Since the dust began to settle in the wake of Friday’s hectic Non-farm Payrolls there seems to have been a shift in sentiment for the dollar. A correction has started to come through as the euro and sterling have both begun to find some support. For now, these look to be near term moves. US bond markets were closed yesterday for Columbus Day and there has been a slight reaction lower on Treasury yields today, although as yet nothing that would point to a larger dollar correction. The sharp rise in US wage growth is still likely to e dollar supportive and a significant move against the dollar is unlikely at this stage. It seems to be local currency nuances that have moves major pairs, with the perception of mildly hawkish comments from the ECB’s Lautenschlaeger on rolling back asset purchases next year lifting the euro a touch. Also for sterling, Theresa May has also looked to ward off dissent within her government. The fact that the US dollar is still broadly flat against the Japanese yen is a suggestion that there is an uncertainty behind the recent dollar slip across several of the major pairs. It could also be that traders will already be looking towards more key risk events in the back end of the week with the FOMC minutes, before US CPI and Retail Sales are served up.
On a quiet session due to Columbus Day, Wall Street closed marginally weaker with the S&P 500 -0.2% at 2545, whilst although Asian markets were broadly higher (Nikkei +0.6%) European markets are following Wall Street with mild early declines. In forex, the dollar is underperforming across the major pairs, with the euro and sterling again positive, whilst the Aussie is also outperforming. In commodities, the weaker dollar is also helping to lift gold for a third consecutive session, whilst oil is also consolidation yesterday’s support.
Early focus for traders will be on UK Industrial Production numbers at 0930BST which is expected to grow by +0.8% for the year, whilst the UK Trade Balance for August is expected to be -£11.2bn (a slight improvement from -£11.6bn in July). There is little significant US data of any note, however traders will be looking out for the comments from FOMC’s Neel Kashkari (voter, dove) who is consistently one of the most dovish members on the FOMC.
Chart of the Day – DAX Xetra
The major Eurozone equity markets (especially DAX and CAC) have pushed strongly higher in the past couple of weeks, however a pause for breath has set in for the past couple of sessions. With the DAX having broken out to new all-time highs there is a feeling that this is a market settling down after a sharp run of gains. Yesterday’s small doji cross candlestick (50 tick range with open and close around the mid-point) shows a consolidating market. With the RSI over 80 the upside potential for immediate further gains looks to be relatively limited. The uptrend channel of the past six weeks is still rising to provide support at 12,835 today whilst there is little of any real sign of a correction on momentum yet. This would suggest that with the small candlestick bodies of recent sessions, a consolidation or intraday slip is still likely to be supported fairly quickly. The market has become stretched and a near term unwinding move could actually help to re-fuel the market for the next leg higher. This would suggest that near term corrections that find support in the 12,840/12,950 of old breakouts will be seen as a chance to buy within the uptrend channel. Initial resistance is 12,997.
There seems to have been a subtle shift in sentiment since the payrolls report on Friday. The market has suddenly turned a touch negative on the dollar and more positive for the euro. This has come as EUR/USD has picked up to leave support at $1.1667 (just above the key August low of $1.1660) to now test the initial resistance at $1.1790. The momentum indicators have started to improve too, with the RSI and Stochastics both ticking higher. However, I continue to see this as a near term move within what looks still to be a correction lower on the pair. The neckline of the top pattern below $1.1820 is still a resistance of note, whilst the momentum indicators are still in a correction medium term configuration (RSI still below 50, MACD lines below neutral). The hourly chart shows a near term improvement but still within what looks to be a recovery within a near term trading range $1.1660/$1.1820. Initial support is now $1.1710/$1.1720.
Cable has bounced with a mild dollar weakness since the payrolls report and with the perception yesterday that Theresa Mays government is not going to fracture quite yet, sterling has strengthened. This rebound on Cable has continued today but for now still looks to be a rally within the three week downtrend which is falling today at $1.3250. This is a confluence of levels with the 50% Fibonacci retracement of the Brexit sell-off at $1.3247 and minor support at $1.3220. The momentum indicators are acknowledging the tick higher with the RSI picking up from around 40, however the market will need to breach the downtrend and overhead resistance levels to suggest the bulls are serious about a recovery. The hourly chart shows a near term improvement with initial support at $1.3120, but the 144 hour moving average (currently $1.3170) has been a basis of resistance for the past couple of weeks.
The consolidation continues. For the past six sessions the market has closed within a 20 pips band as the consolidation range now between 112.20/113.43 has formed which are now key near term levels. The market is very much in the search for the next catalyst as technically there has been a loss of impetus. The momentum indicators re still broadly positive, but it is notable that the Stochastics have finally begun to drop and the MACD lines are now beginning to cross lower. This is as a result of the bulls losing the drive higher but it will be interesting to see if this begins to weigh on the market. The failed breakout on Friday, along with the drift lower on the dollar is questioning whether there will be a breakout to the upside now. A close outside the range will confirm the next direction. The hourly chart is giving very little on direction.
Is this the beginning of a sustainable turnaround? Gold is starting to find upside traction with a second strong candle completed yesterday, whilst there are additional gains today. During the four week corrective downtrend channel, gold has only once managed to string two consecutive bull candles together. A third today would suggest that the bulls are turning a corner. The momentum indicators are picking up with the Stochastics now tracking higher. If the RSI can push back above 50 and the MACD lines also cross higher then the bulls will be in a far better position. However the key tests are still overhead, with initial lower high within the old downtrend channel at $1290 and then the long term pivot range resistance at $1300/$1310. The hourly chart shows support at $1279 now an a more positive momentum configuration.
A degree of consolidation has helped the market take a breather after a few sessions of elevated volatility. However, with the US back from Columbus Day we could be set for renewed volatility today. The market has looked to stabilise around the old $49.20 support with a low on Friday at $49.10 which again held in yesterday’s positive session. The question is how the bulls react with the new trend lower that is now forming and comes in today at $50.20 as a barrier to a recovery. The concern for the bulls is that momentum indicators are beginning to find corrective traction with the RSI below 50 whilst MACD and Stochastics are both in decline too. A closing breach of $49.20 would open a further slide back towards $47.00 which has been an old long term pivot. A three month uptrend comes in at $47.60. There is now resistance $50.50/$51.25.
Dow Jones Industrial Average
Although US markets were open yesterday on Columbus Day, they might as well have taken the day off too as there was almost no direction to speak of. That now make two consecutive sessions of tiny daily ranges and consolidating on the day. A move to another new all-time intraday high was the only significant feature of note with 22,803 posted before the market dropped back again. The market continues to hug the upper band of the 2.0 SD Bollinger Bands (today to be around 22,850) whilst the upper limit of the uptrend channel is also a gauge. Momentum remains very strong on the daily chart with little sign of any reversal yet. The reaction today will be interesting as if the bulls again fail to push on with the trend the potential for profit taking will rise. The hourly chart shows initial support at 22,730 and then 22,645.