After several weeks of newsflow with an overriding theme of division, isolationism and protectionism, finally some good news has come out of the European Union summit of leaders. In the small hours of this morning, the EU28 (yes, including the UK) have come to an agreement on ways to tackle the migration issue. This includes potentially setting up migrant centres in the EU and measures to alleviate countries that feel overwhelmed by migrants, and importantly Italy is in agreement. Politically this is crucial for German Chancellor Merkel who is under fire at home for her liberal stance on migration, but exactly the response she gets in the Bundestag is as yet unknown (especially to the second factor). The importance of Merkel getting a European-wide agreement has knock on political implications for her standing in Germany and subsequently perhaps even the stability of the EU project itself, such is her influence. With the German 10 year Bund yield over 2 basis points higher and Italian BTP yields lower, in response the euro has jumped in the past few hours. With risk appetite improving, the yen and to a lesser extent, the US dollar have corrected back. Equities in Europe are higher but this is still likely to be a short term move before attentions turns back to concerns over trade tensions.
Wall Street closed with a decent rebound higher last night, with the S&P 500 +0.6% at 2716 whilst US equity futures are around +0.3% further higher this morning. This has allowed Asian markets to find a degree of support (Nikkei +0.1%) whilst European indices are also looking positive. In forex, the euro is the main outperformer, with sterling dragged along by its coattails, whilst the yen is the underperformer. In commodities, the slightly more corrective feel to the dollar is allowing gold to claw back some lost ground, but the bulls still have much to do. Oil is consolidating slightly after another big day of gains yesterday.
Inflation is the key for traders today with both the Eurozone and US due to release key tier one data. However, first up is the final look at UK Q1 GDP which is expected to remain at +0.1% (+0.1% a the second reading). Eurozone flash inflation is at 1000BST and with Spanish, Italian and perhaps crucially German inflation numbers yesterday coming in around expectations, the forecast headline rise to +2.0% is likely to be fairly close (+1.9% last month). Core Eurozone inflation is though expected to slip to +1.0% (from +1.1% last month). US core Personal Consumption Expenditure is at 1330BST and is expected to tick higher again to +1.9% (from +1.8% last month) and ever closer to the Fed’s 2.0% target. The final Michigan Sentiment is at 1500BST and is expected to be revised marginally lower to 99.2 (from 99.3 at the flash reading, and up from 98.0 in May).
Chart of the Day – FTSE 100
Equity markets have been under corrective pressure and rallies remain a chance to sell. The corrective move on FTSE 100 has been progressing over the past five weeks in a downtrend channel of lower highs and lower lows. This is reflected in the run lower where a series of old supports are now becoming overhead supply as the correction goes on. The rebound from Wednesday has continued early today but this still seems unlikely to be a sustainable one. The move is now into a band of resistance around the highs from last week around 7690 (which coincided with a series of candle supports from earlier in June). With the downtrend channel at 7715 today, this seems to be an area within which the next sell signal is likely to come. Momentum indicators on a medium term basis suggest this is still a corrective move within the downtrend channel, with lower highs and lower lows, in addition to negative configuration on the RSI (now failing under 50) and the Stochastics too. The near term ticks higher should simply be seen as another chance to sell into strength as the strategy and further pressure on the recent low at 7508 is likely (there is a minor band of support around 7500). A close above the downtrend channel at 7715 would re-open resistance at 7800.
Once more EUR/USD has had a look at the key floor above $1.1500 and once more the buyers have returned. There does seem to be a real sense that this is a key floor now for the pair. As the importance of the support of the May low at $1.1505 grows, so does the importance of it either holding, or of it breaking. For now, the buyers are willing to hold on, posting a mildly positive candle yesterday and have continued overnight, to pull the market back to the old near term pivot around $1.1640 but also, as things stand (admittedly very early in the session still) completely unwind Wednesday’s sharp bear candle. The momentum indicators have never been entirely convincing in their negative outlook recently and with the RSI picking up again into the mid-40s, whilst the MACD lines also threaten higher, there is a sense that a rally is building. Taking the RSI above 50 would be a two month high and signal of intent. The bulls will be eyeing the initial resistance now at $1.1720 as a test if the rebound momentum can be sustained, however the Average True Range is currently 105 pips with the daily range already c. 100 pips). There is intraday support once more at $1.1600.
Yesterday’s downside break below $1.3100 was rather concerning for Cable which continued its run of lower highs and lower lows that has been forming since mid-April. Although the move has bounced mildly overnight from $1.3048 there is an increasing pressure towards a test of the key October/November lows at $1.3025. This initial bounce may give the bulls a little respite, but there is a band of resistance now between $1.3100/$1.3200 which will be seen as another likely sell zone. The bulls have really got their work cut out if they are going to turn this around. Momentum indicators remain negatively configured for selling into strength. The resistance at $1.3315 needs to be broken to really change the outlook now. The hourly chart shows that the rebound has already reached a near term crossroads this morning, with the unwinding of the hourly RSI to 60 and MACD lines to neutral, both areas where the selling pressure has tended to resume in a negative outlook.
There seems to be a sustained effort from the dollar bulls in recent days to build something more positive within the near term range (109.15/110.90). A run of three positive candles looks to be building for a fourth as the market continues to tick higher. There is a notable tick higher on momentum within this range that gives a medium term positive bias to the bigger trading range 108.10/111.40. However, as yet there is still no real indication that this will be the time to back for an upside break above 110.90 and subsequently 111.40. There is a bull bias but the rally still seems to be a touch tentative, with the hourly chart still showing 70 limits the hourly RSI. Despite this there is a clear run of higher lows and this means currently intraday weakness is being bought into, with a basis of support around 110.00/110.40. The question is whether the bull run is ready to break decisively higher. I am not sure.
With an initial rally early this morning, after four consecutive negative daily candles the market is showing the first real sign of support. A rebound off yesterday’s low at $1245 is now testing the steep downtrend of the past two weeks. The magnitude of this downtrend will always make it difficult to sustain and if it were to be broken, this should not be seen as a signal for immediate sharp recovery. There is still a clear negative configuration on momentum indicators, with MACD and even Stochastics (the most sensitive momentum indicator) still falling. The RSI has picked up slightly from the low 20s (which is an extreme position) but need to move decisively above 30 to really suggest a near term technical rally. The hourly chart shows how rallies continue to flounder at old support levels with $1254 now protecting $1260 which is a more considerable resistance. The first signs of life from the bulls for a long time, but more needs to be done. A move above $1272.50 needs to really suggest a technical rally has the legs.
With OPEC uncertainties now out of the way, the bulls are free to run, and they are really going for it now. An absolutely incredible run higher over the past week has now seen the market burst through resistance at $72.85 to pull the market to the highest level since November 2014. Momentum indicators are soaring higher with the run, and although the RSI is now in the high 60s, tis is a trending move and this should allow further gains. The resistance from November 2014 is minimal but the 61.8% Fibonacci retracement of the huge bear market from $107.73/$26.06 is around $76.50, whilst price resistance is $77.85 and then around $80. Support is initially with the $72.85 breakout and the hourly chart shows support around $72.20 and then $71.00 with intraday corrections a chance to buy.
Dow Jones Industrial Average
The reaction to the bulls failing to hang on to a rally and subsequently breaking below the 23.6% Fib level (at 24,117) will now be key. Although there has been a degree of buying returning after the Dow moved initially lower following the downside break of the support at 24,084, the fact that the market is testing downside within the scope of negatively configured momentum will be concerning for the bulls. Momentum indicators continue to deteriorate with the RSI still below 40 around three month lows, whilst the MACD lines are now in decline below neutral for the first time in three months. The market remains set up for selling into strength and if it begins to move clear below the 23.6% Fib level there is little real support to prevent a full retracement to 23,345. The hourly chart reflects the resistance now between 24,270/24,405 but also how intraday rallies are a chance to unwind momentum and renew downside potential. The bulls would now need a move above 24,569 to shift the outlook.
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