There is a consolidation that has formed across markets over the past couple of days. A number of factors are playing into this, with the US Independence Day public holiday yesterday, along with the prospect of Non-farm Payrolls on Friday. However, there is a reluctance for traders to take a view ahead of what could be a crucial move in the trade dispute between the US and China. After months of consultation, on Friday, the US is set to impose $34bn of tariffs at 25% on a range of Chinese imports. The response of China to this could be crucial. China has vowed to respond in kind on US goods, and swiftly. Due to the 12 hour time difference, it had been suggested that China could even move first, but equally has said that it “will not fire the first shot” in what could escalate into a trade war. How the People’s Bank of China also reacts could be key. In an attempt at verbal intervention over the 4% decline in the yuan over the past two weeks, the PBOC said that the yuan would be “relatively stable” and this has helped to limit initial losses. However if the PBOC continue to set the daily fixing to weaken the yuan then markets could see this as an attempt at using the currency as a weapon in the trade war. This would be short-sighted and could induce capital flows out of China, not to mention loss of reputation that it is trying to build for status as a reserve currency. So markets are waiting to see how China reacts. This means that yields are steady and forex has consolidated. There is a mild risk off bias to equity markets today as investors sit on their hands.
Wall Street was closed yesterday, but Asian markets were weaker overnight with the Nikkei -0.9% and with Wall Street futures flat European markets are struggling for direction in early moves today. In forex, there is little real move across the major currencies, other than a pull higher on the euro as the European session has kicked in. In commodities, gold has just lost some of its impetus, whilst oil is also consolidating.
After yesterday’s Independence Day public holiday there is a big focus on US data today. Initially there is the ADP Employment change at 1315BST which is expected to be +190,000 (up from +178,000) but with its poor track record for signalling payrolls recently and the lack of real volatility in the data, do not expect it to cause much volatility. More interest comes with the ISM Non-Manufacturing at 1500BST which is expected to mildly slip to 58.3 (from 58.6 last month). lack of predictive skills. The EIA oil inventories are at 1600BST and drawdowns are expected, with crude stocks expected to be -3.5m barrels (-9.9m barrels last week), distillates at -0.7m barrels (flat last week) and gasoline stocks -1.0m (+1.2m last week). The FOMC minutes for the June meeting are at 1900BST. The rate hike in the June meeting was considered to be pretty hawkish but the market did not really push ahead with a stronger dollar on that, dollar was more influenced by the ECB’s dovish taper. The FOMC is likely to hold on to this hawkish tone in the minutes too.
Chart of the Day – EUR/AUD
The relative euro rally across the major currencies is beginning to look more questionable. The uptrend channel against the Canadian dollar has been broken, but this has been against a strengthening loonie. Against the Aussie dollar, the positive euro outlook has been tested but still seems to be holding true. The uptrend channel in place over the past month held firm yesterday as an intraday decline rebounded from support above 1.5695 to maintain the channel. Since November last year, there has been a key pivot around 1.5770 which has often been a key gauge. Breaking back above 1.5770 yesterday was subsequently an important move for the bulls and positive gains early today adds to bullish conviction. It also suggests that there is an appetite to buy into weakness and to test Tuesday’s high at 1.5885, above which continues the channel higher and opens 1.5960. The bulls will have to continue to fight hard though as momentum indicators are beginning to look slightly jaded, with the Stochastics threatening to pull lower and the MACD lines just starting to plateau. The support at 1.5695 will therefore take on an increasingly important role now as having been tested once, if it now breaks would suggest the euro bulls have lost control of the recovery. For now though, weakness remains a chance to buy.
The market has been consolidating for the past few sessions, with the US public holiday having been a factor. However, there is a pull higher this morning which is positioning for a challenge of near term resistance at $1.1720. It would be a surprise for decisive direction to come ahead of such major geopolitical events tomorrow (trade dispute) and the prospect of payrolls on Friday, however, after a run of very small bodied, tight range candlesticks earlier this week the euro has picked up and is testing initial resistance at $1.17000 ahead of the key near term resistance at $1.1700. This continues the improvement through a run of higher daily lows in the past week. Throughout this though there is still an improvement in momentum indicators underway with the Stochastics rising above 50 at near three week highs and MACD lines ticking higher. However for the bulls to be in control of the range once more there needs to be a move above $1.1720 and RSI decisively closing above 50. The hourly chart reflects a bullish bias and buying into weakness. Support is initially at the $1.1600 pivot. This could be a market ready to breakout.
The improvement in sterling over the past few sessions is just beginning to gains slightly more traction. Having found it as a barrier over the past three sessions, the close back above the old low around $1.3200 in yesterday’s session represents something of a near term break. A very near term uptrend of the past few sessions also continues to build having broken a prior three week downtrend. Despite these minor signs of improvement there needs now to be something tangible for the bulls to achieve and that would be the breach of a lower high. The late June reaction high at $1.3315 is a resistance that needs overcoming for the bulls to begin to break the sequence of lower highs. The RSI above 45 today is becoming a 10 week high (needs to close above there today) but above 50 would be far more of a bullish indication. The hourly chart reflects the gradual improvement in outlook with the higher low of $1.3090 and yesterday’s low at $1.3168 now another level of support to watch. Initial resistance is $1.3250, whilst above $1.3315 opens the key resistance at $1.3450. This is baby steps but the bulls are looking higher now for a change.
With the US on public holiday yesterday the dollar slipped back a touch and the positive outlook on Dollar/Yen within the medium term range is just looking slightly corrective again. The run higher within the 108.10/111.40 range of the past ten weeks has just stuttered at 111.15. A couple of negative candles have just reined in the bulls but with US traders back in the game today it will be interesting to see the reaction to the correction. Daily momentum indicators remain positively configured and suggest that corrections remain a chance to buy. However, the hourly chart suggests that the corrective move has perhaps still got some legs to run. Below 110.50/110.60 resistance puts pressure on 110.00 again, whilst the key near term support within the range remains at 109.15. Breaching yesterday’s low at 110.20 would be a signal that this correction is ready to go further.
The technical rally on gold that we have seen over the past couple of days has reached a key ear term crossroads. The resistance at $1260 is a barrier of overhead supply from a late June low. It is a level around where yesterday’s high peaked (the high was $1261) and under which the market is now consolidating. However, looking at the daily momentum indicators, the RSI has crossed back above 30 (a very basic buy signal), whilst the Stochastics are also crossing above 20 and the MACD lines are threatening to bull cross as well. How the bulls react at this $1260 resistance now will be key. The hourly chart shows the market slipping back from the resistance overnight but if the market now pushes through (with US traders back online) this would be a real suggestion of a continued recovery. Essentially it would imply a recovery target of the old key reaction low around $1282. Initial support comes in around $1248/$1251 which protects the low in place at $1237 now.
How WTI reacts following the Independence Day holiday could be crucial. Traders will return to their desks with renewed perspective on the sharp rally since OPEC and after a consolidation of the past few sessions, it could be a crossroads moment. The breakout which has been supported between &72.50/$72.85 has just begun to lose some of its momentum. Stochastics have rolled over, whilst the RSI is beginning to stall around 70 and the MACD histogram is now in decline. This reflects a loss of momentum in the pull higher. It is interesting that hourly momentum indicators have been just drifting in a negative divergence in the past week and adds weight to the loss of momentum. A move below $72.50 would begin to signal a correction, with a retreat towards the previous breakout at $69.55 then open.
Dow Jones Industrial Average
The Dow was closed yesterday for Independence Day public holiday. Below is the analysis from yesterday:
An incredible run of alternating candles continued yesterday with another negative candle to follow up Monday’s bullish recovery. The downtrend was broken last week and since then there has been a tug-of-war that is showing that no-one is able to feel in control now. The moves have been broadly between the 23.6% Fib (at 24,117) and 38.2% Fib (at 24,595) but latterly there seems to be a tightening which could almost be the market developing into a consolidation triangle. The momentum indicators are no longer in decline and are increasingly in consolidation mode on a near term basis (even if they are still negatively biased on a medium term basis). This would suggest this is an important phase for the market as the next move could be key for direction. Yesterday’s decline of half a percent (c. 130 ticks) is again putting pressure on supports, but for now the consolidation continues. Important support is now at 23,997 and a closing breach would be very negative now. However, equally resistance at 24,569 is significant for a bullish break. Initial support of a higher low is at 24,078, whilst 24,510 is initial resistance now.
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