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Euro on the brink of a breakout ahead of ECB meeting next week


Market Overview

After a brief wobble, the euro has started to strengthen once more. This comes as key monetary policy meetings for both the ECB and Federal Reserve start to come into view. The expectation is growing that the ECB will make a key announcement in its meeting next Thursday to end its forward guidance of potentially moving to even easier monetary policy. This would mark a key sea change in the move towards normalisation of monetary policy. The euro is subsequently back on the brink of a move to its highest level since the day Donald Trump was named as the President. This comes as the Fed is likely to also tighten with another rate hike in a couple of weeks. Markets are pricing for a June hike but the lacklustre inflation (both on the PCE and concerns in last night’s Beige Book) coupled with concerns over Trump means that whilst the rate sensitive 2 year Treasury yield has held up, the 10 year yield has fallen away, which is driving dollar struggles. This is putting a floor under the gold price whilst the yen is also creeping gains. Sterling remains beholden to the announcement of polling figures in front of the election next Thursday, with an increasingly tight race negatively impacting on the pound. Equity markets remain mixed and largely unable to find any traction during a period of consolidation.

euro up

There were very slight losses on Wall Street last night with the S&P 500 -0.1% at 2412. Asian markets have been mixed (Nikkei +1.0%) whilst European markets are mixed to slightly higher today, and it will be interesting to see if the negative correlation of sterling and FTE 100 continues to drive its performance. In forex the dollar is showing mild strength across the board, although the euro is holding on to recent gains, with sterling the main underperformer as another tight poll has been announced overnight. In commodities, gold is marginally lower with the dollar rebound, whilst oil is just under a percent higher on the back of larger than expected API oil inventories.

The Manufacturing PMIs are in focus today with the Eurozone countries announcing early in the session culminating in the Eurozone Manufacturing PMI at 0900BST which is expected to be confirmed at the flash reading of 57.0 which would be up from last month’s 56.7. The UK Manufacturing PMI is at 0930BST and is expected to drop slightly to 56.5 (from 57.3) whilst the US ISM Manufacturing is at 1500BST and is expected to drop marginally from the level of last month to 54.5 (last month was 54.8). There will also be a focus on the ADP employment change which is expected to be +181,000 which is around last month’s +177,000. The EIA oil inventories are at 1600BST today (because of Monday’s public holiday) and the crude stocks are expected to show a drawdown of -3.0m barrels, with distillates -0.8m barrels and gasoline -1.4m barrels.

 

Chart of the Day – USD/CAD

Is there a turnaround in the offing? As the oil price has fallen sharply, the Canadian dollar is beginning to come under pressure again. In the past week the support has formed  around a three and a half month uptrend (dating back to mid Feb) and an old pivot at 1.3385. The downtrend is now rising to lend support at around 1.3410 today and the outlook is improving again. The market has now posted a small higher low at 1.3425 which yesterday’s bull candle also continues a recovery push. This comes with the Stochastics posting a bull cross and the RSI turning up again. A move above the lower reaction high at 1.3540 would now confirm the end of the downtrend and the formation of a possible new uptrend. This comes with a more positive configuration on hourly momentum that suggest corrections into 1.3470/1.3500 are now a chance to buy for the near term recovery. The old key resistance comes in at 1.3600 and remains a level the market will be watching. A move below 1.3425 would scupper the recovery prospects.

EUR/USD

A sizeable turnaround in the apst couple of sessions has put the bulls once more in the driving seat. A corrective drift lower has given way to two strong bull candles which now means that the euro is testing its recent resistance at $1.1267 again. Momentum indicators which have retained a strong configuration throughout have ticked higher again and look strong for the test. Corrections continue to be bought into and the long term pivot at $1.1100 seems to have once more been a key basis of support with Wednesday’s low at $1.1108. Look to use intraday corrections today as a chance to buy for the likely breakout. Above $1.1267 opens the spike high from 9th November at $1.1300 with the medium to longer term base pattern target at $1.1350. The hourly chart shows strength of momentum and any unwinding move today back into support around $1.1160/$1.1200 should be seen as a chance to buy.

GBP/USD

Despite a minor intraday scare yesterday, Cable has held on to the big breakout support at $1.2775. However the recent sessions suggest that moving into the final week before the UK election, the market is highly dependent on polling scores for direction. The early weakness yesterday morning came on the back of a tight YouGov poll and drove a test of $1.2775. However this was countered later in the session by other less tight polls that saw sterling rally. The latest slip back early today comes with another tight poll, so stay close to the announcements of individual polls if you want to call very near term Cable direction in the next week. Technically the daily chart shows the bulls hanging on above $1.2775 but in a corrective phase. Watch for the RSI moving below 40 for a suggestion of deterioration again, whilst a close below $1.2775 would be near term bearish now. The hourly chart reflects the increasingly choppy near term outlook. A move below a minor pivot at $1.2845 re-opens $1.2800 with yesterday’s low at $1.2767 a key low. Resistance is at yesterday’s rebound high of $1.2920.

USD/JPY

Yesterday’s closing breakdown below 110.85 near term support is a bearish move and opens a test of the key 110.20 low. The configuration of the past few sessions show that intraday rallies continue to be sold into and the early gains today will again be eyed as a potential selling opportunity. Momentum indicators on the daily chart remain negatively configured but the decline is more of a bearish drift rather than anything more precipitous. The hourly chart shows a downtrend over the past five days which is coming under pressure from the early rebound today. However there is a near term pivot at 111.20 whilst the hourly momentum is back to levels where the sellers have tended to resume control. The hourly RSI is back around 60, with the MACD lines back to neutral. Another failed rally below 111.20 would increase the downside pressure. Initial support is at 110.45, whilst overhead supply is mounting below the medium term pivot of 111.60.

Gold

The market is confirming the breakout above the old pivot of $1261. The candles in the past few weeks may have shown repeated intraday moves through the pivot, however it is notable that once the candlestick bodies have pushed through, the confirmation has been achieved. Momentum is positively configured on MACD and Stochastics, whilst the bulls would be more comfortable on a move above 60, which has yet to be seen during the rally. With the early slip in the price, continue to use intraday dips towards $1261 as a chance to buy. The bulls pushed through the previous resistance at $1271 yesterday to  open $1278, however if the shackles can be released then there is little reason now why a bounce towards $1295 cannot be seen. For now this remains a rally with the hand brake still on, however a bull candle which starts to trade clear of $1261 would begin to improve the traction. The hourly chart shows a minor pivot at $1265 with support of yesterday’s low at $1258.75 increasingly important.

WTI Oil

The technicals are under increasing pressure now with yesterday’s intraday break below last week’s support of $48.18. This comes as a sharp bear candle that seems to be continuing the OPEC inspired downside move. However, looking on the hourly chart it is also the loss of the support at $48.00 and that is the real concern. A close below $48.00 would complete a head and shoulders top and opens the downside once more. There would be a $4 downside implied target of $44.00 which is all but a full retracement back to the recent May low at $43.75with the continues. Momentum indicators are increasingly negative near term with the RSI falling below 50, the MACD lines ready to cross lower at neutral and the Stochastics already in decline. The early rebound today (on the back of the API inventories) will be important with the hourly chart showing resistance around $49.00. Another failed rally would really ramp up the pressure but the close below $48.00 would be key. The EIA inventories will drive volatility.

Dow Jones Industrial Average

The Dow is beginning to find momentum in a corrective move as a third consecutive lower close has put the market into reverse again. This move is beginning to impact on the momentum indicators with the RSI dropping back from 60 and the Stochastics crossing lower. This still looks likely to be a near term move and whilst the bulls hold on to the support band 20,777/20,887 there is little real scare to the outlook. Watch the hourly momentum indicators which are for now suggesting that corrections are a chance to buy, but if the RSI drops decisively below 30 and MACD lines go negative, then this outlook would be questioned. The hourly cart shows support at 20,943. Initial resistance is at 21,058 under 21,112.


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