Last updated: May 3rd, 2017 at 09:58 pm
In the wake of the September FOMC meeting, the market had settled fairly well on the fact that the Fed would be unlikely to hike rates in 2015. However a hawkish steer in yesterday’s October statement has set the cat amongst the pigeons once more. The concern for the Fed in September had been over “recent global an financial developments”. In other words, it was talking about concerns over the China slowdown and market volatility. However, the removal of this line from yesterday’s release is a hawkish hint from the Fed and has resulted in dollar strength, with other dollar related plays such as gold also sharply lower. The probability of a Fed rate hike in December have significantly improved from around 35% to currently around 43%.
It is also interesting that sentiment on equities initially reacted lower on Wall Street only to then turn around to close at the highs of the day, which is a fairly positive endorsement. The S&P 500 closed 1.2% higher on the day. However, markets in Asia have been a touch more cautious, possibly as the prospect of tighter US rates will impact on any heavily dollar denominated debts in the region. The Nikkei was just 0.2% higher. European indices have started on the positive side of mixed in early trading.
For forex markets there have been some significant declines against the dollar but overnight a degree of consolidation. It will be interesting to see how far any rebounds will go before the dollar starts to strengthen again. The yen has been an interesting mover with a retracement of the Fed-related gains after Japanese Industrial production beat expectations overnight. The Kiwi has also been a mover in the wake of the Reserve Bank of New Zealand policy meeting. The RBNZ held fire on rates, but suggested that there were concerns over the strength of the Kiwi and this could lead to another rate cut.
Traders will continue to digest the Fed statement today but also will very quickly be looking towards today’s key first reading (Advance) of US Q3 GDP. The data at 1230GMT is expected to show 1.6% growth annualised in the third quarter, way down from 3.9% in Q2. There are also weekly jobless claims at the same time with 263,000 expected. There is also the flash reading of German CPI for release at 1300GMT and is expected to pick up by +0.2%.
The Aussie has broken down below $0.7200 which is a key near term move. This completes a small top pattern that gives an implied target of $0.702, however if the downside momentum continues to build then there is a likelihood that there will be a test of the key October low at $0.6935. The concern is that all the daily momentum indicators are now in bearish configuration with the Stochastics accelerating lower, the RSI once more below the 50 level (which has been a very good signal) and the MACD lines crossing over. The intraday hourly chart shows that there is a breakdown with a rebound from an oversold position overnight. Rallies are now to be seen as a chance to sell, with the reaction high at $0.7160 (just prior to the Fed statement) as a lower resistance below the key level at $0.7200.
With the hawkish hint in the Fed statement, the euro has fallen sharply. The consolidation of the past couple of days which had been testing the pivot band $1.1050/$1.1100 has found resistance at this level ($1.1095 to the pip) which has now become an area to look for selling opportunities. The sharp downside move has resulted in a breach of the reaction low at $1.0987 and in all likelihood now could now induce a test of the key multi-month range low at $1.0810. The deterioration in the momentum indicators certainly reflects bearish momentum and that rallies will continue to be sold into. There has been a degree of overnight unwind of the immediate term oversold momentum and a rally off $1.0894. As the hourly momentum indicators just look to unwind a touch this could give us a technical rally today. However there is now resistance with the previous support at $1.0987 towards $1.1020, however, the rebound may not get that far.
The corrective slide continues and is being aided by the hawkish Fed statement yesterday. This has continued the series of lower highs and lower lows on the daily chart. The Stochastics are still falling and the RSI is also on the drift lower too. I am still not of the opinion that this is a huge sell-off though (I would have thought that yesterday’s selling pressure would have been greater than it was on the Fed announcement if the market was to be going significantly lower. There is still the support in place at $1.5200 and it will be interesting to see how Cable treats this support. I look at the hourly chart and I see a corrective chart rather than a strongly bearish chart. The hourly RSI is not overly bearishly configured, moving between 30 and 60 which tells me that rallies are a chance to sell but the momentum is still not massively bearish. Continue with this strategy for now, but watch for the support at $1.5200. Initial resistance comes in around $1.5300 with yesterday’s rally high at $1.5345 now key near term resistance.
The dollar bulls returned with the hawkish lean in the Fed statement yesterday but compared to some major pairs the dollar has not appreciated as much as perhaps it could have done. This has left Dollar/Yen with a rather mixed outlook still. It remains rangebound under the resistance band 121.50/121.70 and is trading above the 119.60 pivot level so the outlook is positive within the range. However much of the 80 pips rally has been retraced and there seems to be a lack of conviction in the move (which is interesting considering the huge reversal on gold which is deemed to be another “safe haven”, see next chart). The hourly technical indicators are in a more positive configuration with support now in the range 120.15/120.60. There is certainly a slight bullish bias here towards a test of the range highs, but it is not a high conviction move.
An absolutely enormous intraday turnaround has scuppered what looked to be a burgeoning rally once more. This is the second time in 4 sessions this has happened (the first being on Friday in the wake of the PBoC rate cut). The reversal has meant that gold has turned back from $1182.50 to post a low at $1152.00. I have been talking for a while about a medium term higher low being posted in the band $1156/$1170 and this reversal has broken through the lower support of this band. The intraday low has though held on to support at $1151.10 and there has since been an unwinding recovery (as was seen following last Friday’s move). We must now let gold settle down before we work out the fallout from this move as clearly taken in isolation this is a massive bearish engulfing candle on the daily chart which shows the correction continuing. The rebound is already strongly off the lows and I would look for how this move reacts to the old resistance around $1170 which had previously held back the recovery.
Despite an intraday breach of the key support at $43.20 on Tuesday, a failure to confirm the move on a closing break has come back to haunt the sellers. A huge rebound has subsequently set in. This rally of over 6% has completely turned around the outlook for WTI in one session. After the slow drift of losses the sharp rally from the key support at $43.20 maintains the trading range of the past two months. Interestingly there has been a technical improvement too with the bull cross on the Stochastics. Also, the remarkable rally has also broken a near three week downtrend too. The intraday hourly chart shows the consistent sequence of lower highs, however the initial resistance at $45.00 has been breached and the band between $46.00 to $46.50 will now be the net test for the rebound. Once the initial near term exuberance settles down and the hourly RSI has unwound we can assess the outlook. The initial support is now in at $45.00.
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