As we move towards the end of the week, markets are beginning to look more settled. The spike higher on US Treasury yields in the wake of the FOMC minutes has calmed down with the US 10 year yield around 2.92%. The volatility in the equity markets which drove such a fearful reaction in recent weeks is also settling down and we are now seeing more of a truncated outlook where trends are being replaced by a broader phase of choppy consolidation. The run of near term recovery on the US dollar began to unwind yesterday but looks again to be regaining some ground this morning. However none of the moves are decisive. FOMC member James Bullard of the St Louis Fed (non-voting and generally more dovish) has looked to rein in expectations of a potential 100 basis points tightening by the Fed in 2018 and this is helping to form a consolidation to an extent today. With a lack of major economic data the views of three more FOMC members could be a kay factor today that makes the difference. Dudley, Mester and Williams are all voters in 2018 and border the more hawkish scale of the committee. They could subsequently shape trading into the weekend if they ague strongly for a more aggressive series of tightening from the Fed.
Wall Street closed higher on the session but lost some steam into the close with the S&P 500 +0.1% at 2704. Asian markets were more positive with decent gains on the Nikkei which was +0.7%. European markets are accounting for the lost impetus on Wall Street and are trading mildly lower in early moves. In forex, the dollar has regained a little ground again this morning across the majors, but can it continue the move? In commodities, gold is $5 lower on the dollar rebound, whilst oil is only trading a touch weaker after a strong more on the back of a surprise drawdown on the EIA crude oil inventories.
Inflation is again in focus for traders today, with the final reading of Eurozone January CPI first up at 1000GMT which is expected to suggest that the flash readings were accurate with +1.3 for the headline CPI and +1.0% for core CPI. This would confirm the slip from +1.4% headline and +1.1% core CPI from last month. Canadian CPI is at 1330GMT with headline CPI expected to drop to +1.4% (from +1.9%), whilst the core CPI movement from last month’s +1.2% for the year will also garner interest. There are three FOMC voters all expected to speak today, with Bill Dudley (centrist) at 1515GMT, Loretta Mester (very hawkish) at 1830GMT and John Williams (centrist/mild hawk) at 2040GMT.
Chart of the Day – AUD/JPY
The renewed selling pressure as the market fear increased three weeks ago meant that the recovery of Aussie/Yen went into sharp reverse again. This move has shown little sign of improving recently as the move has broken the support of the key November lows around 84.40. A downtrend channel formation has subsequently formed this week with Wednesday’s bearish engulfing candle and further subsequent downside on Thursday. Yesterday’s bearish candle was a decisive move to close clear of the support around 84.00 and coming with negative momentum configuration, further weakness to test the low at 83.30 can be expected. On a medium term basis is it the consistent close below the 84.40 which opens the downside now, with the April to June lows of 81.50/81.80 now back in the frame. Momentum configuration remains negative and suggests using strength as a chance to sell still, with anything around 84.40 being an ideal opportunity.
As the euro posts the first positive candle in over a week, the question is whether this is again the time to buy. It looks as though the selling pressure may have abated for now, but the reaction lower again this morning shows that there is no certainty over this issue yet. The correction back from the highs around $1.2350 remain a near term corrective move within a medium term bull market, and the bulls will be eyeing the importance of the support at $1.2205. If the market can now also build from yesterday’s low at $1.2260 then the bulls will begin to think there is a basis to work from. The dropping MACD lines need to abate, whilst the RSI and Stochastics need to begin to roll higher too. The hourly chart shows a more positive configuration now beginning to develop and the resistance at $1.2360 will be key for a resumed recovery.
Despite the GDP disappointment, sterling bulls managed to claw some gains from the day with a mildly positive candle. This was the first move to the upside for a week and seems to have stabilised the recent selling pressure on Cable. The daily chart shows a pivot increasingly forming around the $1.4000 area on Cable and once more the market shied away from a test, however there is also a basis of support now in place at $1.3855 from yesterday’s low which is above the key February lows between $1.3765/$1.3800 and importantly above the three month uptrend support. This recent slip remains a corrective move within larger bull market trends and it was interesting to see that yesterday’s rebound started to take on more of a positive configuration on the hourly chart momentum. The bulls need to start consistently trading above $1.4000 to suggest that they have got control back again, but at least for now the selling pressure has been contained.
After four sessions of recovery the selling pressure began to resume yesterday, with a strong bear candle of over 100 pips of downside. The overhead supply of 107.30/108.30 is a prime area to use for a selling opportunity to continue the medium term bear trend and yesterday the resistance was left at 107.90 below the six week downtrend and falling 21 day moving average. It is interesting to see the RSI seemingly floundering around 40 again whilst the Stochastics are also beginning to tail off where they did a couple of weeks ago. Rallies are a chance to sell and the early rebound again today should throw up another opportunity, with the hourly chart now more correctively configured. There is near term pivot resistance around 107.30/107.60 under the key near term resistance at 107.90 now.
Gold is another chart impacted negatively by this recent dollar rebound, but yesterday’s positive session is looking to begin the process of stabilisation once more. The market picked up from $1320.60 which was above the $1306.80 key low from earlier in February. With the outlook on gold still seemingly as though the near term corrections on gold will be bought into, it was interesting to see the buyers returning yesterday. An early drop back lower again today will test the validity of the low at $1320.60. The daily momentum indicators are beginning to settle whilst the hourly chart is also settling from its recent negative configuration. The resistance of the old pivot at $1332 limited the upside overnight and now will be a key near term upside gauge. However the market may now begin to settle into more of a ranging phase near term.
As the dollar weakness looked to resume yesterday afternoon, then the oil price looked to find support. This was exacerbated in the wake of the EIA inventories which shows crude stocks in a larger than expected drawdown. This has now prevented the support around $60.85 from being breached and the recent consolidation on oil is showing signs of looking to break to the upside now. The price has spent several days in a small range between two old pivots, with the support at $60.85 and resistance at $62.85. It is now the turn of the upper resistance to be tested and a decisive close above would begin to re-open the highs again. Daily momentum indicators are now finding upside traction again, with the RSI and Stochastics both pushing higher and the MACD lines threatening to cross higher. Remember though, a closing breakout of these pivots is the key factor and without it, the market will continue to be resistricted.
Dow Jones Industrial Average
After such a negative close on Wall Street on Wednesday the reaction of the bulls was going to be key, and there was a positive reaction that saw the market rebounding firmly. However, a late slip in the session meant that this was not a decisive bull candle and still poses some questions for the resumption of the rally. However, a positive session has helped to settle down what had threatened to become an increasingly corrective move. Despite this though, the buyers need to continue higher once more today in order to develop some more positive traction in the market once more as there is a sequence of lower highs that is now in place under the key 25,432 high from last week. The post-FOMC minutes rebound high at 25,268 is resistance at the falling 144 hour moving average which needs to be breached in order for the outlook to turn bullish in the recovery once more. The support at 24,793 is strengthening but bulls still need more firm foundations.
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