Markets look set to end a volatile week in a positive mood after key data yesterday from the US and Japan helped Wall Street higher and stemmed losses in Asian trading. Q4 GDP from the US rose an annualised 3.2%, while inflation in Japan was at its fastest pace in more than five years at 1.6%. Strong numbers from tech giant Google also helped to boost sentiment as the S&P rebounded by 1%. During Asian trading, the strength of the yen weighed slightly on the session for Japanese equities, with the Nikkei just over half a per cent down. With markets in China, Hong Kong and South Korea closed for Chinese New Year, volumes throughout the region were fairly thin and most indices broadly flat. The European trading session has stabilised after the sharp losses earlier in the week. The key data of the day comes from the Eurozone with January’s inflation data. Expectation is that the consumer prices index will pick up slightly to 0.8% which would certainly be a welcome bucking of a trend which has shown inflation in the region falling ominously in recent months. However any miss of this estimate will heap further pressure on the ECB to ease its monetary policy either through conventional (interest rate cuts) or unconventional (LTRO or QE) means. Today also gives us a look at November’s GDP in Canada.
Chart of the Day – EUR/JPY
The corrective slide over the past few weeks continues with what is now a pretty well-defined downtrend channel. The falling 21 day moving average is capping the gains to the upside at $141.28. Also the rate continues to hug the bottom Bollinger Band which is also a signal of continued correction. The move appears destined for a return to the rising 120 day moving average which has been an excellent gauge of support for the big corrections since June 2013. The intraday chart shows a series of lower highs in place and supports failing. A small buy signal on the hourly Stochastics (momentum indicator) suggests that there could be another rally intraday which should be viewed as a chance to sell. There are previous mini-rally highs in place at 139.50 and above there 139.94.
The Euro came under sustained selling pressure for much of yesterday as the latest GDP figures for the US showed the economic recovery was well on track. The daily chart shows EUR/USD is now right back at the 120 day moving average (now $1.3549) which has been an excellent gauge of support in recent months. The key support that needs to hold is the reaction low at $1.3506, with a breach opening the low at $1.3398. The intraday momentum indicators are showing signs of a bullish divergence on the hourly chart which may indicate waning downside momentum. The intraday chart shows a band of support between $1.3506 and $1.3529. The first resistance is at $1.3561.
Cable continues to drift back towards a test of the uptrend. The 21 day moving average is beginning to roll over which is a slight warning sign for the strength of the uptrend, but for now with momentum indicators still in bullish configuration there is no reason yet to suggest the outlook is change from its longer term positive for Sterling. We spoke yesterday about the 61.8% Fibonacci retracement of the big rally being supportive at $1.6445 and this was used as a floor for cable almost to the pip. However the drift backward has regained some impetus overnight and this looks to be coming under pressure once more. The breach would open support at $1.6398 but also suggest a potential full retracement back to the key low at $1.6308.
Dollar/Yen continues to find the resistance around the pivotal band 102.83/102.93 as the rate ranges above the key support at 101.77. Intraday momentum indicators are increasingly neutral as investors battle it out over whether this period of consolidation after the big correction is a longer term chance to buy or not. The dip in the rate overnight came after the Japanese CPI came out slightly above expectation and this suggests that Abenomics is having a positive impact on inflation with perhaps less need for further action. With hourly moving averages flattening off the rate is now mid-range in this 6 day consolidation and we await a definitive signal for the direction of the break.
The recovery seen throughout January is coming under pressure as investor appetite for risk begins to stabilise once more. The 21 day moving average has supported the previous two reaction lows but is currently around $1246 and has been broken. Having yesterday fallen under the $1248.90 low, the outlook is under pressure near term and would certainly turn negative again should the gold price fall back below the support at $1231.36. The price has consolidated overnight as intraday momentum became oversold, however as this position unwinds the downside potential could grow once more. Above $1246.30 helps the near term outlook but would need a sustained move above $1248.90 to turn more positive again.