The dollar may have been a driver of forex pairs in recent sessions, but all eyes will be on the euro today with the ECB meeting. The European Central Bank currently engages quantitative easing in its €60bn per month Asset Purchase Programme (APP), however this is due to finish at the end of the year. Today, the ECB is widely expected to announce it plans to extend the programme but also reduce the monthly purchases of the APP. Consensus is for a cut to around €30bn per month in a programme extended by 9 months to the end of September. This would mean an extra €270bn of QE in total. However, given the issue with scarcity of German bonds to be purchases and the tendency for an inherently cautious Draghi and the Governing Council to lean dovish, they could stretch this out over longer period with fewer purchases. Subsequently it is likely to be the total purchases that are the key aspect of the announcement. Lower for longer could be the outcome. For example, €25bn per month over 12 months (ie.€300bn) is more dovish than €30bn over 9 months (i.e. €270bn). The markets would likely see a total asset purchase over the span of the programme of €300bn as dovish, €270nbn would be broadly in line with market consensus, €225bn would be more hawkish (€25bn over 9 months?), whilst €200bn or less would certainly be seen as hawkish. Changes to the current stance will also be watched. At the moment: Underlying Inflation expected to rise gradually; Growth risks are broadly balanced; Exchange rate volatility is a source of uncertainty. Changes to this language will also be watched. The euro will be certainly reactive, but the German 10 year Bund yield will also be a key factor, holding above 0.50% will be considered positive for the euro.
Wall Street had another wobble yesterday with a drop across tie indices on the back of weaker than expected earnings (Boeing was a key driver here). This drop meant the S&P 500 fell by -0.5% to 2557. Asian indices have had a mixed session, with the Nikkei +0.2% higher. After yesterday’s sharp declines, European markets seem to be holding a bit firmer today with a mildly positive open across the major indices. In forex, the slight dollar correction continues, but in truth markets will be biding time in front of the ECB decision. The commodity markets shows the dollar weakness helping to lift gold by a few bucks whilst oil is mildly weaker, still suffering the impact of the slight inventory build of EIA crude stocks.
As for the economic data announcements today, traders will be fixated on changes to the ECB monetary policy meeting. The rate announcement will be at 1245BST, with no expectation of any change to the main refinancing rate of 0.0% or the deposit rate of -0.4%. There could be a suggestion that there will be details of changes to the Asset Purchase Programme at 1245ST, with the details included in Draghi’s press conference at 1330BST. Other data to watch for today includes US Weekly Jobless Claims at 1330BST (235,000 exp) and Pending Home Sales at 1500BST (+0.2% exp).
Chart of the Day – GBP/JPY
The moves on Sterling/Yen will be well watched in the coming days as the market digests the positive surprise in UK growth. Technically on GBP/JPY the outlook has been improving since Friday’s breakout above the near term pivot resistance at 149.10. The market had already been using this breakout as the basis of new support before yesterday’s strong bull candle. This move higher has now meant that a series of higher lows have been posted in recent weeks and the pivot at 149.10 now becomes the latest higher low in the run higher. Upside has now been opened for initially 151.60 resistance, however the key September high at 152.85 should also not be ruled out. The improvement is reflected in the momentum indicators with the RSI confirming the run higher and the MACD lines posting a bull cross above neutral (a strong signal). This all points towards corrections being seen as a chance to buy now. The hourly chart shows a band of initial support 150.10/150.50 being tested early today and any unwind that finds support around 50 on the hourly RSI being a chance to buy. The more positive outlook will remain intact whilst the market trades above the 149.10 breakout.
The euro has steadily gained ground in the past 24 hours as the market has picked up from the near term support around $1.1730. A positive candle added around 50 pips yesterday as the market has positioned ahead of the crucial ECB meeting today. This has come with a mild weakening of the dollar across the forex majors. However this just continues what has become a consolidation of the past couple of weeks where the market has increasingly settled between $1.1730/$1.1880. Furthermore, this chart is likely to look drastically different this time tomorrow with the ECB decision on its Asset Purchase Programme sure to drive sentiment for the coming days and weeks. Technicals on a near to medium term basis are broadly neutral but would change significantly with a dovish surprise that would test and likely complete a large head & shoulders top pattern below $1.1660, or a hawkish surprise that would see a break above $1.2000 again.
The strength of sterling in the wake of the higher than expected UK GDP growth print has posted a strong bullish candlestick, adding around 130 pips on the day and to drive Cable up through the resistance of a five week downtrend. The move has also significantly improved the wavering momentum indicators and threatened to enable some decisive direction. The RSI is now back above 50, whilst Stochastics are tracking higher and MACD lines are threatening a bull cross. A move above near term resistance at $1.3230 has certainly improved the outlook, shown especially on the hourly chart with the move forming a base pattern. However the move is in effect a push above a mid-range pivot which now opens the bigger resistance from the key October high at $1.3335. The $1.3230 breakout now becomes supportive and a reference for near term bull control. Unwinding moves will be seen as a chance to buy whilst this breakout is intact.
The edge has just come off the dollar rally in the past 24 hours and the bulls are beginning to sit a bit more nervously. There is still a sense that the breakout above the early October high of 113.43 is holding, however the bulls are certainly being tested. The negative candle posted yesterday posted a high of 114.24, coming right at the resistance of the 23.6% Fibonacci retracement of the big bull run of 100.07/118.65 at 114.27. This should not be dismissed, with the number of times over recent months the Dollar/Yen pair has turned at Fib levels. A close back below 113.43 would begin to be a disappointment now for the bulls and begin to ask a few more questions. The hourly chart shows 113.23 is a support to watch as a breach would complete a small top pattern and shift the outlook more corrective. Key support is at 112.30.
The downtrend of the past week and a half is just being breached now as a mild dollar correction has set in to enable gold to pick up again. This rebound on gold has formed some initial support at $1270.60 from yesterday’s low and the tick higher has continued early into today’s session. As yet this move has done little to affect the daily technicals, with the outlook remaining still corrective over the near to medium term. However the hourly chart shows the improvement in greater detail with the hourly momentum indicators now increasingly taking on more of a neutral configuration. The overhead pivots on gold are the levels to watch, with the pivots at $1284 and around $1290 acting as near term resistance, whilst $1300/$1310 is longer term resistance. What is also noticeable is that the trends on gold are becoming increasingly shorter term before they are being broken. This could make for an uncertain market and therefore trading needs to be done over shorter time horizons. Key support remains at $1260.
The surprise small inventory build for EIA crude stocks has just pulled the reins on the bulls for now, however it will still likely provide another chance to buy. Momentum indicators are strongly configured whilst a series of higher lows is in place that suggests the bulls are willing to back the corrections. The key near term low is at $50.70 as last week’s higher low, whilst Tuesday’s low at $51.55 will be the first support of note the bulls will be looking out for. Today’s session will be key though as there has not been a second consecutive negative candle since the rally from $49.10 began a couple of weeks ago. The hourly chart continues to show positive configuration on momentum and this will continue whilst $51.55 remains intact, meaning a bullish bias of buying into weakness.
Dow Jones Industrial Average
It is interesting that whilst the medium term bulls have yet to concede control, there are a few signs of tiredness in the bull run. A second corrective candle in the space of three sessions is becoming a concern, especially with the fall below the low of Tuesday’s strong bull candle. It is still difficult not to put this move down as a buying opportunity, such is the strength of the bull run, however there is a move lower on the momentum indicators which needs to be watched now. Certainly the bull run is nowhere near as decisive and strong as it has been previously, so watch for momentum sell signals forming. The RSI falling below 70 (on a closing basis) would be a basic signal but important as it would be the first time the RSI had been below 70 in well over three weeks. The Stochastics have also crossed lower and a move below 80 would also be a warning of further correction. The hourly chart shows negative divergences on the hourly RSI and a close below Monday’s low of 23,274 would complete a small top pattern and open a near term correction. A six week uptrend comes in to support at 23,083 today.