Euro remains strong as markets call Draghi’s bluff, but will it last?

Market Overview

The euro has been strong in the wake of the ECB meeting, but is the move sustainable? The market reaction to the ECB was curious yesterday. The ECB have a fine balancing act to play in the coming months as they move towards tapering the asset purchase program. Governing Council President Mario Draghi did his best to put markets off the scent, by being as vague as he could. However when Draghi said “Autumn” for when the discussions over tapering will be held, the market called his bluff. The September meeting will contain the ECB staff forecasts and the market has assumed that September is very much live. The euro shot higher and burst through key resistance levels. However this comes as Bund yields fell back, the two usually move all but hand in hand. Will the euro be able to sustain such a move? It was certainly a predominantly euro move, with Treasury yields barely budging over recent days and the dollar holding up relatively well against other majors. An interesting move on the euro, but is it sustainable?

Wall Street closed mixed last night with the S&P 500 -0.1%, whilst Asian markets were mixed to lower (Nikkei -.2%) and European markets are also mixed in early moves, with the Eurozone markets under pressure from the stronger euro. In forex, the dollar seems to be once more under a degree of selling pressure, whilst it it interesting to see the euro hanging on to yesterday’s gains. Commodities are running along similar lines with the dollar weakness helping to support gold marginally higher. Oil is all but flat.

It is a rather quiet end to the week for economic data. UK Public Sector Net Borrowing is released at 0930BST which is expected to be £4.3bn, with the lower the borrowing, the more positive for sterling. Other than that, there is only really Canadian CPI inflation at 1330BST which is expected to be -0.1% for the month which would be a drop to +1.0% for the YoY data.

 

Chart of the Day – FTSE 100

European equities have lagged the performance of Wall Street which has been pushing all-time highs in recent days. However, sterling weakness at a time where the euro shot to multi-year highs has helped to benefit the FTSE 100 index that is around 70% foreign revenues. With two strong bullish daily candles, the buyers are resuming control for the FTSE 100 once more. The March high at 7447 had been a pivot on the FTSE during May and June. However, yesterday’s strong bull candle broken decisively above 7447 whilst also breaching the next resistance with a close above 7480. The momentum indicators are now tracking solidly higher in the recovery, with the RSI at a four week high, the MACD lines accelerating higher and the Stochastics also strong. A closing breakout above 7480  now also re-opens the key all-time highs between 7560/7599. The hourly chart is strongly configured across the momentum, whilst hourly moving averages are all rising in bullish sequence, which suggests that corrections are now a chance to buy. The previous 7447 resistance now also turns supportive as bulls will see corrections as a chance to buy.

EUR/USD

An attempt by the ECB to keep a lid on the euro somewhat backfired yesterday as a strong bullish candle took EUR/USD to its highest level since August 2015. The bulls remain firmly in control as the May 2016 high of $1.1614 was blown out of the water. The strength of the momentum indicators suggest there is considerable intent behind the move. The one caveat now will be that the RSI is back over 70, something that has tended to pull the reins on rallies and seen as a little stretched. This could result in a consolidation or potentially a minor slip. However the way that the bulls dealt with $1.1614 resistance was extremely impressive. There is now a basis of support above $1.1490 to $1.1583, the latter being Tuesday’s high. A test of the August 2015 high of $1.1711 is now well within range. The bullish technical set up suggests that corrections are a chance to buy.

GBP/USD

Despite the selling pressure that the dollar endured yesterday against the euro, in addition to the higher than expected UK Retail Sales, sterling remains under strain. A fourth consecutive bearish candle continues to drag Cable lower, with intraday rallies being sold into. However the configuration of the daily momentum indicators would suggest that for now, this is still just a near term correction. The RSI and Stochastics lines are drifting back towards 50, whilst the MACD lines are still above neutral. The key July low at $1.2808 is the support to watch, however there is near term support between $1.2890/$1.2927 of the past couple of weeks and the bulls will be looking out for posting a higher low. The hourly chart shows yesterday’s low at $1.2930, however the near term momentum is negative and the old psychological $1.3000 level is becoming resistance. A failure to break back above $1.3000 would suggest that the sellers are still in control to put pressure on $1.2890/$1.2927. A close back above $1.3000 improves the outlook and re-opens the resistance around $1.3050 again.

USD/JPY

Can the bulls begin to form support? For a second consecutive session the market has had a look at the 111.55 support of the 38.2% Fibonacci retracement of 100.07/118.65. These intraday tests have broadly been rebuffed (yesterday’s low was at 111.46) to leave two candles of small bodies and long lower shadows. This suggests an uncertainty in the recent decline around the Fib level, something that continues with the early consolidation today. Momentum indicators (especially the RSI and Stochastics) are beginning to tail off. This all suggests that the selling pressure is dissipating (at least for now), but also increases the importance of a break of the 111.55 support should it be seen. The hourly chart reflects this sideways move that has developed in recent days with the downtrend broken. Resistance is at 112.40 which is around some old lows from earlier this week. An upside break would form a small base pattern, although the key resistance for a recovery is at 112.90. The outlook is uncertain for Dollar/Yen on a near to medium term basis.

Gold

Having broken above $1240 the market has now achieved three daily closes above this old pivot and the recovery remains firmly on track. A test of the next pivot resistance around $1260 is increasingly likely. Momentum indicators continue to improve, with the RSI rising above 50, the Stochastics in bullish configuration and the MACD lines also rising. The market is back into what I see as the neutral band between $1240/$1260. The daily candles are more considered now and there is a sequence of higher lows. The hourly chart shows that old breakouts continue to be used as new support, with the latest at $1235 above the key $1229 breakout. It is interesting to see that gold is now two weeks into this rebound, with rallies tending to last for maybe three to four weeks in 2017.

WTI Oil

Having broken out above $47.00 resistance, WTI has started to take out a key barrier that has been standing in the way of continued recovery. Even though yesterday’s candle would have been a disappointment for the bulls, the positive implications of the break remain in place. However, there needs to be a positive reaction from the bulls today. Momentum indicators remain positively configured and have barely been impacted by yesterday’s dip into the close. However this will begin to change if the market posts another negative candle. Momentum is though on the brink of strong configuration with the RSI close to 60, MACD lines accelerating towards positive and the Stochastics also strongly configured. With the support bolstered at $45.80 and corrections being bought into this is still likely to be seen as another chance to buy to make the decisive move above $47.00. The initial resistance is then around $48.40 which would is another strong barrier.

Dow Jones Industrial Average

With the market drifting back from a test of the high once more, the bulls will be looking at this as another chance to buy. Momentum indicators remain strongly configured and there is little reason not to think that this correction will be anything more than a blip in the bull run. Tuesday’s low at 21,471 takes on added importance as the market drifts lower but expect the bulls to return before that low is tested. The all-time high at 21,681 is resistance overhead.


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