11/06/2014: Caution taking over once more as the dollar consolidates its upside break

Market Overview

A mixed and uncertain trading session on light volume saw Wall Street basically flat on the day. This rather uninspiring day in Asia with markets generally lower, although the Nikkei managed to buck the trend slightly as it edged to slight gains amid news that the country’s largest pension fund was set to increase its equity investments. However this sense of general caution in the markets is filtering through to European trading today with equity markets slightly lower.

There are no really significant moves on the major currencies in forex trading today. A slightly weaker euro is helping to sustain the strong break higher on the Dollar Index from yesterday. The Kiwi dollar is trading stronger ahead of the prospect of a rate hike to 3.25% in tonight’s Reserve Bank of New Zealand monetary policy decision due at 22:00BST.

There are a couple of issues which are also holding back markets today. The World Bank has downgraded its global growth forecast for 2014 from 3.2% to 2.8%, citing concerns over geopolitics in Ukraine and China’s slowing growth. Additionally, news that militants have taken over the city of Mosul in Iraq could add to investor risk concerns today.

Sterling traders will certainly be watching out for the UK unemployment data that is due to be released at 09:30BST. Unemployment has been on a strongly improving trend in recent months and is expected to continue this to bring the 3 month ILO rate down to 6.7% (from 6.8%) and for jobless claims to fall by 25,000.

Chart of the Day – FTSE 100

Some fight-back from the bulls into the afternoon yesterday has kept alive the possibility of a breakout. A “dragonfly doji” candlestick (where the market trades lower for almost all of the day only to rally back to close basically at the open) has left FTSE 100 just 5 points off its 14 year closing high at 6878. A slightly weaker open this morning is not helping its cause initially today but the bulls will still have hope of a breakout. Momentum indicators remains in positive medium term configuration despite the lack of drive to breakout over the past month. Could this be the day we see a solid breakout? The intraday indicators are all in positive configuration and the index is set up nicely for it. The recent key high is at 6895, while the all-time high on the FTSE 100 is 6950. Support for a near term correction comes at yesterday’s low at 6836.

FTSE   11062014

EUR/USD

With another large red candlestick yesterday the bears remain in control. Daily momentum studies are all in negative configuration and in the Asian session the posting of another lower daily low suggests a continuation of the trend down towards a test of the key low at $1.3502. The intraday chart does not give the bulls much hope either, showing a stepped decline over the past two days and hourly momentum indicators heavily in bearish configuration. Selling any rallies seems to be the best course of action with a test of $1.3502 on the cards. Key supports on the daily chart come in at $1.3475. Intraday resistance comes in at $1.3557 and $1.3581.

EURUSD   11062014

GBP/USD

The emphasis placed on the burgeoning 5 week downtrend continues as a second consecutive daily lower high is posted to bolster the resistance at $1.6844 as an important near to medium term turning point. Daily momentum indicators have all turned lower again and remain in corrective configuration. It looks as though the 89 day moving average (currently $1.6719) will come under scrutiny again today, being the key limit of the corrections over the past few months. The intraday hourly chart showed another worrying development for the bulls yesterday as the key support of the $1.6780 neckline has been breached and now becomes resistance for any potential technical rally today. Hourly momentum indicators are in bearish configuration and with the hourly moving averages rolling over, this suggest that pressure is growing once more to the upside. Expect a retest of the support around $1.6700 to be seen. It would need a break and hold above $1.6780 and probably a breach of the reaction high at $1.6817 to change the outlook back towards positive once more.

GBPUSD   11062014

USD/JPY

The bulls will be disappointed that a continued consolidation overnight has now broken the formation of the three week recovery uptrend. This sideways period of trading is also exerting pressure on the reaction low at 102.10 and the near term pivot level at 102.00. The moving averages which had also started to turn higher are now flattening off once more as the outlook begins to turn more neutral again. Daily momentum indicators have lost upside impetus as well. The hourly intraday chart also reflects this increasingly neutral stance as moving averages converge and hourly momentum calms down. If anything there is a slight negative bias with the rate trading below the hourly moving averages and the MACD momentum lines below zero. The bulls will remain confident above 102.00, whilst the bears will point to a slightly lower high at 102.65. A difficult one to call.

USDJPY   11062014

Gold

The recovery bulls certainly won the day yesterday as gold pushed sharply higher to now build consolidation around $1260. The unwinding momentum indicators reflect this recovery rally, but also that, at this stage, there is little to suggest this is anything more than a bear rally yet. The potential resistance of the moving averages is now approaching, as is the resistance of the former key low at $1268.24. The intraday hourly chart shows that this is the second time in this nascent recovery that a period of consolidation has resulted in a push higher to find support around the old resistance. I am still of the opinion that selling into strength is the most viable way to play gold at the moment but this recovery may have to play out first. A break and hold back below $1257.50 support would begin to question how long the recovery will last for before the sellers gain control.

Gold   11062014

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