The improvement in risk sentiment continues as safe haven flows continue to reverse as the dollar edges further higher, in moves helped overnight by better than expected US and China data. The rebound in Treasury yields is helping to support the dollar in a near term recovery which has been helped by yesterday’s upwards revision of Q2 US GDP to 3.0%. The yen is under increasing pressure and gold is threatening to drop back below the key $1300 level that the bulls have previous fought so hard to break through. Equities have been supported in the past day or so, with VIX volatility on the wane and the S&P 500 reflecting this back at a nine session high. The Chinese survey data may have been mixed overnight, however the market is taking the risk positive outlook to the growth driving manufacturing component. China Manufacturing PMI increased to 51.7 (51.3 exp, 51.4 last) which seems to have induced a glass half full sentiment as the China Non-Manufacturing PMI fell to 53.4 (54.5 last). Traders will be looking at today’s inflation data, but will also be increasingly keeping an eye on tomorrow’s Non-farm Payrolls data, with anticipation improving in the wake of the strong ADP employment change yesterday.
Wall Street closed higher with the S&P 500 +0.5% at 2457, whilst Asian markets were also positive overnight (Nikkei +0.7%) and European markets slightly positive in early moves. Forex markets show the dollar continuing to make gains across the majors with the yen being the main underperformer. In commodities, gold is slipping again, another $5 or 0.4% lower, whilst oil is consolidating after another negative session yesterday.
Inflation is paramount for traders today as both he Eurozone and US release key data releases. The Eurozone flash inflation reading for August is announced at 1000BST which is expected to tick higher to +1.4% on the headline (from +1.3%) but tick lower to +1.2% on the core (from +1.3% last month). The upside surprise on the German HICP yesterday will give hope to the euro bulls of a similar upside surprise today. Then in the afternoon, the US releases the Fed’s preferred inflation figure, the Personal Consumption Expenditure which on the headline PCE is expected to be flat on the month and could tick lower to +1.3% for the year, although the core PCE monthly reading is expected to be +0.1% which would see the year on year reading stay at +1.5%.
Chart of the Day – EUR/GBP
The move higher on EUR/GBP has been getting increasing attention in recent weeks as the uptrend had been showing little sign of slowing. That is until now. With the 14 day RSI hitting record levels of being overstretched at 79 this week, the euro has started to move into reverse. This has pulled the RSI lower, now back below 70 which is a classic RSI sell signal. There are also sell signals threatening on the MACD lines and Stochastics. The largest single one day decline on the pair since the market bottomed in April was seen yesterday and adds a concerning shift in sentiment for the bulls. This comes as the market has now retreating back towards the six week uptrend which is today at £0.9200, and will actually be breached if the bulls do not support the pair today. However, has the profit taking now got some momentum? Such has been the strength of the run higher, there is very little support that has been left by the rally and there is plenty of room to retrace the uptrend. A recent breakout at £0.9140 is the first real support. A profit-taking technical indicator has already been seen with the Parabolic SARs (stop and reverse) having triggered a negative signal with yesterday’s sharp bear candle. The hourly chart shows a breach of the first higher low at £0.9228 is now testing a reaction low at £0.9187 this morning and a breach opens £0.9140. There is a near term band of resistance £0.9228/£0.9245 which is under the big high of £0.9306.
The euro is turning increasingly corrective as the failure to hold on to the move above $1.2000 continues to drag the market lower. Yesterday’s bearish candle completes an “evening star” three candlestick pattern, which comes at the top of a run higher. This corrective pattern has also breached the support of the key breakout of $1.1909 to add to the near term deterioration. The potential for a retreat back towards the four month uptrend is growing now, which now comes in at $1.1670. Momentum indicators have rolled over with the Stochastics turning giving a near term corrective bear cross. A move on the RSI below 55 would also be a multi-week low. However the reaction to the next couple of sessions will be key, being that tomorrow is Non-farm Payrolls. There is also a band of support from the trading throughout August that kicks in under $1.1845 now. How the bulls react to the old resistance at $1.1909 could be key now with the hourly chart increasingly correctively configured, this could become a basis of near term resistance now. The key support is the mid-August low of $1.1660.
The market has spent the last few days gravitating around the old neckline at $1.2930 which I still see as near term gauge for Cable. The consolidation is coming with the momentum indicators just tailing off in their recovery and is interesting to see this happening on the RSI and Stochastics momentum signals around neutral. The market remains in the balance and with Non-farm Payrolls approaching tomorrow, this could be a situation that persists for now. The small candlestick bodies of the past two sessions reflect the uncertainty in the market (even though sterling is holding up relatively very well, given the dollar rally of the past couple of sessions against other majors). A decisive close above $1.2930 sees the recovery back on track for a test of the next reaction high of $1.3030. Yesterday’s low of $1.2875 will also be seen as a gauge for building negative sentiment today. The hourly chart has become rangebound with resistance at $1.2978 and support of a reaction low at $1.2870.
With the improvement in risk appetite gathering pace, the yen is being shunned and a dollar recovery is pulling Dollar/Yen sharply higher. This is now significantly improving the near term outlook. After a little early consideration, the market pulled well clear of the near term resistance at 109.80 yesterday and is now on its ways towards a retest of the 111.00 key near term resistance. This is coming with strong improvement in momentum and suggests that the bulls are increasingly confident. The RSI is rising above 50, Stochastics are accelerating higher into six week highs and the MACD lines have also crossed higher. Tuesday’s sharp bull recovery candle has been backed by another strong move to the upside yesterday with almost 50 pips added. Further initial gains today suggests this is a move worth backing to 111.00. The key test comes at 111.00 though, a level that has held back the bulls throughout August. The hourly chart shows a series of higher lows, so corrections are being bought into, with 101.15 being the first support above 109.80/90. Another higher low above 109.80 would be a good near term entry point.
The safe haven plays are looking corrective now (i.e. Treasuries, the yen and gold) and this is shown on gold by the run of negative candles that is developing. However the uptrend of the past seven weeks remains intact for now (rising today at $1290), whilst there is still a positive configuration on the momentum indicators. The correction on gold is now at a key crossroads today. The initial breakout above $1300 was a big moment for gold and is subsequently a key basis of support. A failure of this support would begin to question the strength of the bulls. There are other supports further back (the seven week uptrend and also the rising 21 day moving average around $1284) but the failure of $1300 would be a blow for the bulls who had spent much of the year trying to breakout. The hourly chart is also taking on more of a negative bias with RSI dropping back towards 30 and MACD lines turning lower again under neutral. The near term previous support around $1305 could now become a basis of resistance with rallies being sold into over the past couple of days. However, a move above $1313 would re-energise the bulls.
The market has taken the negatives out of a mixed set of EIA inventories and the market continues to fall. The bear candles are racking up now as the bears take on increasing control. This comes with momentum further deteriorating as the MACD lines fall below neutral, and the Stochastics back in bearish configuration. Rallies are a chance to sell with the resistance band $46.45/$47.00 bolstered by the highs of the last two sessions. A retreat to test $45.40 is still likely in due course with the increasing likelihood of a retreat back towards $43.75. The bulls would need to at least break above the three week downtrend which is at $47.65 now. The hourly chart shows negative configuration has built up over the past week with a succession of lower highs and rallies sold into.
Dow Jones Industrial Average
A consolidation with a mild drift higher has followed the sharp bull candle from Tuesday’s strong intraday rebound. This comes as the market is testing, but has so far failed to break back above the near term resistance at 21,913, a level around which the recent three week downtrend is currently adding a further barrier to recovery. It is also interesting that the 21 day moving average (at 21,909) is now also a basis of resistance. A failure at this level now would bolster the view that rallies are being sold into and put pressure back on the downside. The bulls will though be pointing to the momentum indicators which are beginning to take on a more positive outlook , especially with the Stochastics tracking higher. This all suggests that the market is in the balance now and the next move could be crucial for the near term outlook. The hourly chart shows the Fibonacci retracements of the 21,496/22,179 rally are playing a role in near term reversals. Watch 38.2% Fib at 21,918 and 61.8% Fib at 21,757 to trigger moves.