower the key support at $1.1065 comes ever closer to being tested. This is the level that marks the difference between a bull recovery and a bearish downside break. The daily momentum indicators are beginning to become a bit of a concern now with the RSI already falling to a 10 day low, and a sell signal threatening on the Stochastics. The intraday chart shows the hourly moving averages beginning to all turn lower and the weakness that has been seen during the Asian session today is putting real pressure on the euro now. Friday’s initial reaction high on the payrolls data which has left a high at $1.1288 is now the resistance. A break below $1.1065 instantly puts pressure on the key breakout support $1.1035/$1.1050.
Sterling has been driven higher by the UK election result, but as yet there has not been a breakout above $1.5550 resistance. This is the level at which the Cable bulls would be really gaining control as it would complete a 4 month base pattern. Although the base has not been completed it is noticeable that sterling is holding up much better than the euro today and there is still the element of support intraday. There has been little real decline since the announcement of Friday’s payrolls data and the near term outlook on the hourly chart is far more neutral. In fact this minor decline in the Asian session this morning could easily be a chance to buy. The spike low on Friday (on the payrolls data) sits at $1.5353 and this is the initial support, whilst there is further support back around $1.5300.
The neutral medium to longer term outlook remain firmly intact a it has down now for several weeks. The momentum indicators are very much indicative of a range play, although latterly with the move above the key pivot within the range at 119.40, there is a very slight positive tilt to the outlook. However, I would caution in the fact that the pair is now in the process of looking to post a third green daily candle and it is very rare for this to be seen in recent weeks without some sort of retracement subsequently being seen. I spoke on Friday about the fact that despite the 119.40 pivot not being perfect that we should not discount it, and this has been vindicated as there was a spike low which turned around just above the pivot once more. The bulls are looking towards a retest of the Non-farm Payrolls reaction high at 120.23 but this resistance overhead could provide too much once more as there are key levels at 120.50 and 120.85. Once more it is possible to continue to use the hourly RSI overbought/oversold signals to play the range.
The benign market conditions continue as the rang play above $1170 and below $1224 continues. There has been a tightening of the range in the past week or so with the price settling in the bottom portion of the band, under the resistance now at $1200. Even the Non-farm Payrolls data on Friday failed to inject life into the price. Both daily and hourly momentum indicators are increasingly neutral and in search of direction. Thursday’s low at $1178.60 is the initial support now but a catalyst is increasingly needed.
The daily chart of WTI shows that the uptrend in place since the low around $42 in mid Mach remains intact despite a significant test in the past couple of days. This minor bout of corrective pressure has tested the key near term support at $58.30 but the level has held firm (a brief intraday breach could not be sustained). The pressure remains on but for now the bulls are hanging on. A decisive breach of $58.30 would change this outlook and would re-open the support around $56. Interestingly the hourly RSI continues to find support around the 30 mark so if this started to be breached then this could be a telling indicator of further correction. Due to the more accurate time scale, the hourly chart shows that the uptrend is already being breached and for this reason I am turning far more cautious on WTI for the time being, although the bulls will be buoyed by how the support has been holding. It would need a breach back above $59.90 to re-engage the bulls otherwise this could turn into a top pattern.