Markets are taking a pause for breath on Monday morning after the monetary policy fuelled strong moves that closed last week. There is a light economic calendar today and uncertainty over talks between the US and Iran, whilst also with a crucial OPEC meeting on Thursday, traders appear reluctant to commit themselves. With Wall Street just losing a bit of headway into the close this has just taken the steam out of the rise and European markets have reacted accordingly. Asian markets though have all reacted strongly higher to play catch up after the China rate cut came after the close on Friday. However, there is a slight air of profit taking in the early trading exchanges of European trading.
Forex trading looks to be cautious today with little real moves anywhere, although the Aussie and Kiwi dollars have managed to maintain some of the momentum built up after the China rate cut. The economic calendar may look a touch light but there are still several factors that need to be watched. Probably the most important is the German Ifo Business Climate which having been under ressure through 2014 gives further insight into economic activity in the Eurozone’s largest economy. It may not be too much but Ian McCafferty (a hawk on the Bank of England’s policy committee) speaks today. Then this afternoon, data firm Markit releases its flash PMI composite for the US at 14:45GMT. Finally, right at the end at 23:50GMT the BoJ releases the minutes of its latest meeting.
Chart of the Day – USD/CAD
The Canadian loonie has managed to claw back some lost ground on the US dollar in the past few days and the move is now to an extent at which the rate is approaching a key crossroads. The momentum indicators on Dollar/Loonie have dipped back towards the limit of where the bulls can consider themselves in control since a four month uptrend began in mid-July. The RSI is at 45 around where the key lows have been seen, whilst the Stochastics are seeing a similar move. The rising 55 day moving average has been a good gauge for the uptrend (now 1.1200), whilst 1.1200 has been seen as a pivot level in the past two months. The intraday hourly chart shows that the price has begun to stabilise between 1.1190/1.1220. The trend I your friend for now but all means that the bulls are under pressure and if there is further downside in USD/CAD then the bears will gain the upper hand. The key reaction low at 1.1120 is now crucial.
The euro has regained a little bit of poise early on Monday morning after such a Mario Draghi induced significant decline that turned what was seemingly going to be a second straight positive week into a negative one. This move has reiterated the status of the three month downtrend, whilst technical studies have taken a turn for the worse once more. The strategy of selling into strength remains viable and the bears will be eying any move that attempts to retrace some of Friday’s decline as a chance to sell. The 40 pip band between $1.2400 and $1.2440 is going to be seen as an initial opportunity as the oversold intraday hourly momentum indicators quickly unwind. The move on Friday suggests that there will be a retest of the support at $1.2357 and if there is a subsequent breach further downside would result.
Cable may have been able to deter some of the worst selling pressure that hit the euro on Friday but that does not mean that the bears are not still a significant force. The week of consolidation just seen has given oversold momentum indicators (RSI and Stochastics) a chance to unwind slightly, however the ongoing configuration remains extremely negative and suggest that any bout of strength is short-lived. The resistance that has now been found twice at $1.5736 is clearly now key near/medium term. The slight rebound that has been seen early on Monday morning is once more likely to be seen as a chance to sell with a series of lower highs over the past few days ($1.5692 and $1.5713 have been left). Expect further pressure on $1.5588 in due course, below which would re-open $1.5425.
With a negative day on Friday, it could be argued that we have just seen the first two consecutive disappointing days on Dollar/Yen since mid-October. However it is still a little early for any hopeful sellers to get excited, out there because the trend remains good and strong whilst the sequence of higher lows also continues. Having said that, the support between 117.00/117.33 needs to hold as the momentum indicators on the daily chart have just begun to slightly tail off. This is nothing drastic yet but it certainly does reflect a slight slowdown of the recent buying pressure. In the last day or so the intraday chart shows that resistance around 118.37 has built up and it would signal a return of the bulls if this level were to be breached.
The bulls will be gaining in confidence following the support that has formed at $1175.50. This suggests that one more the pivot level around $1180 has proved to be a useful turning point. This has allowed the momentum indicators to regain the upside impetus and continue to suggest gains in the near to medium term. The continuation of a sequence of higher lows and also higher highs will also encourage. The next step will be to consistently hold above the psychological level at $1200 to suggest the bulls are in control. The next resistance above Friday’s high at $1207.70 comes in at $1221.70. A retreat to lose $1175.50 would see the bulls lose control now.
Volatility returned with a bang on Friday as the People’s Bank of China surprised the market with a rate cut. This sent the oil prices sharply higher, but whilst the Brent Crude price stayed largely higher, the spike on WTI was largely retraced from the downtrend channel to leave the bulls in an uncertain position. A weak candlestick pattern suggests a rejection of the move and that the bulls have failed to gain control. Interestingly this rejection came right at the top of a downtrend channel that has been in place since mid-October. Momentum indicators have picked up but still suggest that the recent gains should still be seen as a chance to sell. There is now a key high I place at $77.83. The big caveat with trading this week will be the increased volatility as the OPEC meeting on Thursday approaches.