Moving into the final week before the Christmas holidays, there is still a question mark over whether the Republicans can finally haul their tax reform bill over the line. Some key concessions on Friday seem to have persuaded some of the potentially dissenting Senators (Bob Corker and Marco Rubio) and this helped improve sentiment for the US dollar and Wall Street on Friday. Treasury yields picked up amid the potential growth prospect of getting this enormous $1.7trillion package of tax cuts through. However, it is interesting that a degree of uncertainty continues on Monday morning, as the vote has not passed yet and there are a few undecideds still to persuade, whilst illness may also play a role. The dollar has slipped in the early moves, but it certain to be tax reform that drives markets in the coming days. The sense of uncertainty in recent sessions has meant that markets are still lacking direction, but the outcome of tax reform this week (either positive or negative) is likely to have a defining impact on the near term market outlook.
Wall Street closed higher again on Friday with the S&P 500 +0.9% at 2676, whilst Asian markets were also positive (Nikkei +1.6%). European markets are positive in early moves. In forex, the improvement in market sentiment is affecting major pairs, with the commodity currencies outperforming whilst the yen is the primary underperformer as the dollar is also a touch weaker. In commodities, with the dollar weakness, gold has been supported today, whilst oil is also edging higher again.
Traders will be on the lookout for the final reading of Eurozone CPI for November at 1000GMT, with the consensus expecting the flash readings of +1.5% on the headline CPI and +0.9% on the core CPI to be confirmed. Into the afternoon the only real US data of note is the NAHB Housing Market Index at 1500GMT which is expected to remain at 70.
Chart of the Day – DAX Xetra
Market has been stuck in a ranging formation for the past five weeks between 12,810/13,240. Within this, although there have been a couple of intraday breaches of resistance, there has been no closing breakout above 13,200 now as every time the market looks set to breakout the bulls lose momentum. In the past week the DAX has steadily lost ground, once more backing away from 13,200 and posting a series of daily lower highs. Perhaps understandably within this range, there has been regard given to the psychological round number 13,000. It is interesting to see that the lows of Thursday and Friday both flirted with 13,000 but the level held. The market is increasingly rangebound according to the daily indicators, with the RSI moving broadly between 40/55 throughout the past five weeks and the MACD lines now almost entirely flat lining. Although 13,000 can be considered to be a near term gauge, and a breach would open the range lows between 12,810/12,900 again. However on a technical basis, there is little suggestion that this range will be broken any time soon. The move higher into the close on Friday has put the bulls back on the front foot again today, with an opening gap higher left at 13,109, but the range resistance 13,200/13,240 is sizable, beware another false upside break today. A close above 13,240 would be encouraging for the bulls.
Increasingly we are finding that EUR/USD lacks any real direction now as the market appears to be waiting for a catalyst now. Trendlines are being broken on an increasingly shorter term time horizon, moving averages have converged and flattened, whilst momentum indicators are giving very little away. We come into this week almost entirely where we started last week, but support has strengthened at $1.1715 and resistance is in place at $1.1860. Even on the hourly chart the direction is lacking, with tighter support at $1.1735 and resistance at $1.1812. A mild tick higher in early moves today will give the euro bulls a lift, but it looks like it will need a fundamental event to drive direction now, probably tax reform related.
There is a sense that sterling is under pressure. Fridays strong negative candle that cut over 100 pips off Cable more than retraced a similar looking positive candle earlier last week and once more ramps up the pressure on support around $1.3300. Momentum indicators are now drifting lower and the long term uptrend could be set to be tested now. The trend line comes in at $1.3220. However, for now the support around $1.3300 remains in place as the market has ticked slightly higher this morning. On the hourly chart it is worth watching the hourly RSI as another failure around 60 would be a negative signal and the hourly MACD lines failing under neutral. There is resistance $1.3380/$1.3420 with last week’s high $1.3462 taking on added importance as a lower high now. A close below $1.3300 opens $1.3220 support.
In this period of indecision amongst forex majors we see Dollar/Yen turning round again. Just when it looked as though the yen was beginning to gain ground again, the market seems to have formed support and pulled higher. Support at 112.00 has held in the past two completed sessions and the bulls have come into this week on a bid. Momentum indicators which had threatened to falter have come to find a move higher again, but essentially this is the neutralisation of the market now. The nine month trading range has a pivot at 111.00, above which there is a slight positive bias. However latterly the market has struggled for traction and resistance is building at 113.00/113.75. Support is in place initially at 112.00 but the numerous trend breaks suggest that unless a major fundamental catalyst is seen it will be difficult to really drive direction. Closing above 113.00 would improve the outlook today.
The rebound off $1236 has stuttered in the past few sessions and it is interesting to see the overhead supply that begins at $1260 coming in as resistance now. With momentum indicators having picked up in recent days, there is still a sense that this is just a minor unwinding recovery and is helping to renew downside potential for the next move lower. The hourly chart shows that this recent run is a consolidation between $1251/$1260 and an early tick higher today will give the bulls some hope. However there is very little direction of note and the market seems to be biding time for now. Resistance builds at $1260, $1263, $1265 and then $1270, with rallies seen as a chance to sell.
The corrective outlook within the multi-month uptrend channel seemed to have been averted following Thursday’s strong positive candle, a move bolstered by another gain on Friday. Support formed at $55.80/$56.10 is added to by the fact that the uptrend channel now comes in early this week just under $56.00. Momentum indicators retain a corrective near term outlook within a positive medium term configuration, meaning that corrections remain a chance to buy. Friday’s candle was less decisive but importantly the bulls did not give up their recovery from $56.00. The negative elements of the near term chart are eroding away as the small head and shoulders top is set to be aborted on a rally above $57.85 and a more positive configuration takes hold on momentum. Support is building above $56.95. A move above $57.85 opens $58.55.
Dow Jones Industrial Average
Corrections remain a chance to buy on Wall Street as the bulls have again seized on even the most minor of drop in the market as a chance to buy. The opening gap higher on Friday reflects the appetite of the bulls and has now left near term support building at 24,500/24,510. Momentum indicators on the daily chart retain their positive configuration and the recent three week uptrend is also holding well. With the hourly chart taking on a sharp improvement again following a brief corrective move, the outlook for further moves into all-time highs remains strong. Initial resistance is Friday’s intraday all time high of 24,689 but the three week trend higher suggests the bulls are in no mood to stop here.
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