The reaction on financial markets to an invitation from the White House for Chinese trade officials to discuss the trade dispute reflects just how much markets remain attuned to this issue. For the past week there has been little real direction but there was a jump in sentiment, away from safety and towards risk. This means primarily that the yen and the dollar have been hit, whilst the Chinese yuan has also made ground again (a positive signal for emerging markets). How long this positivity lasts remains to be seen, and already there are signs that the gains in Asia overnight are not translating into the European session. The dollar moves and those of the Chinese yuan continue to be telling. However, markets in Europe seem to be more interested in central banks today, with the Bank of England and the ECB both updating on monetary policy. Neither are expected to cause too many surprises, with the potential for the ECB to shave a little off its growth forecasts likely to be the extent of it. More interest could therefore come from the US inflation numbers. Producer inflation showed a negative surprise yesterday and it will be interesting to see if consumer inflation is also going the same way. Treasury yields slipped a tough yesterday on the PPI miss, playing into the drop on the dollar, so eyes will be on the CPI data today to see if rising wages translates into stronger prices. As another interesting aside though on emerging markets will be the Turkish central bank also updating monetary policy. In an attempt to prop up the ailing lira, there could be a rate hike of 325 basis points if the expectations are anything to go by. Reaction could be felt across the EM space.
Wall Street closed with only marginal gains last night (S&P 500 just +1 tick at 2889) whilst futures are shading lower by -0.1%. Although the Asian markets have run on the trade story (Nikkei +1.0%), the European markets look to be struggling in early moves and are cautiously lower. In forex, there is a slightly mixed look to the dollar as the positives from the trade story have seemingly failed to ignite, whilst traders seem to be cautious ahead of a raft of tier one calendar events today. In commodities there is a consolidation on gold after a jump higher on dollar weakness, whilst it is interesting to see oil unwinding some of the considerable bounce of the past two sessions.
There are some major tier one announcements to watch out for on the economic calendar with two of the G4 central banks announcing monetary policy and US inflation to factor in. First up is the Bank of England monetary policy at 1200BST which is not expected to change policy after last month’s 25 basis point hike to +0.75%. The MPC meeting minutes are expected to show the decision to be unanimous with all nine of the MPC voting to hold rates at +0.75% and no change to the asset purchase facility which still stands at £435bn. The European Central Bank monetary policy decision is at 1245BST with the main refinancing rate to be kept at 0.0% with the deposit rate held at -0.40%. The tapering of asset purchases will come as the amount is curt to €15bn from €30bn per month. This has all be laid out previously and confirmed but for the press conference at 1330BST there are suggestions that the ECB could be set to cut its forecast for GDP growth which currently stands a 2.1% for 2018 and 1.9% for 2019. Inflation forecasts are not expected to be changed. Expect Draghi to also reaffirm that the rate rises are still not likely to take off until at least the summer of 2019. In focus also today is the US CPI for August which is expected to drop marginally to +2.8% on the headline CPI (+2.9% in July), whilst core CPI is expected to stick at +2.4% (+2.4% in July).
Chart of the Day – EUR/CAD
Earlier this week we focused on the corrective signals growing on USD/CAD and the strengthening Canadian dollar is also weighing on its cross with the euro. The move is now threatening to abort what had looked to be an improving outlook that was forming earlier in the month. A decisive pull back below former resistance at 1.5190 now threatens to breach support at 1.5070 which would abort a recovery. Looking at the deterioration in momentum indicators there is a corrective move gathering pace. The RSI falling back below 50 to three week lows, the Stochastics accelerating lower and the MACD line on the brink of a bear cross. If this all comes with a close below 1.5070 it would really be a negative signal, opening a move at least back towards the pivot around 1.5000 again. The old neckline is now a basis of resistance around 1.5190 whilst the hourly chart shows an increasingly corrective configuration. The early rebound today also looks to be limited and the sellers look ready to resume control once more. The big caveat to this is a scuppering of the positivity surrounding the NAFTA negotiations.
Another mildly positive candlestick (a third in a row) has continued to neutralise the outlook on EUR/USD in front of the ECB meeting today. The flattening and converging 21,55 and 89 day moving averages all reflect this position, whilst the momentum indicators are also giving almost nothing in regards to a direction. It is likely to come down to reaction on the ECB meeting. Any hint of positivity from the ECB and this will pull the euro higher. Initial resistance is around $1.1650 and a closing breach of this would help improve the outlook marginally, but then the key highs of July and August around $1.1735/45 come into play as a more considerable barrier to gains. However the band of support making a floor around $1.1505/$1.1530 is key for the outlook should the ECB guide lower.
Another marginally positive candle continues to bring Cable creeping to the resistance of the shallow five month downtrend (which comes in around $1.3080 today. This is a very gradual improvement in sterling against the dollar, with momentum indicators reflecting this too. Indicators such as the RSI and MACD lines are on the brink of a significant medium term improvement and coming with the price testing the downtrend it seems that there is a technical crossroads being eyed. A decisive bull candle through the downtrend, taking the RSI above 60 and MACD lines accelerating above neutral whilst the Stochastics are strongly configured, would all be a significant development in the recovery. The hourly chart shows support coming in $1.2970/$1.2980, with $1.2900 becoming increasingly key in the continued recovery. Corrections are being bought into and initial resistance is at $1.3085 and a closing breakout opens $1.3170/$1.3215 as the next barriers.
The bulls will have been shaken by yesterday’s corrective candle, but the slight positive bias in the medium term trading range is coming through again today with some early gains. The big question is whether there is enough appetite to push the market through the key highs, starting at yesterday’s 111.65 (including 111.75, 111.80 and 112.15). Momentum indicators suggest it will be a struggle and are certainly not leading the price, which implies that the move will likely be event driven. The hourly chart shows support now at 111.10 will be near term important as having broken a four day recovery uptrend, a failure to breakout above 111.65 and to then move below yesterday’s low would mean a chance in near term sentiment. It would then turn move corrective to test 11.85 initially, with 110.35 a key level.
After two weeks of mild corrective drift there was a subtle change in sentiment on gold yesterday. A decisive positive candle has started to find some upside traction. It is a testament as to the bulls awakening from their slumber, in that there has almost instantly been a significant shift in the configuration on the momentum indicators. A bull cross on the Stochastics, with the MACD lines resuming their pull higher and the RSI above 50. With regards to the RSI, if there is a decisive close above 50, this would be the best momentum on gold since the April sell-off took hold. A decisive close above $1200 has helped psychologically and if the market can now begin to trade decisively above $1207 then there is a real potential for testing for a base pattern completion (which would come above $1214/$1217 resistance). The bulls will be happier now also to leave behind support at $1187 above the higher low of $1183. Today’s early move has been to slip back a touch but the bulls will look to build above $1200 now and it will be interesting to see if corrections are now being bought into.
Hurricane fundamentals continued to drive the oil price higher yesterday, posting a second straight strong bull candle and testing the overhead resistance of the July/August highs between $70.45/$71.40. The fundamentally driven move is helping to significantly improve the technicals with the bull kiss on the MACD lines, Stochastics crossing higher and RSI in the 60s. However, prices tend to be volatile during times such as this and already this morning the market has pulled strongly back from the high of $71.25, posing the question of whether this move has now already played out. The hourly chart shows support at $69.50 which is increasingly a pivot and then $68.50. These supports could be key now.
Dow Jones Industrial Average
Once more the bulls seem to be unable to break the shackles of the consolidation that has put the brakes on the bull run of the past few weeks. With the unwinding of the momentum indicators coming without any significant bear signals, the inference is that this would remain a consolidation that is still likely to be a chance to buy within the uptrend channel (which is currently rising around 25,600). The RSI remaining around 60 and the Stochastics looking to turn positively around 50 is a reflection of the renewed upside potential. However, yesterday’s session seems to have been a case f the bulls jumping the gun. A strong move higher slipped back into the close to leave a doji candlestick (which poses more questions than provides answers). Tuesday’s low at 25,754 is however initially supportive, and as continues to be the case, whilst the low at 25,608 remains intact then the bulls will remain confident. However, a failure at 26,145 adds to resistance of August’s high at 26,168. There is positive bias and an upside break remains likely, but the market remains in wait and see mode for now.
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