Investor sentiment has taken a double shot in the arm overnight as first a dovish set of Fed meeting minutes was followed up by the improved HSBC China manufacturing PMI data. Wall Street closed just under a percent higher and left Asian markets also to trade positively. The Nikkei 225 was also helped by the weakening of the yen which resulted in a gain of over 2% in the equity market. European markets have started trading in positive fashion also today. Despite the dovish tone from the Fed, the dollar has made some gains in forex trading this morning, with the only notable exception being the Aussie dollar which has been strong since the Chinese PMI data.
The FOMC meeting minutes last night showed that the committee were beginning to discuss the process of “normalizing” or tightening interest rates but stressed that this did not mean that there would be a rate hike imminently. This continued dovish tone helped to boost sentiment, which was further improved when the flash estimate for the HSBC China manufacturing PMI jumped to a five month high. A reading of 49.7 was significantly better than the April reading of 48.1 and gives the market the hope that the contraction in Chinese growth could be bottoming.
Attention now turns to the Eurozone PMIs which are announced early this morning up to 09:00BST. Hopes will be that the forward looking data will be able to improve the outlook for the European economy, with sentiment being hit following the weaker GDP numbers last week. Forecast suggest that the manufacturing PMIs for Germany, France and the Eurozone as a whole will be broadly flat on the April data. There is also the second reading of UK Q1 GDP at 09:30BST which is expected to remain at the original reading of +0.8%. In the US, traders will be watching for the weekly jobless numbers at 13:30BST, expected to climb to 310k after last week’s 297k.
Chart of the Day – EUR/GBP
For the past few days the Euro has consolidated as is has clung on to the support around £0.8150, but yesterday finally saw the sharp break lower. This has left the Euro trading at a 17 month low against Sterling, with an extremely bearish outlook. Moving averages are all falling in bearish sequence and momentum indicators are extremely weak. The only real consolation that could be taken is that the RSI is below 30 and this may induce a near term technical rally. However, the falling 21 day moving average at £0.8180 has been a very good gauge of resistance over the past two months and should be the limit to any recovery. There is also the old support, now turned resistance at £0.8150 overhead. The intraday hourly chart gives little solace for the Euro bulls either, showing a band of resistance comes in between £0.8130/£0.8160. Rallies on Euro/Sterling are certainly chances to sell. The next lows on the daily chart to be aware of are £0.8083 and £0.8030 back from early 2013.
Despite the dovish suggestion in the Fed meeting minutes that US interest rates would not be rising any time soon, the Euro has still failed to make any real gains against the dollar and has drifted backwards in Asian trading once more. Yesterday saw the Euro hit a 3 month low at $1.3634 as the selling pressure continued. The technical outlook on a medium to longer term basis is now coming under increasing strain and a large top pattern appears to be completing having fallen below the April low at $1.3671. For confirmation, for such a large pattern I would prefer to see a two day close below the support which has not been seen yet. The Eurozone flash PMIs are announced this morning and could induce a rally. However there is resistance at $1.3723 (yesterday’s high) and $1.3734 to hold back a recovery. Expect any rally to be sold into. The major resistance is at $1.3774.
With five consecutive days of gains the outlook for Sterling has now changed from corrective back to bullish once more. The intraday hourly chart shows that a series of higher lows are now in place over the past few days and corrections are being bought into. Yesterday there were two key technical positive technical events, the break above the reaction lower high within the sell off at $1.6874 and the correction which found support at $1.6855 which was around the old resistance of the highs of 19th/20th May. The dovish Fed meeting minutes last night certainly gave Cable a boost however the bulls are now looking to build from the support of the 89 hour moving average which is now rising at $1.6841. The bulls will look for a retest of $1.6920 above which would re-open $1.6975. There is support at $1.6832 but the key level is at $1.6800.
Having posted a low at 100.80 which was just above the crucial medium term support at 100.74, Dollar/Yen has significantly rallied. However there is little reason to believe this is anything more than another chance to sell at this stage. On the daily chart, momentum indicators remain in bearish configuration and are merely unwinding the outlook which should help to renew downside potential. The underside of the old trend support is now a basis of resistance, currently around 101.70, whilst the underside of all the moving averages are also barriers to gains between 101.93 and 102.40. The intraday hourly chart shows a rally that is now into the resistance band between 101.70/102.00 and this should be a chance to sell again. Furthermore the hourly RSI is up towards overbought levels and may now begin to run out of steam. A breach of the rally high at 102.36 would be needed to abort the corrective outlook and continued pressure on the 100.74 low.
Yesterday was a second straight day where gold traded below the lower support of the converging trendlines, however this is more a case of tedious sideways trading rather than a bearish breakdown. There is an argument though that the Stochastics have moved to a three week low which could be a sign of downside pressure growing. There is little else to go on for the daily chart and that is even reflected on the hourly intraday chart. Flat moving averages and benign momentum indicators suggest the gold price continues to consolidate. However, having previously been seeing $1290 as a basis of support for the past week, the last two days of breaches have been more considered, with yesterday’s low at $1283 as gold gets closer to a test of the first significant low in the range at $1279.60. A failure to move above a two day high at $1296.60 today would see the bearish arguments beginning to weigh.