Buoyed by strong housing data and a pick-up in the flash PMI, the bulls on Wall Street have remained in control as the S&P hit both an intraday high (1994.76) and closing all-time high at 1992.37. There has been little steer from a slightly mixed Asian session that had no key data announcements, whilst European markets have opened flat to slightly lower. The consolidation could well continue through the morning as markets are now looking towards today’s Jackson Hole speeches by Janet Yellen and Mario Draghi.
The hawkish noises coming out of the recent FOMC meeting minutes will add extra spice to what Yellen has to say. It would be surprising if she did anything other than hold a steady ship and that the Fed will maintain an accommodative monetary policy for a considerable period of time. Despite recent improvements in economic data, many on the FOMC believe there needs to be more improvement seen before the Fed can begin to hike rates. Yellen is likely to focus on factors such as the participation rate and lack of wage growth in order to retain this stance today. This may take a bit of steam out of the recent dollar rally, but ultimately the path towards tightening is certainly underway and the greenback should continue to strengthen. As for Draghi, he may use his speech to lay the ground work for potential further monetary easing measures such as quantitative easing.
The dollar has just had a little froth taken off the top in early trading today, although aside from a little strength in the Aussie and Kiwi, the likelihood is for consolidation to run through the morning in forex trading as focus on Jackson Hole takes over. There is little other data due today other than Canadian CPI which is released at 13:30BST and is forecast to increase slightly to 1.9% (from 1.8%).
Chart of the Day – EUR/JPY
The improvement in risk appetite in the past week is certainly showing through in the chart of Euro/Yen. The first real test of a potential recovery is now being seen. The August high at 138.00 came at the resistance of the old support from lows of May/June and this has been tested overnight. This resistance is an important level to overcome for the Euro recovery. A breach would also completed a five week base pattern that would imply a rebound to 139.70. The euro has already traded above the resistance of the falling 55 day moving average, which Euro/Yen has not been above since early May. Throughout the sell-off since April, rallies on the RSI have consistently fallen over between 50 to 55, but the RSI has also moved to the highest level since early April. This suggests that momentum is now beginning to improve. The recovery is not confirmed yet and ideally there would be a close above 138.00 to signal the bullish intent. A decline below the support band 137.10/137.40 would dampen the spirits of the bulls.
The way that Euro/Dollar is falling it would seem now as though any rally should be viewed as another chance to sell. Yesterday’s rebound (on positive German flash PMI data) has allowed a little bit of oversold momentum to unwind, but is likely to prove little more than a rally that will once again be sold into. The resistance starts to come in around $1.3300, but the old support of the two week consolidation around $1.3330 is the first real test for a rebound. Momentum indicators which had been showing bullish divergences have now aborted the recovery signals and this now suggests that selling into any rebound would seem to be the only real strategy. A dovish speech from Yellen today could give the euro a pop to the upside, but it is unlikely to go too far before the seller quickly pounce once again.
Despite a minor consolidation overnight, the selling pressure shows little real sign of abating as Cable moves to within striking distance of yet another support level. The April low at $1.6552 is the next on the list and is the final real support until the key March low at $1.6459 . Momentum indicators remain incredibly weak and the price has been accelerating away from the 5 week downtrend. A stretched near term momentum may mean that there is room for a near term bounce that would give another chance to sell. The RSI reached 25 yesterday (lowest since March 2013) and this does give scope for a rebound. The intraday chart shows initial resistance in at $1.6600 and then stronger resistance at $1.6650. A dovish Yellen speech could give the Cable bears another bounce to sell into this afternoon.
Hitting a peak at 103.96, Dollar/Yen spent much of yesterday in consolidation mode. However, coming after such a strong run higher may not be such a bad thing. The RSI remains well over 70 and despite the strong momentum, this puts it at risk of a near term correction. The initial support comes in around 103.60 and a breach would just complete a small top pattern that would imply a near term retreat back towards the next intraday support at 103.20. If Dollar/Yen can sustain a small consolidation or even correction then the dollar bulls will gain confidence and start to believe this is a key breakout that suggests that a move above 104.12 and subsequently towards 105.00 can be seen. Above 104.12 opens the upside.
A big sell-off yesterday started in the Asian session and continued throughout the day as the key support at $1280 was decisively breached. This is a big breakdown and puts the bears firmly now back in control. I also believe this is now the signals that suggests that the medium term outlook is suggesting a retest of the June low at $1240.60. Momentum indicators are increasingly weak, and there is further downside potential in both the RSI and the Stochastics. There has been s slight amount of support that has come in overnight, but the intraday chart shows that there is a resistance between $1280/$1287.50 now that should be the limit of any technical rebound. However in the absence of any flare up in geopolitical tensions (which has been the chief reason behind most rallies in recent months) I would expect the negative technical indicators to continue to drag gold lower in due course. There is initial support at $1258.85, but little real support now until the $1240.60 low.