Sentiment seems to be a little divided in markets currently as equity markets continue to rally at a time at which forex and bond markets are showing caution amid signs of a renewed lean back towards safer haven preference. Overnight gains on Wall Street of +1.4% on the S&P 500 filtered through to the Asian markets which also posted decent gains (Nikkei +0.7%). However, in forex the yen is stronger, sterling and the euro weaker, whilst Treasury yields are back lower again.
The first of the month is manufacturing PMI day and the data should help to mould risk appetite through the session. A downbeat set of PMIs out of China (official data was in line at 50.0, whilst the Caixin manufacturing PMI fell to 48.6 and missed estimates too) and the continued decline of Japanese CPI paints a rather drab picture of the region (although the Tankan survey was reasonably positive). Sterling has come under renewed pressure as comments from the Bank of England Governor Mark Carney pointed towards either a rate cut of more QE in the months ahead. Carney said, “the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer”. It is likely therefore that this would come with the August inflation report.
The safer haven shift in forex is showing through with sterling and euro weakness and yen strength. It is worth noting though that sterling has been weak during the Asian session for the past couple of sessions only to rally in the European session. Interestingly though, despite the downbeat China data, the Aussie and the Kiwi are holding up relatively well. Precious metals are carrying on from the late gains from yesterday with over $10 on gold and also silver looking to confirm the breakout above its key resistance at $18.50. Oil is marginally higher.
Traders will be looking out for Eurozone Manufacturing PMIs with the regional data at 0900BST (52.6 exp which would be in line with the flash reading), with the UK Manufacturing PMI at 0930BST (50.0 exp which would be slightly down from last month’s 50.1) and the ISM Manufacturing at 1500BST (51.4 exp up slightly from 51.3 last month).
Chart of the Day – EUR/JPY
There is a similar outlook on Euro/Yen as there is to Dollar/Yen, however the moves are far more pronounced as the euro is an underperforming currency out of Brexit, whilst the yen remains the market’s safe haven of choice. Therefore if you are a bear of Dollar/Yen and negative on the impact of Brexit, then Euro/Yen could provide even greater downside momentum. The key technical factor to note of Euro/Yen is that despite the technical rebound in the past few days from the spike low at 109.46, the momentum indicators suggest this is an unwinding rally that will be sold into. Despite yesterday’s rally into the close, the RSI remains bearishly configured and shows little sign of any sustainable recovery, whilst the MACD lines are also negatively configured and the Stochastics look primed for a sell into strength. The hourly chart shows the loss of momentum in the recovery with the hourly RSI and MACD lines tailing off back below neutral again and also arguable showing slight bearish divergences. The rally yesterday seems to have formed resistance now at 114.85 which is underneath the Brexit day rebound resistance at 115.32. Yesterday’s low at 113.30 will be eyed as a potential trigger for a renewed sell-off if breached today. For now though I await the sell signal.
The recovery in the euro that was seen on Tuesday and Wednesday hit the buffers a bit yesterday and the move seems to have stalled. The swings of an outside day 130 session seem now to be resulting in the euro rolling over. Although the recovery slightly breached the long term pivot at $1.1100 (reaching a high at $1.1155) I still see the sell-zone between $1.1100/$1.1200 as being where the next lower high will be posted and this now is where I am on the lookout. The momentum indicators show little real energy in a recovery with the RSI struggling in the low 40s, whilst the MACD lines and Stochastics also uninspiring. With the further weakness today I anticipate a move lower again to retest the low at $1.1022 from yesterday. At best I see this as a consolidation now but favour a downside move back towards $1.0968 and $10909.
I continue to expect further weakness in Cable in due course. Yesterday’s late sell-off was induced by dovish comments from Bank of England’s Mark Carney and shows how wary the market is now. Cable lost over 200 pips in the wake of Carney’s statement and although there was a slight clawback into the close the bearish outlook has been set. This has left the resistance at $1.3533 and yesterday’s high at $1.3492 and the momentum indicators retain a bearish outlook. Rallies will continue to be seen as a chance to sell. The hourly indicators also show a bearish configuration now with the overnight rally rolling over around a near term pivot at $1.3360 and the hourly momentum bearishly configured. I expect further pressure back on yesterday’s low at $1.3202 and ultimately a retest of $1.3118.
I believe that this rally will be seen as a chance to sell and that the recovery is only short term. The rebound may have managed to scrape a third day of gains but there is a large band of overhead supply between 103.60/106.80 which is where I believe the next lower high will come in. Also the old key floor at 105.50 is a band of resistance too. The momentum indicators are struggling to gain any traction from this recovery with the RSI not even up above 40 and the Stochastics very tepid too. The reaction high so far is 103.39 prior to the early morning yen strength which has pulled the pair lower again. The hourly chart does show a series of higher lows and higher highs with 102.32 the latest reaction low, but with hourly momentum also failing to find bullish configuration the bears will be eying this as a key test for the recovery. I am waiting still for the next sell signal but it may not be long in coming.
Is the gold price starting to regain some traction once more? The overnight weak economic data from China and Japan gave gold a boost again and the support around the breakout above $1306 has been bolstered. I spoke yesterday about gold being in a near term range between $1306/$1335, whilst the Fibonacci retracements of the Brexit rally from $1251/$1358 are also playing a key role with 50% Fib at $1305 and 23.6% Fib at $1333. A confirmed breakout above $1335 would re-open the rally high at $1358 again, and with the hourly momentum indicators improving there is the upside potential for the move. Near term support comes in at $1320 and $1312.50.
The bulls seem to have been unable to maintain their push as news of improved oil supplies in Norway and Nigeria drove some selling pressure. This has left resistance bang on $50.00 and puts focus back on the near to medium term pivot around $48.50. The outlook subsequently is very much rangebound now as the 21 day moving average has plateaued, the Bollinger Bands flatten and momentum indicators take on a more neutral configuration. The RSI is now oscillating between 40/60, whilst the MACD lines flattening just above neutral and Stochastics uncertain. This leaves us with a choppy range play between support at $45.83 and resistance at $51.67. Closer look at the hourly chart suggests that there is a pivot band between $48.00/$48.50 suggesting that a breach of the downside support would likely re-open the range lows again.