Last updated: May 3rd, 2017 at 09:58 pm
Could it be that markets look to be beginning to settle down after several days of wild swings in the wake of the Brexit decision as yesterday’s risk recovery has not yet tempted the bears back in once more? However, the rebound on sterling of over 100 pips might sound a lot but in the context of around 1800 pips of weakness in two days, the move is a minor blip. The question is whether this is merely a consolidation before further selling pressure returns? The move is though managing to allow other markets to draw breath and regain some poise with equities having bounced and forex majors unwinding some losses against the safer haven US dollar. However, as the Asian session passes over to the Europeans, there is a slight swing in sentiment once more and a shift back towards the risk off mode with the yen stronger and the precious metals rallying again. It will be interesting to see the impact that this has on equity markets which seem to be taking a positive handover from Asian trading after the Nikkei rallied 1.6%.
On the forex majors there is an uncertain feel today as sterling is fluctuating higher and lower and the yen stronger which should reflect reduced risk appetite, however there are mixed moves on the commodity currencies with Kiwi strength. Gold is higher by around $10 with silver also strong, whilst the oil price is following up yesterday’s gains with further upside today.
Traders will be looking at inflation data today with the preliminary reading of German CPI released at 1300BST which is expected to improve to +0.3% (from +0.1%). The market will then be focusing on the US Personal Consumption Expenditure at 1330BST which is the Fed’s preferred measure of inflation. The expectation is for the all-important core PCE to stay around +1.6%.
Chart of the Day – NZD/USD
After two sharp days of correction the Kiwi looked to engage a recovery yesterday amid the general improvement in risk appetite. Despite losing impetus a little into the close the rebound has continued with further minor gains today. However, there are still questions over the strength of a recovery. We have seen though in June has been key support holding which is the main positive. The support around $0.6960 is clearly a key level that the market is watching on the Kiwi, whilst incredibly in spite of the huge volatility of recent days the $0.6976 support of the Brexit day has held to the pip. However the momentum indicators suggest that the corrective pressure is still present. The RSI has broken below the 60 level that had been holding with the support throughout June, whilst the MACD lines have given a bear cross, and the Stochastics have also given a near term crossover sell signal. It looks as though pressure on $0.6960 could mount again in the coming days. The Kiwi has a tendency to use the support of previous breakouts with $0.6880 an old key breakout level that would be the next test on a breach of $0.6960, whilst a pivot band around $0.6820/$0.6845 could also be tested. There is pivot resistance around $0.7100 that is an initial barrier today, whilst the bulls will be looking a regaining the initiative and a push above $0.7160 would regain them control.
Markets continue to settle down after yesterday’s recovery in market risk appetite. The selling pressure seems to have abated for now but whether this is the start of a sustainable recovery is another story. Yesterday’s bull candle bounced by over 40 pips and helped to unwind some of the weakness but the market continues to find resistance with the pivot band $1.1050/$1.1100. The momentum indicators are still in deterioration mode and there is still a sense that rallies will be seen as a chance to sell. The hourly chart shows yesterday’s rally high at $1.1110 is resistance initially and the bulls will need to push through $1.1188 to suggest there is any real substance behind a recovery. My expectation is that this is a settling period before further selling pressure to retest $1.0968 and then the low at $1.0909.
The bulls have managed to complete a strong closing candle after two days of precipitous selling pressure. However the market remains volatile with over 200 pips of daily range and over 100 pips of recovery gains. Even today in the Asian session there has been a high/low range of over 100 pips already. However there is a sense that the huge swings that followed the Brexit decision are now calming down, however there is still a degree of uncertainty over the Cable moves. The technical outlook remains negative with momentum indicators still falling in bearish sequence and the prospect of further downside potential. Looking at the hourly chart there is still a sense that this move is simply unwinding some oversold momentum and that it will provide another chance to sell. The resistance at $1.3473 is still in place following yesterday’s reaction high at $1.3418. With the volatility still present in trading sterling there is the potential for significant swings still but for now there is a minor consolidation underway. I favour a retest of the support at $1.3215 and then the big low at $1.3118.
The recovery in risk sentiment yesterday allowed a positive candle to form, adding around 75 pips on the day and some minor respite from the selling pressure. However the Asian session overnight has once more pulled yen strength and this looks to be developing into a phase of choppy consolidation. The momentum indicators remain negatively configured and the prospect of further weakness continues. I favour selling into strength and on the hourly chart the resistance band between 103.18 (the intraday rebound high on Friday) and 103.60 (the old support of the old mid-June lows) seems to be a sell-zone of overhead supply. I expect a retest of Monday’s low at 101.37 in the coming days and a likely move back towards the 100 psychological support area.
The overnight bounce in gold has helped to maintain the breakout support above $1306. The corrective candles of Monday and Tuesday put pressure on the near term outlook and a closing breach would confirm a small top pattern and open for a deeper correction back towards $1277. However the bulls have held on overnight and the outlook for gold remains positive for now. Holding on to the breakout above $1306 means that I am more positive on gold, an outlook backed by the precious metal’s safe haven status and that Brexit is likely to push the next Fed rate hike further into the future. However, I am still concerned for a near term corrective move and the lower highs are building up at $1335 and now $1329.50. The recent trading could start to turn into more of a consolidation now and it will be interesting to see if this support around $1306 can hold.
Markets are moving in lock-step of risk-on/risk-off now. The recovery in sentiment yesterday allowed the oil price to drive a rally, but the question is how long will it last? WTI looks to continue to be in corrective mode and the rebound yesterday could still just be a retracement move. The key to the near term outlook is the resistance around $48.50 which seems to be holding back the recovery near term. This is the top of a near term pivot band $47.75/$48.50 and a decisive breach back above would be a really positive response by the bulls and would question the corrective outlook. The daily chart shows the RSI at 50 and a mixed look on the momentum indicators now. A decisive move back above $48.50 would re-open $50.50, so in a sense this seems to be a crossroads for the outlook. Initial support at $46.85 now protects $45.83.
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