As the trade spat between the US and China has shown signs of receding, sentiment on financial markets has improved. Donald Trump has welcomed the speech of President Xi on Chinese openness and this clearly improves the prospects of an agreement between the world’s two largest economies that can hopefully avert a growth busting trade war. Trading in recent weeks has been newsflow driven, choppy and lacking trend. Perhaps now, this can change. However, geopolitics never seems to be too far off the agenda, with the potential for a bombing campaign to be ramped up in Syria. This is helping to underpin the oil price gains, whilst adding a safe haven flow as well. There is a dollar weakness that is beginning to filter back through markets, with the Dollar Index at two week lows, whilst Treasury yields still look to struggle for upside traction at the longer end of the curve. Inflation will be the key theme for today with US CPI data but also the Fed’s views in the FOMC minutes. Chinese inflation missed estimates earlier today with CPI falling to +2.1% (+2.6% exp, +2.9% last), and the PPI down to +3.1% (+3.2% exp, +3.7% last).
Wall Street bounced strongly last night with the S&P 500 +1.7% at 2657, but with S&P 500 futures around half a percent lower today Asian markets have been mixed (Nikkei -0.5%) and European indices are also lower in early moves. In forex, the dollar remains under pressure, although the commodity currencies (Aussie and Kiwi) are underperforming after the drop in China inflation. In commodities, the dollar weakness is boosting gold by $5 whilst oil is just giving back some of yesterday’s sharp gains.
Today is the big data day of the week, and begins with UK Industrial Production at 0930BST which is expected to improve by +0.4% on the month and to +2.9% for the year (form +1.6% last month). After both core and headline PPI surprised to the upside yesterday, the consumer inflation data US CPI is released at 1330BST today with much anticipation. Expectation is that the headline CPI will not increase on the month, but due to a monthly fall a year ago, the year on year reading will increase to +2.4% (from +2.2%). Core CPI is also expected to increase by +0.2% on the month (the same monthly expectation for over two years) whilst that would mean the year on year reading is expected to jump to +2.1% (from +1.8%). The EIA oil inventories are at 1530BST which are expected to show crude oil stocks flat on the week (-4.6m drawdown last week) with distillates -0.5m (+0.5m barrels build last week) with gasoline stocks -1.1m (-1.1m drawdown last week). The day ends with the FOMC minutes for the March meeting at 1900BST. The rate hike of 25 basis points was fully anticipated by the market, but as ever further flesh on the bones of inflation moves in 2018 will be watched.
Chart of the Day – AUD/JPY
Aussie/Yen is a classic forex major cross that reflects risk appetite and the improvement in market sentiment in recent days has driven a decisive improvement in the pair. Having broken the downtrend channel last week there has been pressure growing on the resistance around 82.60. Now, posting a run of higher lows and higher highs in the past couple of weeks, yesterday’s solid bull candle has decisively broken resistance at 82.64 to complete a small base pattern that implies a rebound of c. 210 pips in the coming weeks. This now confirms the improvement in the outlook that has been building recently and opens a recovery to the key March high at 84.50. This move is also confirmed by the momentum indicators, with the RSI accelerating above 50 to 10 week highs, with the MACD lines also rising strongly, whilst the Stochastics are also in positive configuration. The neckline around 82.60 is now a basis of support with 81.90/82.60 a near term buy zone for the early unwinding move seen today. The hourly chart shows support in the band 82.45/82.95 initally and that the overnight drop back is simply helping to unwind momentum and renew upside potential. A decisive push back above initial resistance of an old pivot at 83.30 would open 84.50.
With the support in place at $1.2210, the euro is now beginning to make firm ground in the recovery within the sideways range again. A third consecutive solid positive candle has taken the market above the initial resistance at $1.2345 whilst the support continues to build early in today’s session. This move has opened the March high at $1.2475. Momentum indicators are advancing once more with the RSI into the mid-50s, whilst MACD and Stochastics lines advance. The RSI is actually now at an interesting stage as previous mid-range rebounds have floundered in the high 50s, so a move above 60 would be a good sign of growing confidence in the bulls. The hourly chart shows an uptrend has formed in the past few days and positive hourly momentum is configured. Intraday corrections are being used as a chance to buy. There is initial resistance at $1.2420 today protecting $1.2475. Initial support is at $1.2330 with yesterday’s low at $1.2330 a near term higher low now.
The sterling bulls continue to build as a third solid positive candle was formed yesterday. This now brings the market to a challenge of the resistance of the March high at $1.4245 today. Momentum indicators are strongly configured, with the RSI into the low 60s and Stochastics ticking decisively higher again, although the MACD lines may be a little slow to react currently. It will be interesting to see how the bulls react up around these heady levels once again as technically the position is strong for Cable short, increasingly medium and still longer term now. Corrections remain a chance to buy, but there is still upside potential in this current move. A break above $1.4245 would open the key January high at $1.4345. The hourly chart shows a run of higher lows in recent days, with initial support to be watched at $1.4120/$1.4140. The support of the April lows around $1.4000 (at $1.3965) remains key, with the five month uptrend at $1.3980 today.
With the technical outlook having improved following the breaking higher of the series of lower highs, the dollar bulls still cannot grasp control of the market. Breaking the bear trend is one thing, but forming a new bull trend of sustained recovery is quite something else. There is a run of higher lows which has formed a near term uptrend of the past couple of weeks but this trend needs to push on now. A resistance at 107.50 has been in place now since last week and needs to be broken to signal the next push higher. Yesterday’s bull candle has not been the trigger to open the way this morning yet and the market is threatening a consolidation. There has been a more improved look to the daily momentum indicators but this needs to continue, as the RSI is just hovering around the low 50s now and MACD lines have just unwound back to neutral. The hourly chart shows that some of the impetus has ebbed away from the rebound. The support is though building around 106.60 and whilst the market trades above 107.00 this seems to be a more positive bias. This is a market at a crossroads near to medium term.
As the dollar has slipped in recent sessions, the gold price has rallied. There have now been three consecutive positive candles posted now that have taken a more positive bias to the market. However, taking a step back shows that there is still much that needs to be done for the bulls to be considered in full control. The push higher has been taken with very small candlestick bodies (at least in the past couple of sessions) and essentially there is little that this rally has achieved yet. Recent resistance levels at $1348/$1357 remain intact, whilst momentum indicators have only marginally improved but within very much of a ranging look to the market. The support at $1321 has been bolstered by the rebound and there is a sense of the market setting up for a test of the $1348 resistance today, however with such a lack of decisiveness in the technical outlook, the market will move off newsflow. Positioning higher may be coming from geopolitical risk surrounding Syria, but also watch out for US inflation this afternoon.
A second consecutive strong bullish candle has seen the buyers return to control of the market. A recent two week downtrend has been decisively broken, whilst the market has also rallied back above the resistance of a six week pivot around $64.20 on the daily chart. This pivot becomes a basis of support today and the buyers will now look to use weakness as another opportunity. Daily momentum indicators are looking to swing higher again, with the Stochastics crossing back higher again and MACD lines turning up above neutral. The hourly chart shows the market pulling above what looks more like a pivot range between $63.75/$64.25 and this 50 cents range is a decent buy zone now. Initial resistance is at yesterday’s high at $65.85 with $66.55/$66.65 the key long term resistance. The recent rebound has significantly strengthened the $61.80 key support that was again bang on the 7 month uptrend.
Dow Jones Industrial Average
The Dow is very much risk-on/risk off on trade tariffs newsflow and with the conciliatory tone of President Xi of China, the market has jumped back higher again. Technically this has brought the Dow back into a crucial zone of resistance between 24,450/24,650 which is also a confluence level as the resistance of the 10 week downtrend falls at 24,620 today. The momentum indicators are mixed with the RSI ticking higher again (although it is simply back around 50) whilst the Stochastics and MACD lines are somewhat indecisive in their moves. That makes the moves on the Dow in the next session or two extremely important from a technical perspective. If a run of positive candles can be formed that breaks through the confluence of resistance to engage positive momentum, then the bulls can really regain confidence. A move above the reaction high at 24,620 today would certainly help to break the shackles, opening next resistance at 24,978. Initial support at yesterday’s traded low of 24,199, with 23,738 now a key potential higher low in the recovery.
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