The reaction to the ECB monetary policy announcements yesterday was remarkable. The euro has sold sharply lower as the ECB laid out its monetary policy plans for the coming months. Ending its Asset Purchase Programme with a taper into the end of December was broadly expected by the market even if the timing of the announcement was at the early end of expectations. However, an initial pop to the upside was then sharply sold into as markets digested the ECB’s forward guidance on rates which would be kept at record lows “through summer” next year and also tied to inflation developments. With the ECB sounding cautious on inflation the market took this as a dovish steer on future rate moves. It would appear that Mario Draghi has once more pulled off a masterclass in essentially mixing what is a hawkish move with a dovish caveat, managing to jawbone the euro lower. The 10 year Bund yield fell back by 4 basis points and remains under pressure today. The euro fell over 200 pips on the day and is threatening its May lows again, whilst equity markets such as the DAX jumped strongly higher (although not Draghi’s primary concern, but still…). Job done Mario! As the dust settles today and in the coming days, the reaction will be key. Essentially, the ECB is now formally beginning on its tightening path and this should help to support the euro in the medium to longer term. Rate normalisation is a necessity and perhaps the market has taken its knee jerk reaction too far in its concerns over the speed of ECB tightening for decisions that are well over 12 months away, whilst Mario Draghi is an expert at dovishly dampening down expectations. For now the euro is under pressure, but once the dust settles it should begin to find support once more.
Aside from the ECB reaction, we also had the Bank of Japan overnight where it held fire with no change on rates at -0.1% and kept the yield curve control intact, as expected. The BoJ did though revise lower its inflation target to between +0.5% to +1.0% (from around 1.0% previously). Although this cutting of the inflation forecast had been broadly expected, the yen has still slipped slightly as a result. Furthermore a feature of the session will be the expected confirmation of a list of US tariffs on Chinese goods and how China subsequently retaliates.
Wall Street closed mixed to slightly higher with the S&P 500 +0.2% at 2782, whilst futures are mildly lower today. In Asia markets were slightly higher with the Nikkei +0.5% and in Europe today markets are looking mixed as the dust from a hectic session yesterday still looks to settle. In forex, there is a continued strength of the US dollar that was driven through events of yesterday. Interestingly, the euro is looking to consolidate after yesterday’s sharp losses, but other majors are still under pressure. In commodities, gold is dropping slightly with the dollar strength, whilst oil is consolidating.
A hectic week ends on a slightly quieter note but still there are some important data points for traders to get their teeth into. It is a bit of a case of “after the Lord Mayor’s show” for the revised Eurozone inflation data today at 1000BST which is expected to be confirmed at +1.9% for the headline CPI and +1.1% on core CPI. New York Fed Manufacturing is at 1330BST and is expected to tick very slightly lower to +19.0 (from +20.1). US Industrial Production for May is at 1415BST and is expected to improve by +0.2% on the month, whilst capacity utilization is expected to improve further to 78.1% (from 78.0% last month). The prelim reading of Michigan Sentiment is at 1500BST and is expected to again be strong and rise to 98.5 (from a revised lower 98.0 last month).
Chart of the Day – GBP/AUD
The market has been building a recovery over the past couple of weeks, breaking a corrective downtrend that has been in place since late April and on an intraday basis yesterday broken through key near term resistance at 1.7735. Although the bulls could not quite hold this break into the close yesterday, the market is certainly edging for the breakout. An uptrend has formed recently and the momentum indicators are signalling for further recovery gains. The MACD lines are the most important turn around with the bull cross forming after ten weeks of decline. The Stochastics and RSI are also rising strongly to suggest that near term corrective dips such as yesterday’s pullback will now be seen as a chance to buy. Key near term support is at 1.7530 as this week’s higher reaction low, whilst the nature of the intraday fluctuations yesterday show that 1.7620 is also now an important support. A close above 1.7735 completes a head and shoulders base pattern which would imply around 340 pips of additional upside. Yesterday’s high at 1.7790 is initial resistance before the old pivot at 1.7900.
The euro has just posted the biggest single bearish session since the day of Brexit in June 2016, with a 220 pip close lower. This move in the wake of the dovish taper from the ECB has completely changed the outlook for the euro. In one session the prospect of technical improvement on the euro has been smashed, at least for now. Momentum indicators have turned sharply into reverse lower and levels that were once supportive in the recovery are now resistance. The reaction to this move lower today will be interesting. Initially there is a degree of consolidation (perhaps the euro bulls are still shell-shocked). There is resistance overhead initially at $1.1615/40 but more considerably now starting around $1.1710. The hourly chart has ticked slightly higher coming into the European session from the overnight low of $1.5553. The May low at $1.1505 is within range now though.
Significant intraday volatility during a hectic session where three contrasting factors pulled Cable first higher (strong UK Retail Sales) and then sharply lower (ECB and strong US Retail Sales), resulting in a daily range of around 190 pips and a close lower of 115 pips on the day. A huge bearish engulfing candlestick has also formed with Cable at a two week low and now within range of a test of the key May low at $1.3203. Momentum indicators have swung decisively lower too. The key now will be how the sterling traders react today, and initial signs are that there is still further negative pressure. Another bearish candle and close lower would confirm the move and open the potential for continued downside back towards the crucial November low at $1.3025. The importance of resistance at $1.3450 growing too.
The dollar started to regain strength again from the EB decision and has kept going through the BoJ and this has pulled Dollar/Yen to a three week high again. The pivot around 110.00 has been a key feature of trading during the phase of trading over the past eight weeks and again is now a key basis of near term support (the low from yesterday’s session was 109.90 before the rally resumed). This also continues to trend higher of the past two and a half weeks and with momentum indicators finding upside traction again into positive configuration, a test of the key May high at 111.40 comes back into play. The hourly chart shows the bulls more positively configured, suggesting intraday corrections are a chance to buy now. Initial support is at 110.45 above the 110.00 pivot.
Although gold hit a four week high yesterday, the significance of turning lower from $1309.30 may be much greater. The long term pivot banc of $1300/$1310 has long been a key turning point on gold, and the failure to breakout above this barrier will be a concern for the bulls. The market formed a long upper shadowed candle which although contained a small positive close, is ultimately not a positive candle. Given that the market is tailing off again today, there will be a real concern that this near term rally within what is a medium term corrective phase (following the formation of the multi-month top pattern). The bulls need to react otherwise the market will begin to drift back lower again and the bulls would have lost their chance for recovery. A close above $1310 is key to this. Support is at $1292 and then $1289/$1290 whilst the market will also take not of reaction to the $1300 key psychological level. A close back below here would be disappointing now.
The mild recovery drift back higher continues to test the confluence of resistance with the old pivot at $66.65, the 50% Fib level at $66.90 and the underside of the old nine month uptrend (today at $67.30). Yesterday’s session contained the seventh successive higher daily high and a close above $66.65, but the bulls could not get away. However, if the bulls can begin to consistently close above the $66.65 pivot, then the outlook for a sustained recovery can continue to improve. There will still be question marks surrounding the sustainability of the recovery whilst the $68.65 lower reaction high remains intact, but the bulls are gradually gaining ground now.. The Stochastics have crossed back higher and above 20 is a positive near term sign, whilst the RSI is also climbing and the MACD lines are threatening to cross higher. The support of the rebound uptrend comes in at $65.50 today and coincides with the latest higher reaction low.
Dow Jones Industrial Average
Having broken the two week uptrend on Wednesday the market suddenly looks under threat of a correction. The Dow has posted a fourth consecutive negative candlestick and the fact that the bulls sold decisively into an intraday rally will be of increasing concern. It is interesting to see that for now, the momentum indicators have rolled over but do not look to be decisively calling for a significant move lower, however if the run of bear candles continues then this could become more considerable selling pressure. A retreat to the support band of around 100 ticks between 24,980/25,086 (between the 50% Fib and the old key breakout) is an area that the medium term bulls will be looking to build support for a pullback and another higher low. However if momentum for a correction continues to build then a basis of support may become difficult. Resistance around the 61.8% Fib at 25,367 is growing ever stronger.
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