With geopolitical tensions moved to the backburner yesterday, Wall Street got back to doing what it knows best, making solid gains. Despite flat retail sales, the S&P climbed by around 0.7%, although it should also be remembered that any data which is solid but not spectacular (due to the perception of strong data encouraging Fed rate tightening) tends to be seen as a positive now. With a lack of destabilising factors overnight, Asian markets were positive also, with similar gains on the Nikkei 225, whilst the European indices are mildly negative in early trading.
It should be pointed out though that whilst events are somewhat calmer in Ukraine currently, they have a tendency to quickly escalate, and with Ukraine denying the Russian convoy to enter over the border, there could be something bubbling under the surface which may rock investor confidence once more.
Again, this morning there is a slight dollar positive bias in forex trading, without any really strong moves being seen yet, although notably, the euro has held up in spite of the weaker GDP data (see below) in the past hour. The only exception to this dollar strength is the Kiwi dollar which is showing some level of fight once more.
Traders’ focus is dominated today by the Eurozone. French and German GDP numbers have already been released and do not bode especially well for the Eurozone. French GDP was down 0.01% (+0.1% expected), whilst German GDP fell 0.2% having been expected as flat. There must now be a serious risk of Eurozone wide GDP contracting in Q2 now. The figure out at 10:00BST which is expected to show the Eurozone as growing by 0.1% in the second quarter. Also at the same time is the final Eurozone inflation number. The flash data saw inflation dip to 0.4% (from 0.5% and the expectation is that this number will stay the same at 0.4%, although with disinflationary pressures through the Eurozone there must be a downside risk to this number. Other than that the US weekly jobless claims at 13:30BST which are expected to remain under 300k for the week with only a slight increase from last week’s 289k up to 295k.
Chart of the Day – EUR/GBP
The recovery for Euro/Sterling continues to develop. It has not been straight forward so far, but there does seem to be a recovery none the less. I spoke last week about the base pattern which completed on a move above £0.7985. With the rate again posting a higher low yesterday at £0.7920 (and above the previous higher low at £0.7907), the base pattern remains intact. The 21 day moving average, currently at £0.7937, is certainly becoming a basis of support (having been a resistance throughout the four month sell-off), whilst yesterday’s close at a six week high bolsters the recovery case. With the downtrend also now broken, expect the rate to make gains now. It may not be a straight line recovery and another retreat to the 21 day ma should not be ruled out but there is certainly progress now being made. The next resistance is £.8034 with the pattern implying £0.8115. A breach of the £0.7907 low would defer the recovery.
Another choppy day yesterday for the euro. An initially positive move was retraced and the consolidation now continues. The early trading today has a slight negative slant (and with the disappointing GDP data for Germany, France and Italy this could be a theme of the morning). However talk of a recovery continues as the key near term support at $1.3330 remains intact. Momentum indicators have slightly drifted back again, but the bullish divergences remain intact on RI and Stochastics. Although there have been a number of slightly negative candles recently, there are a series of long tails in the recent consolidation which suggests an intraday rejection of the selling pressure. The longer this continues the better the prospects of a recovery rally. The euro needs to push above $1.3440 to suggest the rally is progressing. A close below $1.3330 would open the key November low at $1.3295.
What a day for sterling yesterday. The initial signs were good, looking to break through the downtrend, but then fundamental events took over as firstly UK employment then the Bank of England Quarterly Inflation Report resulted in a massive sell-off. In fact it was the biggest downside move since 3rd Feb (which saw Cable drop 158 pips from high to low and lose 140 pips on the day close). Cable is now breaking through the key lows from May at $1.6690 and the outlook is under significant pressure once more to the downside. The next real support does not come in until $1.6550 so there is plenty of room for the further declines now the May support has been breached. The RSI is oversold once again but momentum is now so bearish that it is difficult to use this as a positive. Selling into strength seems to be the way to go once more. The intraday chart shows little resistance until $1.6754.
After all the choppy trading of the past couple of weeks, Dollar/Yen has developed a fairy solid and consistent run higher as it continues to push towards a retest of the resistance around 103.00. The barrier at 102.30 was overcome fairly easily yesterday and this should now act as a basis of support. Momentum indicators are beginning to look more positive and with the shorter moving averages (21, 55, 89 day moving averages) all converging to turn up in bullish sequence the outlook is improving. We can now begin to have thoughts once again of a successful breakout. Firstly we need a close above 102.80 and then an intraday move above 103.10 (preferably with a close above). The intraday chart now shows good support in the range 102.00/102.30 and any near term dip into the band should be seen as a chance to buy. The continuation of a 4 month trading range makes it riskier to buy in the middle of the band, but with the improving technicals, the chances of an upside break are improving.
Gold has still got a slight bullish bias although the price has moved into a consolidation phase in the past few days. However, trading above the moving averages is a positive, whilst momentum indicators have the slightest hint of being positive and the price is trading above the $1300 psychological support which is also encouraging. However there is a lack of conviction to the trading which is a concern for the bulls. Despite trading above the $1305 intraday support, there has been little appetite to push the price through resistance at $1316.60 and more importantly $1322.60. Perhaps it is the lack of geopolitical drivers over the past few days which have contributed to the consolidation. If this is the case then picking the next direction becomes an incredibly difficult thing to do. The best thing to do therefore is stand aside to see a break of either $1305 or $1322.60 and go with the break.