Asian markets traded mixed to negative after a disappointing handover strong Wall Street on Friday. The situation in Ukraine seems to be progressively worsening and investors are opting to shift positioning towards the more safer haven assets. The strengthening seen in the Japanese yen over the past few days is taking its toll on the Nikkei 225 which remains highly correlated with the movements in Dollar/Yen. European trading has though begun the day fairly positively. Forex trading is is also quite mixed, although earlier dollar strength is now being reversed, especially against sterling. The gold price is also unwinding some earlier weakness as the dollar retreats slightly.
The tensions in Ukraine have once more taken over as the primary concern for investors. Pro-Russian separatists taking European military observers hostage suggests the conflict has entered a new phase and is sure to induce further sanctions on Russia in the coming days. It will be interesting though to watch the VIX index of volatility as if it begins to spike higher once more this would be bad for equities again. Friday saw a 5% jump in volatility and a loss of 0.8% on the S&P 500.
Away from Ukraine there is not much to keep traders distracted, with only really US Pending Home Sales being released at 15:00BST with a slight improvement to 95.3 expected.
Chart of the Day – FTSE 100
The early mixed open may be masking the possibility of a bigger correction in store for the FTSE 100. Having failed to breach the 61.8% Fibonacci retracement level of the 6866/6492 correction, on Friday we saw a top pattern completed on the intraday move below 6661 support. Although the move was instantly unwound by a late rally and the early gains of today, however the prospect of a correction is still high, with an implied target of a retreat back towards 6600 possible. Intraday momentum indicators are corrective and there is little real support until 6600. Intraday traders would certainly be looking at a breach of Friday’s lat reaction low at 6657 to act as a sell trigger. A move above Thursday’s high at 6725 would be a bullish upside break.
This could be a hugely volatile week for EUR/USD the recent consolidation on the price chart has continued. Once more there appears to have been a failure to break above a near term reaction high resistance within the two week sideways trading. Euro/Dollar posted a doji candlestick (implying uncertainty) on Friday, under the $1.3854 and $1.3865 mini peaks and is now drifting lower once more. The daily momentum indicators are giving precious little steer either. The intraday chart shows a sharp drop as trading re-opened from the weekend break, forming a low at $1.3813, however once the European trading gets going there could easily be further downside pressure growing. The two key downside levels to watch would be $1.3790 and then more importantly $1.3783, the failure of which would suggest the sellers are in control again.
Traders will be tearing their hair out hoping for some increased volatility in a pair that is now into its 8th straight session trading within an 81 pip range. However, even escalating events in Ukraine thus far, appear to be unable to wake Cable from its slumber. Daily momentum indicators have flattened off, but we wait any serious move below the initial support at $1.6760, below which would open the near term key low at $1.6680. Intraday shows the consolidation in further detail with all hourly moving averages now converging, which can often be the forerunner to a decisive move. Until we get a breach of $1.6760 or above $1.6841 it is difficult to get enthused about much on Cable currently. Perhaps traders are waiting for the raft of market moving economic data this week. It certainly needs something.
After the run of higher lows, Dollar/Yen is now putting together a bearish run of lower lows and lower highs on a move back towards the safe haven yen once more. The latest reaction high at 102.50 is now the daily benchmark. Interestingly though, momentum indicators are not yet showing any real deterioration (if anything the Stochastics are improving) so this will be worth watching over the coming days. Although the intraday hourly chart looks to have more of a corrective outlook, with falling moving averages and hourly RSI and MACD indicators firmly in corrective configuration, the European dollar bulls have battling back. The resistance at 102.27 will now be a key near term barometer, as a move above would open a test of 102.50. The Dollar/Yen bears would need to breach support at 101.94 to continue the correction.
I mentioned on Friday about the big bullish key one day reversal which dominates the near term outlook. The significance of this pattern has since been confirmed by gains on Friday which took gold back above$1300. The strength in the dollar seen on some of the currency pairs early today could limit or even reverse some of these gains, but while tensions in Ukraine remain elevated it is difficult to see support for gold diminishing too far. Daily momentum indicators are now supportive of a near term move higher. The intraday shows a very slight correction is underway, but the top of the support band comes in at $1297.90. The strength of the turnaround suggests that corrections will be bought into for the time being. Next resistance is at $1307.20.