The reflation trade has been a key feature of market moves in recent weeks. However the euro is coming under increasingly corrective pressure as inflationary pressures are beginning to ease. This was seen in the weaker than expected German inflation data that was posted yesterday, which bodes ill for today’s March flash CPI for the Eurozone. The expectation that the ECB would begin to talk about tightening before the end of the QE programme took a hit this week on reported denials from Governing Council sources. This has started a euro decline and a set of weak inflation readings today could accelerate the move. However this comes as US data remains positive, with final growth in Q4 revised higher than expected. Bond yields have been propped up and the dollar is a continued recovery play today. This is beginning to drag across forex majors and the precious metals. Equities have been on a recovery track for the past few days and it will be interesting to see if this momentum can be sustained moving into the new quarter.
Wall Street closed higher with the S&P 500 +0.3%, whilst Asian markets were a touch more corrective (Nikkei -0.8%). This came despite overnight data being supportive for sentiment, with Japan core CPI inflation improving to +0.2% (from +0.1%) which is nearly a two year high and in line with consensus forecasts. Chinese data was also positive with China Manufacturing PMI improving to 51.8 which was marginally higher than the forecast of 51.7, whilst the services data Non-Manufacturing PMI also improved to 55.1 from 54.2 last month. European markets are marginally lower on the final day of the month and the quarter. In forex, the dollar is just giving back some of yesterday’s gains, but with little real sign of significant selling pressure. Gold and silver are consolidating after yesterday’s corrective move. The oil price is giving a little of its gains back after three strong days of recovery, however, for now WTI remains above $50.
Traders will be looking out for the final reading of UK GDP for Q4 2016 at 0930BST and expectation is that there will be no revision from the +0.7% of the second reading. Eurozone flash CPI is at 1000BST and in the wake of the surprise drop in German HICP yesterday there is a clear downside risk to the consensus forecast of +1.8% for headline (+2.0% last) and +0.8% on the core (down from +0.9% last month). There is further key inflation for the US in the afternoon with the Fed’s preferred inflation measure the Personal Consumption Expenditure at 1330BST. The headline PCE was +1.9% last month and +1.7% on the core, however the expectation of +0.2% for the monthly core PCE is not expected to drive any change to the year on year data. The revised Michigan Sentiment is at 1500BST and is expected to be slightly upwardly revised to 97.8 (from 97.6 in the prelim).
Chart of the Day – EUR/GBP
Has sterling finally started to engage a short covering rally? With record short positions on sterling building up in recent the risk is for a short covering rally in the wake of removing the uncertainty of Article 50. Sterling/euro had a key move to the downside yesterday which broke the pair to a four week low and seemingly sets the pair free for further downside. The market has been consolidating around the old £0.8650 pivot in recent days, but two sharp bear candles is starting to drive some direction. The RSI is confirming the near term break down with MACD lines corrective within a ranging phase and the Stochastics negatively configured for the near to medium term. The hourly chart shows a near term break below £0.8602 and this now means that there is a band of resistance on the hourly chart initially between £0.8602/£0.8615 with the Marabuzo line (centre line retracement) of yesterday’s session is at £0.8610. Rallies are now a chance to sell and also anything between £0.8600/£0.8650 to acts as a near term sell zone. Key resistance for downside bias towards the February low at £0.8400 comes in at £0.8735.
There were elements of both euro weakness and dollar strength which have combined to break the pair back below the key near term support around $1.0710. This now means three consecutive bear candles and the move is strengthening with a candlestick of exactly 100 pips of downside that fell consistently throughout the session to close around the day low. This breakdown is reflected in the momentum indicators which have deteriorated as the MACD lines looks to complete a bear cross, the Stochastics confirm a near term sell signal and the RSI drops back below 50. This all suggests that selling into strength is now the strategy for near term moves towards $1.0600 initially and perhaps even a test of the key lows just below $1.0500 at $1.0492. The hourly chart shows strong bear near term configuration with 50 pips of resistance between $1.0720/$1.0770 as a near term sell zone now. The hourly RSI shows any moves into the 40/50 area are now limiting and should be seen as a chance to sell. The hourly chart also shows the next support is at $1.0640.
Despite the dollar strength that is impacting throughout forex majors, the outperformance of sterling is also beginning to impact in the past 24 hours. This sterling strength is questioning the corrective outlook on Cable that arose following the strong corrective candle on Tuesday that broke the recovery uptrend. This is beginning to leave the market with something of a mixed outlook near term. Yesterday’s candle showed gains on the day but the sterling bulls were held back by the dollar strength which drove a close around the mid-point of the session range. This suggests a positive market that lacks a bit of conviction. That is also shown in today’s early marginal gains. The hourly chart shows mixed configuration on hourly momentum, but also the increasing importance of the support at $1.2380/$1.2400 now. The hourly moving averages are flattening. Yesterday’s high at $1.2525 is an immediate line in the sand and a breakout would give the bulls confidence for a test of the key near term highs at $1.2595 and $1.2615. There is a near term pivot forming around $1.2460.
The strength of the dollar has started to pull the pair higher. There has now been a key near term break above the resistance at 111.60, a move that completes a rounding base pattern that implies around 150 pips of recovery. That means that a pull higher to test the resistance of the old low at 112.50 is now likely in this recovery phase. On a medium term basis this move still looks to be a technical rally within the bear market, however it is equally interesting to see this this rebound took off from what is now a 6 month uptrend. How the bulls commit to this rally now will be interesting for the longer term perspective. Looking nearer term, there is breakout support now 111.40/111.60 and the early move back from 112.20 overnight is a chance to buy into support. The reaction low at 110.70 is now a near term key higher low and needs to hold for this recovery to continue.
After several days of consolidation, the gold price finally looks to be succumbing to the strengthening dollar. The key near term support at $1240.30 has been marginally breached early this morning but the bulls are still hanging on by a thread. A decisive move below a reaction low at $1240.30 would change the near term outlook and break the recovery phase. The momentum indicators are beginning to roll over with the Stochastics threatening a near term sell signal and leading the way. The next support on the daily chart is at $1226.30, whilst the breakout support at $1220 would also come back into play. The hourly chart shows a corrective configuration on the momentum with the RSI now failing around 60 and falling below 30, whilst where the MACD lines had previously been supportive around neutral, this is now becoming a basis of resistance for unwinding moves. There is a mild sequence of lower highs forming, with the resistance band $1246/$1251 now beginning to be seen as a sell zone. Initial support is an old breakout at $1235.50.
Oil continued its recovery with a third consecutive strong bull candle and a move through the key resistance at $49.60. This move has now completed a near term base pattern that suggests that the bulls could recover around $2.60 of upside towards $52.20. Furthermore, oil is back above the key $50.00 level would now confirms the base pattern. The momentum indicators are improving sharply now with the MACD lines giving a bull crossover, whilst the Stochastics are advancing strongly and the RSI has further recovery potential. The next band of resistance is the old lows $50.70/$51.22. The hourly chart shows strong bullish momentum configuration and that intraday corrective moves are being seen as a chance to buy now. Today’s early slip back could be that opportunity and holding above $50 would be a strong signal. The neckline support of the base pattern is at $49.60 for a pullback, whilst the bulls would not want to lose the support of yesterday’s low at $49.25.
Dow Jones Industrial Average
The bulls are pushing for a recovery and the near term resistance between 20,757/20,777 is key to the move. However, it interesting to see that the bulls just a touch reluctant at that resistance during yesterday’s session. Despite this though, gains on the day were posted and the opportunity remains for further tests of the overhead supply today. With the daily Stochastics now advancing strongly the momentum is taking off once more. The hourly chart shows a well-defined near term head and shoulders base pattern that would complete on a move above 20,757 and would then imply an upside target of 21,060. The pattern would also confirm on a break back above the old key reaction low at 20,777. The daily chart shows downtrend resistance for the recent few weeks of correction comes in at 20,827 today and also needs to be breached for the bulls to regain real confidence in the recovery. The small base pattern would lose integrity if the market were to fall back below 20,625.