There once was a time when the actions of the Donald Trump’s administration did not drive markets, but I am struggling to remember that now. Once again, the twists and turns of the US protectionist policy path are setting the agenda for traders and driving intraday volatility. A decision to opt against stringent limits on Chinese investment in US tech companies (instead to allow Congress to beef up the abilities for regulation) has seemingly shown a softening from Trump. However, a globalist stance to protectionism rather than a China specific one is hardly an about turn that everyone should be positive about. The direction of the policy path is set, even if there may be more twists and turns than previously anticipated. Sentiment initially improved sharply yesterday, driving an equities rebound, only for the bond markets to take more of a questioning stance. Subsequently, Treasury yields fell away again (10 year yield below 2.85%) and equities on Wall Street have sold off. However, considering how yields fell away, there was also a remarkable dollar rally, with the greenback gaining across the board, even against the yen. Even though this move may be counter-intuitive, the dollar strength shows little sign of reversing this morning, with gold continuing to suffer. Something also tells me that the bounce on European equities may not have formed the low quite yet.
Wall Street lost intraday gains to close sharply lower (S&P 500 -0.9% at 2700). However, with US equities futures mildly higher this morning, this means that there is a mixed feel to Asian markets (Nikkei +0.1%), whilst European indices are mildly lower. In forex, the selling pressure on sterling continues, whilst the euro and yen are dipping again as European traders take over and the dollar remains positive. In commodities, this is not helping the beleaguered gold price which is again staggering around looking for support but finding little after another disappointing session yesterday. Oil has looked to unwind a touch after a huge run higher again yesterday.
The EU Summit was meant to be an event that was Brexit focuses, however this has now changed, with the political process in the UK dragging and a seeming inability to present a coherent plan to the EU leaders. This has certainly been overtaken by the debate over immigration and how to seemingly save Angela Merkel from an ignominious end to her leadership.
There is a limited economic calendar for the European morning and the focus will be on the final reading of US Q1 GDP which is expected to not see any revision to the +2.2% from the Prelim reading. Weekly Jobless Claims are expected to again remain around recent levels at 220,000 (218,000 last week). There are also a couple of central bankers to be aware of, with the recent dissenter of the Bank of England, chief economist Andy Haldane speaking at 1430BST, whilst mild voting dove on the FOMC Raphael Bostic is speaking at 1700BST.
Chart of the Day – GBP/AUD
The recovery uptrend that has been developing over the past few weeks is being seriously questioned as the market has lost impetus in the past week. The question is whether this is a move that will spell the end of the recovery. The rally has been increasingly tentative in the past few sessions, with resistance building at 1.7980 and either bearish or neutral candles, culminating in a bearish outside day yesterday in the correction. A test of a three week recovery uptrend held yesterday but continues with today’s early drop back again. The concern for the trend grows as momentum indicators are rolling over with the Stochastics suggesting this move is a near term sell signal. The market has been supported well above 1.7735 since a breakout and this neckline is now a key basis of support to watch. A closing breach of the neckline would also have the market below the uptrend and would then call for further correction. The hourly chart shows how support at 1.7750 is key and taking the hourly RSI decisively below 30 would reflect the deterioration in outlook. Resistance is building at 1.7900 under the 1.7960/1.7980 range of peaks over recent days.
A remarkable move lower was seen yesterday afternoon as US traders really bought into the dollar on the back of the latest Trump announcement. A big bearish candle cut almost 90 pips off EUR/USD and once more move to threaten the key support around $1.1500. Technical momentum indicators have taken a turn for the worse and in leaving resistance at $1.1720 from Tuesday’s high, the pressure is really mounting on the key medium term range floor once more. It now might just be that the reaction of the market today could be key as to whether the range floor can remain intact. Initially this morning there is a degree of consolidation as the dust settles on yesterday’s sharp downside move. However there is a negative configuration now on hourly momentum indicators with the RSI failing around 50/55 and MACD lines under neutral. The bulls will need to fight hard, with yesterday’s low an early reference of support. There is resistance now between $1.1600/$1.1640.
With the Cable bears in control the market has posted a second negative candle which has cut 115 pips off the price. This now means that the market is testing the recent June low again as last week’s gains have been all but wiped out. Momentum indicators have ticked lower to reflect the move which has now left important resistance at $1.3315. The market has spent the Asian session this morning consolidating around the $1.3100 support area however, as the Europeans drink their morning coffee there is a downside break forming. The dollar strength which drove the market lower yesterday looks set to continue to drag an underperforming sterling even lower as support at $1.3100 has given way. This now opens the key October/November lows at $1.3025, whilst trading with a $1.29 handle would be a decisive breakdown again. There is initial resistance now $1.3100/$1.3120, below the $1.3200 overhead supply.
The strengthening dollar even managed to drag USD/JPY higher yesterday as a second consecutive positive candle has pulled the market back above 110 again. This move has helped to improve the outlook once more, but taking a step back, there is still a likelihood that this all lays out as part of a broader consolidation band. On a medium term basis the range is 108.10/111.40, whilst that can be refined to 109.15/110.90 nearer term. The market has ticked higher but momentum indicators are reflective of this as a consolidation that is likely to have more twists and turns. The hourly chart shows a mild positive bias within a near term range play. Resistance is 110.75/110.90 could see some action but the bulls need to start pulling some decisive positive candles on the daily chart to really grasp control. Support is initially around 110.00 with 109.65 a mini higher low above 109.15/109.35.
A third consecutive decisive bear candle simply continues the move lower on gold that eyes the key December low and implied target from the medium term top at $1236. Momentum is deeply negatively configured with the RSI falling into the low 20s, whilst MACD and Stochastics lines track lower. There is an argument to say that the RSI is oversold, but this is a trending move and that means the move could easily continue. It does though mean that when a technical rally does come, it will likely be sharp in nature, so being mindful of this with managed stop losses on short positions might be a wise move. Resistance is initially at $1261, whilst $1272.50 is a lower reaction high. The hourly cart could give a clue as to any exhaustion but there is no let up yet in negative momentum there, with the hourly RSI continually failing around 50 and MACD lines below neutral. Any change to this might hint at recovery but until this is seen then old support remains new resistance. The latest breakdown below $1254 could now become the next basis of resistance. A move to $1236 remains preferred.
The bullish momentum in the oil rally was there anyway, but the surprisingly larger than expected EIA crude oil inventory drawdown has added fuel to the fire. Another huge bull candle has now broken the market above the key May high at $72.83. This move (which has included a multi-year closing high) now takes the market to a level not seen since November 2014 and once more open the upside recovery and retracement of the huge bear market. The next (minor) resistance is at $77.85 whilst $80 is then back on the agenda. Momentum indicators are accelerating higher and still with upside potential with the RSI in the mid-60s and MACD line still with plenty of room to run. The near term breakout level at $69.45/$69.55 is now a basis of support for any unwinding correction now. Initial support today is around $70.60/$71.00.
Dow Jones Industrial Average
Trade tariff concerns have been a significant driver of the market lower in the past couple of weeks, and given the moves during yesterday’s session, traders are struggling to grasp the issue. A huge initial rally entirely turned lower to close eventually with a 165 tick (-0.7%) loss on the session. A huge bearish outside day session which although has broken the nine day downtrend, remains very negatively configured. Technically the importance of the Fibonacci retracements of the 26,616/23,345 sell-off simply grow by the day now. Yesterday’s intraday rally turned back from the 38.2% Fib at 24,595 (posting a high at 24,569, only to fall all the way back to close the session at the 23.6% Fib of 24,117 to the tick. The worry is that a decisive close below 23.6% implies a full retracement back to 23,345. Resistance is mounting overhead and clearly rallies are a chance to sell. The market is not responding well to this news-driven slide into US protectionism.
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