The strength of the dollar in the past few days has had a sizable impact and is changing the outlook on several key markets. However, there has been a muted reaction to the meeting minutes from the Federal Reserve. The breaks have been put on the recent dollar recovery, whilst Treasury yields remain elevated and equity markets have also consolidated near term. There was not much we did not already know in the minutes, with the weak economic data classed as “transitory” whilst the committee has suggested that a June rate hike is unlikely. The economic data has remained fairly disappointing in the wake of the Fed meeting and the minutes just confirm the shift in outlook for a rate hike into the latter stages of the year. Attention will turn towards Janet Yellen who gives a speech on Friday, with the market looking for any further clues.
Wall Street closed off by 0.1%, whilst Asian markets have also been mixed overnight with the Nikkei up just 0.1% despite the weakness in the yen. Interestingly, one market that has been strong is the China Shanghai index which was higher after another disappointing reading on the China flash Manufacturing PMI. The data missed estimates at 49.1 (49.3 expected) and this third straight month of contraction means that “bad news is good” as it could induce further monetary stimulus. The European markets are slightly lower in early trade.
After all the Eurozone flash PMIs, traders will be looking towards the UK Retail Sales data at 0930BST which is expected to come in at 0.4%. The US weekly jobless claims are expected to show a slight increase to 271,000 from last week’s dip to 264,000. The US existing home sales at 1500BST is expected to show an improvement to 5.23m (from 5.19m).
Chart of the Day – EUR/JPY
I have been noting that the outlook on EUR/USD and EUR/JPY has been fairly well correlated in recent weeks (as Dollar/Yen has been broadly flat), however this could be in the process of changing now. The weakness in the euro in the past few days has done significant damage to the recovery outlook, but with the yen also weakening, the impact on EUR/JPY has not been as severe. However there has still been two strong bearish candles that have pulled the reins on the bulls, furthermore, the daily momentum indicators are now suggesting a correction, with the RSI at a 3 week low, the MACD lines crossing negatively and the Stochastics falling sharply. This would suggest to me that the supports at 133.43 and probably too the key low at 133.06 could come under pressure now. The “doji” candle yesterday has done little to improve the outlook and I see this as a likely respite before further downside pressure now. Trading under an old pivot level around 135.25 also should add to the downside pressure. I see this consolidation as being a chance to sell.
Yesterday’s move lower on the euro continued the sell-off which I now believe has changed the outlook. The close below the previous key reaction low at $1.1130 is an important development as it now confirms the breakdown of a key marker post the bulls had left in the recovery. With daily momentum indicators deteriorating, (MACD bearish cross and Stochastics falling sharply) I would now be looking at any rallies to be taken as opportunities to sell. It is interesting though that the intraday dip to the next key support at $1.1065 basically held (the intraday low was at $1.1061), however I expect this to come under further pressure. I see this early bounce today as an unwinding move, with resistance in place around $1.1150 and up towards an old pivot level around $1.1200. The intraday hourly chart shows the hourly momentum indicators such as RSI and MACD unwinding back to neutral and this should help to renew downside potential. I anticipate this rally being fairly short-lived and that the low at $1.1065 coming under further pressure once more. Below $1.1065 opens $1.1035, but if that is breached the old $1.0900 pivot level comes back into play.
Along with many of the other majors pairs, Cable has had some significant downside pressure in recent days, but it was interesting by the fact that it formed support at $1.5445 on Tuesday, a low that remains intact. Furthermore, there has still not been a closing low below the key support band $1.5500/$1.5550. This suggests to me that the bulls are still hanging on. The uptrend in place since the April low remains intact and today comes in around $1.5490. The daily momentum indicators are also actually still fairly positive, simply suggesting this could still just be a bull correction. The 21 day moving average (currently $1.5413) is a good gauge for the outlook and it continue to rise and shadow the advance. The support formed above $1.5500 is continuing today and until this is breached on a closing basis I am going to stay positive on Cable. The intraday hourly chart shows a higher low in place at $1.5470 above the key low at $1.5445. Hourly MACD and RSI are beginning to roll over which would suggest the bulls will have a fight on their hands today.
Having traded sideways for so long without any real sign of trending, the traction that the dollar has finally got in the past few days and has now posted a bullish run of three strong candles in a row. However can this run higher last? The breach and close above the key March high at 120.85 has now re-opened the old highs again at 122.02. The move is also now beginning to improve the daily momentum indicators with the RSI now showing far more positive configuration above 60 and the MACD also showing signs of life too. However, the hourly momentum indicators show that with this near term correction seen early today could provide an opportunity to buy. Look for signs of support around the key breakout level at 120.85 the initial level to watch for, whilst the hourly chart shows 120.70 as a reaction low within the recent run higher. There is further support back at 120.50. A move below 120.27 would suggest the bulls have lost control.
The failure of gold to take the breakout above $1224 with any conviction was a concern and the large red bearish candle on Tuesday tells me it is still a range play. The lack of conviction in the near term outlook has also been added to by a rather uncertain looking “spinning top” candle yesterday. Coming after such a decisive candle, this consolidation candle just adds to the uncertainty now in the near term outlook. The initial resistance around $1211/$1215 is holding back the bulls now and I see this as more of a continuation of the trading range that had been in play between $1178/$1224 which has never really been decisively breached. With the close below $1210.80 I now expect further retracement in the range back towards the $1200 pivot area which broadly now marks the mid-range point.
WTI has engaged the pullback to the neckline at $58.30 and this still looks to be a chance to sell. The top which completed below $58.30 implies $54.00 and this looks to be all part of the rolling over of the price in the past few weeks. The daily momentum indicators continue to deteriorate and look corrective, whilst it is also interesting that the 21 day moving average having been breached to the downside. The pullback rally is advancing well near term, through the neckline resistance at $58.30 and is now looking to test the $59.50 resistance. The corrective outlook will remain intact whilst the price trades below the resistance of the pivot level that has been in place throughout May at $59.90. The hourly chart shows the overstretched near term momentum has now been unwound and this suggests downside potential has been renewed. Tuesday’s low at $57.09 is the initial support.