Trading sentiment is once more rather mixed as cautious markets start the week looking for the next catalyst. A consolidation has set in for the past few days as the initial reaction to the FOMC minutes has settled. However with FOMC member Eric Rosengren (previously dovish) adding to the calls for a hike in the next couple of meetings the markets need to be aware that this is a move that seems increasingly likely now. Interestingly though the dollar is consolidating around the resistance of an old pivot level around 95.2 on the trade weighted dollar and we are seeing Treasury yields settling and commodity prices also lacking trend. Wall Street lost impetus into the close on Friday (S&P 500 +0.6%) and this sense has filtered into the Asian session today which saw mixed trading and set to impact also on the European session today as it traders slightly weaker int eh early moves.
In forex markets, as the European session takes over the dollar is beginning to come under a little corrective pressure, underperforming against all the major currencies. The yen has strengthened on the back of a larger than expected trade surplus driven by a decline in imports, whilst the Aussie and the Kiwi are the biggest outperformers. Despite this dollar weakness the precious metals are struggling again today and the oil price is also off around a percent. This commodities weakness will not help equities sentiment either today.
The morning is packed with the flash Eurozone PMIs with both Manufacturing (51.9) and Services (53.3) expected to improve when the data is released at 0900BST. The US flash manufacturing PMI is at 1445BST and is expected to improve to 51.0 (from 50.8 last month).
Chart of the Day – EUR/JPY
The market seems to have consolidated in the past few weeks and this could mean that sustainable support begins to build. This comes after three failed attempts to break below the support around 122. The chart is littered with downtrends over the past year, but the sharpest of these downtrends was broken by an intraday move on Friday which increases the potential for a another such move again today as the bulls look to breach through the near term resistance band now between 124.15/124.60. This resistance at 124.60 is also a medium term pivot band within the sideways move in the price of the past few months. Momentum indicators are picking up with the Stochastics at a three week high, however a sustained move on the RSI above 50 would also improve the outlook too. The longer term outlook is constrained by the falling 89 day moving average at 125.60 but if the recent support at 122.57 can turn into a higher low (by a move above 124.60 this week) then the bulls will certainly gain in confidence. Is this an improving picture now? Today’s initial reaction o yen strength is questioning the move again, but for now the initial support of Thursday’s low at 122.90 is holding and protecting the reaction low at 122.57.
After the strong reaction of dollar strength in the wake of the FOMC minutes last Wednesday, EUR/USD has settled into a consolidation phase. However the move has simply helped to unwind the price back to the resistance of a three week downtrend and looks likely to be the limit and another chance to sell. As yet there is little sign that this is the beginning of a recovery, however the Stochastics have started to potentially bottom which needs to be watched in the next few days. At this stage the trend I your friend still and having broken decisively below $1.1213 the next support at $1.1142 is open but there is also potential for $1.1100. The hourly chart shows how the resistance band $1.1255/$1.1290 is a barrier to recovery with $1.1345 now key near term. Initial support is from Wednesday’s low at $1.1178.
There is a mixed outlook now as Friday’s session which lost over 100 pips has complicated what looked to be an improving chart once more. However this is perhaps not to be unexpected and in the coming weeks this sort of retracement move is likely to be seen more and more as the crucial Brexit vote approaches and volatility increases. The negative candle on Friday is almost arguably an “evening star” three candle formation (strong bull, small body, strong bear) but needed to be more of a retracement on Friday to really suggest this correction was going to take hold now. Today’s candle is therefore important as if there is another negative candle then the momentum for a correction will grow. Currently the momentum indicators are increasingly mixed/neutral. The hourly chart shows Friday’s low at $1.4480 is protecting a retreat to $1.4400 again. With initial resistance overhead at $1.4560 providing the bottom of around 100 pips of resistance the outlook is increasingly uncertain.
The recent gains are once more consolidating but this time it is interesting that this is being seen at the resistance of the downtrend channel (today comes in around 110.65), the falling 55 day moving average (today around 110.30) and under the resistance of the old February/March floor between 110.65/111.00. Is this another rally that is a chance to sell? The momentum indicators are beginning to question this too, with them all around levels where the sellers have returned previously. The Stochastics are beginning to lose impetus, whilst the RSI is struggling under 60 and the MACD lines are under neutral. The old resistance at 109.50 is supportive now and the bulls ill also look at the key reaction low from last Wednesday at 108.70 as support. The hourly chart shows price resistance at 110.60 and the recent uptrend has been breached as the continuation of the rally faces further questions.
This looks to be an important few days ahead for gold as the outlook for the bulls continues to creak. The uptrend in place since the key $1208 low in early April is under threat as the price fell away last week and has failed to generate any real appetite from the bulls. Following from the confirmed downside break of the support around $1260 last Wednesday this old band of support $1257/$1263 has become resistance and the confluence of the seven week uptrend and 55 day moving average are being tested. The momentum indicators are on the brink too, with the RSI around its March lows and looking to see the correction gain traction. The support of Thursday’s low at $1244 is key today as this is also an old pivot level. A breach of $1244 would mean a test of $1237 initially but the support around $1227 is more important. However if the momentum indicators really begin to get traction it is possible that further downside could be seen. Above $1263 the resistance is mounting with $1270 and $1282 important as a series of lower highs continues.
There is still the potential for a corrective move on oil as the market has once more shied away from the high at $48.95. This now means that the momentum indicators are just beginning to roll over, with a bear crossover on the Stochastics (not yet confirmed as a profit trigger signal), whilst the RSI is backing away from 70 again. I spoke recently about the potential for these corrective moves on the RSI to last between 3 days and two weeks as the rally has taken off since February. Corrections continue to be seen as a chance to buy. So the support band at $45.60/$46.80 will be eyed as the first potential buy zone once more. The big uptrend also comes in at $44.00 today for a deeper correction. The other aspect would be that a breach of Thursday’s low at $46.75 would complete a near term top pattern and imply around $2 of corrective move. Friday’s reaction high at $48.80 has added to resistance.
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