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Consolidation setting in as US inflation lies ahead of the Fed

Last updated: May 3rd, 2017 at 09:58 pm

Market Overview

Was this the bond markets taking a view that the Fed may be about to pull the trigger on a rate hike? Yesterday we saw the yield on the 2 year Treasury yield breaking sharply through the resistance barrier at 0.750%/0.760% to hit a peak of 0.815%. Although some of the gains have been pared this morning this looks to be a decisive move in front of the FOMC tomorrow. As many other markets move into more consolidation mode, unwilling to take a view, bond traders seem to be laying their cards on the table. Equity markets had a decent showing yesterday as Wall Street jumped over a percent higher, however volumes were light and daily ranges are tight reflecting the uncertainty. The oil price finding support helped sentiment though with WTI still holding up above its key support at $43.20. Asian markets were settled across the region with the Nikkei up 0.8%. European markets are also solidly higher in early trading.

In forex majors there is a distinct lack of conviction in the early moves, with a very slight move away from the dollar as the euro and yen have both strengthened a touch. The gold price is holding steady whilst the oil price is also holding off the recent selling pressure.

Sterling is broadly flat ahead of a key announcement of employment data at 0930BST. The average weekly earnings growth will be the key component eyed as unemployment is announced. The market is expecting +2.9% growth in average earnings ex-bonus which would be slightly up from 2.8% last month whilst unemployment is expected to remain flat at 5.6%. The final reading of Eurozone August CPI is at 1000BST and is expected to remain unrevised from the first reading of +0.2% year on year. US CPI inflation data is the last tier one release in the run up to the FOMC and is announced at 1330BST. The expectation is for the headline year on year reading to be +0.2%, whilst the core CPI is expected to pick up slightly to +1.9% (from +1.8%). Finally, at 2345BST there is the announcement of Q2 GDP from New Zealand which is expected to be +0.5% for the quarter.

Chart of the Day – EUR/JPY

I know can see that EUR/Yen is far more of a range play that I had expected last week when I was talking about the prospect of a large medium term top (which would have been pretty bearish for market sentiment generally). The fact that the RSI hit 30 and then sharply rebounded before there could be a two day close below the key support at 133.20 has maintained the range play outlook. This sharp euro rebound has though now lost steam, and interestingly that has happened almost bang on the resistance at 136.95. The 5 day rally is now looking to turn lower once more and the barrier of the old pivot level around 137 will once more act as a key gauge. With moving averages all but flat this is reflective of the ranging outlook and the RSI at 50 is not an especially helpful indicator at this stage. The daily candles of the first few days of this week suggest a loss of impetus in the rally and failing under the 137 pivot, so once more suggests short positions would be preferable whilst this continues. The intraday hourly chart shows deteriorating momentum and a failure of a rally under 136.40 would confirm the building downside potential for a test of the support around 135.00. Below 135.00 support opens 134.25 and then 133.35. A close above 137 would suggest the bulls are fighting back within the range.

EURJPY   16092015


As markets move towards the crucial FOMC announcement the euro is beginning to pare some of the recent gains that has taken it so positively away from the medium term pivot level at $1.1100. The momentum indicators on the daily chart are increasingly neutral (although the Stochastics are still rising) and it would seem that a pre-Fed run higher has come to an end, at least for now. A drift back towards the initial support around the old pivot level at $1.1215 could be seen now. The intraday hourly chart shows a sequence of lower highs and lower lows is now forming with resistance at $1.1330 coming under the $1.1370 key high. The initial support at $1.1253 has held but a failure to move above $1.1330 is likely to result in further drift back to test the support again. A breach of $1.1215 would subsequently re-open the $1.1100 pivot. It is difficult to be any other than very short term-ist on the euro in front of the crucial Fed meeting.

EURUSD   16092015


The recovery that had been progressing for over a week has now been aborted for the time being. Monday’s doji candle has been followed up by a strong bear candle that has stopped the bulls in their tracks. The interesting feature though is the fact that the previous key support at $1.5330 which has been an old pivot level has caught the sharp correction (within a few pips) and this will become a key level to work from today. A confirmed breach would open $1.5265 but more importantly the possibility of a retreat back towards the old key floor at $1.5170. However if this support can survive then the bulls will look to recover and test the overhead resistance comes in at $1.5370/$1.5400. As we approach tomorrow’s FOMC meeting, trading may become increasingly cautious, but for the very near term this basis of support around $1.5330 is again the key pivot.

GBPUSD   16092015


The changeable nature of these forex markets in the run up to the FOMC makes calling direction a risky game. Yesterday’s initial move lower on Dollar/Yen seemed to be gaining decisive direction before an entire unwind, however there is still a sequence of lower highs in place which suggests using the rallies as a chance to sell remains a viable strategy. The rebound fell over at 120.50 which has seen the bears begin to control again. The overhead supply between 120.65/120.85 from the past few days means there are plenty of sellers still willing to partake. The key overhead resistance remains 121.30. The hourly chart also shows that the momentum indicators are also consistently in negative configuration with the rallies now with the hourly RSI falling over in the low 60s and the hourly Stochastics also giving a sell signal. A retreat back towards the pivot band at 119.60 should not be ruled out (yesterday’s low was at 119.38). This has to be a short term play, intraday as the FOMC meeting is likely to create huge volatility with the market not gaining any certainty on direction.

USDJPY   16092015


Despite the consolidation of the past few days the gold chart continues to trend lower, with the recent settling of the price still not showing any sign of a reversal. The daily momentum indicators continue to drift lower and with all moving averages falling in bearish sequence there is a definite bearish bias. There has though been a support band forming between $1098/$1103 which is still holding, but rallies continue to fall over at lower levels and on technicals alone the next break would surely be to the downside. The resistance comes in at $1110 and then just under the old support around $1117. Once again this is a market that could be consolidating in front of the Fed which makes trading tricky for the next 36 hours until volatile direction will surely ensue. Below $1098 re-opens the key lows around $1080.

Gold   16092015


Although the price of WTI is still trending lower, the breakdown of the support at $43.20 s still yet to be seen. For now the bears are being kept at bay, but for how long? Aside from the fact that the equivalent support at $47.75 on Brent Crude was breached last week, the market could simply be consolidating in front of the FOMC. Technically, the corrective outlook is still in play with the momentum indicators drifting lower (RSI and Stochastics especially), however the support formed now means that the downtrend is being tested. The resistance around $46.00 is therefore key near term, being a rally high from Thursday last week and which marks the latest lower reaction high. There is little that has been achieved yet on the intraday hourly chart with the negative momentum having unwound to a point at which the bears have tended to resume control in recent weeks. I continue to expect pressure on $43.20, but consolidation could be seen first. A breach of $43.20 opens the next support at $41.50.

WTI   16092015

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.