It would appear as though the two fundamental factors that helped to improve market sentiment towards the end of last week are unravelling quickly. The ceasefire in Ukraine seems to not be fit for purpose as the two sides show little real sign of withdrawing heavy artillery from the front line. Once again it would appear that Putin is making the western leaders look rather silly as it seems that he is paying lip service to the latest attempts to drive a peaceful solution to the issue in eastern Ukraine. In Europe, the Greeks continue to stand their ground and refuse to allow the Eurogroup to dictate terms to them. In a much shorter meeting than last week, Greece refused the deal that was put before them and with the negotiations clearly tense the prospects of a solution are dwindling. This has all taken a negative impact on market sentiment.
With Wall Street closed for Presidents Day the Asian markets have been mixed overnight. Another round of disappointing Chinese housing data has again resulted in a lift of the Shanghai index. It seems as though the “bad news is good” theme continues with Chinese data with the prospect of further easing of monetary policy constantly being aired. The Nikkei 225 was 0.1% lower. European equity markets are weaker in early trading.
In forex trading, the major pairs are reasonably flat, although the early gains in the oil price and the prospect of Chinese easing has created some support for the likes of the Aussie, Kiwi and Canadian Loonie.
Traders will be on the lookout for UK CPI this morning which could have an impact on sterling. With the Bank of England recently suggesting that the UK could slip into deflation in the coming months, the CPI number is expected to continue to slide today to +0.3% (from +0.5% last month). The reading last month was well below expectations and if this happens again it could be a drag on sterling. The German ZEW Economic Sentiment will be impacting on the euro at 1000GMT. After having fallen throughout 2014, for the past 3 months the ZEW has not only risen but also beaten expectations. The forecast is for 55.4 (up from 48.4 last month). The only other entry on the calendar of any note is that at 1700GMT the SNB’s Jordan is set to speak ad this could impact on the Swissy.
If you are going to play a correction on the dollar, it would seem that the Kiwi is one major to play. The Kiwi is by some way the best performing major currency in February and continues to rebound. I spoke last week about the key near term resistance at 0.7440 holding back a recovery, well, this barrier has now been breached and the rebound continues. In fact, if you take the consolidation under 0.7440 as a bullish wedge pattern then there is an upside target that implies 0.7595. So it seems as though the Kiwi is in the least, rallying back towards the key old support which is now the overhead resistance around 0.7600. The daily momentum indicators suggest the rebound is strong, with the Stochastics now into positive configuration, the RSI climbing strongly and MACD lines improving. Quite how far this rally can get before the medium/long term bears regain control remains to be seen however, for now this is a rally that should be backed.
Yesterday was all about the Eurogroup meeting and the euro traders reacted with a fair degree of caution. The daily trading range was not huge at just over 90 pips but the market looked to be ready to put a little bit more selling pressure on the euro. There has been no significant damage done yet to the consolidation with the support at $1.1260 still intact, but the prospects of a recovery of any note still look slim. Volume was light (the smallest volume since 25th August) with the US on public holiday too, so this may mean that when the US comes back online today there could be further selling pressure. However, for now the intraday hourly chart suggests the outlook is still reasonably neutral with support formed at $1.1317 still well above the key near/medium term low of $1.1260.
The outlook for the recovery has not been damaged too badly from yesterday’s decline, however despite this the bulls did not have a great day. A bearish outside day (bearish engulfing) has admittedly come after a very small trading range on Friday has not improved the chart, but on reflection with such light volume the importance of the daily candle is somewhat reduced. So we look more towards today’s candle with the US back and trading again, to give us more direction. So far the market is forming a small rebound. The daily chart shows the recovery is still on track and if yesterday’s low is anything to go by at $1.5335, the near term support band $1.5300/$1.5350 is still to be looked upon as an area that the bulls can work with. The rally high is at $1.5440 but the technicals still suggest a move towards a test of $1.5485 in due course. Key support remains at $1.5200.
I discussed yesterday the need for the bulls to hold this correction up in the support band 118.00/118.50 to sustain the medium term psositive outlook and so far the y have. The daily chart shows The selling pressure beginning to settle down in the past 24 hours and this has come with the RSI around 50, the MACD lines neutral and the Stochastics still falling but far less aggressively. The intraday hourly chart is far more benign and interestingly the selling pressure since last Thursday is abating. This support band 118.00/118.50 remains an important pivot level and if the price started to trade with a 117 handle then this would be a significant signal. For now though we must await the next direction. Near term resistance comes in at 119.20.
I remain mindful of the continuation of the four week downtrend and bearish correction that I believe is beginning to dominate this chart. The sequence of lower highs and lower lows continues and despite posting three days of gains I am worried that the bears may once more be ready to take control. The three consecutive up days have not been strong candles with two of the three days showing closing prices in the bottom half of the candle. The intraday hourly chart shows the rebound has taken gold back into a resistance band $1230/$1245 and may well now have posted a near term high at $1236.50. Hourly momentum indicators have rolled over and if the minor reaction low at $1222.70 is now breached then the outlook could be once more looking bearish. For now the bulls will be hanging on to their rebound argument, but the forces of the 4 week downtrend are still sizeable. I expect that having broken the support around $1222 last week the pressure will remain to the downside and there will be a retest of $1216.50. Key overhead resistance is at $1245 and $1251.90 with the downtrend currently falling at around $1247.
Despite the Presidents Day lack of volatility, WTI is straining now to follow Brent crude oil and breakout to a 6 week high. The resistance at $54.24 remains a barrier but the way the daily chart is shaping up, it could just be a matter of time before we see the upside move. The momentum indicators continue to improve, whilst the downtrend since September is also being broken. The 21 day moving average is the basis of support at $49.10 and although this is over 7% away from the price any dips in WTI look to be a near term buying opportunity. A breach of $54.24 would complete a bullish wedge pattern which would imply upside towards $58, whilst a test of $59.00 resistance would also be on.