Sentiment has been buoyed as it appears that a debt ceiling default in the US has been averted, at least for three months as President Trump has come to a n agreement with the Democrats to extend the federal government’s borrowing limit to December. This move has steadied the nerves of traders concerned over a potential government shutdown. However, attention will now quickly turn to the ECB monetary policy meeting which is held this afternoon, with forex and commodities consolidating ahead of the decision. The ECB is widely expected to begin tapering its asset purchase program in the coming months, but it is possible we could get some signals as early as today. Expectations of definitive plans for tapering being announced today have reduced in recent weeks, with the strength of the euro being a primary concern now. A stronger euro has a negative impact on inflation and this could be reflected in the staff forecasts today with a likely cut to 2019 inflation expectations from last month’s 1.6%. Consensus therefore expects the ECB move to come in October, but the question and answer session in Mario Draghi’s press conference could be used to begin to lay the groundwork.
Wall Street was supported by the move from Donald Trump on the debt ceiling, closing +0.3% higher on the S&P 500 at 2465. Asian markets were mixed to slightly positive (Nikkei +0.2%) with European markets also mildly higher in early moves. In forex, there is very little direction with consolidation in front of the ECB meeting. Although the ECB is not likely to move, the Bank of Canada has unexpectedly raised interest rates for a second time. The move has significantly strengthened the Canadian dollar just consolidating those gains today. In commodities, one more there is little direction to speak of, with consolidation on gold and silver, whilst oil is just pulling back a touch after WTI engaged a strong rebound in recent days.
ECB rates decision will be key for traders today but also look out for Eurozone growth too. Revised Eurozone GDP is at 1000BST and is expected to be unchanged at +0.6% QoQ. The ECB monetary policy decision will be key though, with the rates announcement at 1245BST and then Mario Draghi’s press conference at 1330BST. No change in rates is expected, with the main refinancing rate of 0.0% and the deposit rate of -0.4% to remain in place. However, the focus in recent months has been when the ECB moves to taper its asset purchases which is currently €60bn per month. This could be today but is not expected. More likely is that Draghi will say that the staff are looking into how the taper would work. The consensus is currently for an October taper. If there were to be a surprise, it would be a dovish taper. The EIA inventories are a day late this week due to Labor Day on Monday, and are at 1600BST. The expectation is that crude stocks will increase by +4.6m barrels, whilst distillates will see a -3.0m drawdown and gasoline stocks also drawdown by -5.0m barrels.
Chart of the Day – DAX Xetra
The outlook for the DAX has been looking increasingly more positive over the past few sessions. Intraday breaches of the 11 week downtrend have previously failed to be held however, recently the market has been consistently posting positive candles, with the bulls getting ready for a recovery. Yesterday’s strong bullish candle has now set that recovery in motion with a move that added over 100 ticks to close well clear of the downtrend. The market is now eying the confluence of several key technical levels overhead. The resistance of the falling 55 day moving average (c. 12,306) which has historically been a strong medium term gauge, the resistance at 12,340 which capped the gains throughout August, and the underside of the old 13 month uptrend which comes in just above 12,400. That means that in the coming days there is a barrier of around 100 ticks broadly between 12,300/12,400 that will be seen as a key barrier for the bulls to breach. On a near term basis there is now a higher low at 12,050 above the 11,868 but a move above 12,340 would be key for the price perspective. Momentum indicators are increasingly positive with the RSI above 50 for a 7 week high, the Stochastics rising well and the MACD line also accelerating higher. The ECB will be key to the outlook too, but the bulls are well positioned ahead of the announcement.
The euro has become increasingly quiet this week as the market has drawn breath in front of the ECB monetary policy meeting today. Candles have been somewhat benign in recent days despite US dollar volatility against other major currencies. Yesterday’s 48 pip daily range was the lowest in around two weeks and almost half the average true range of 86 pips. The euro is supported above $1.1820 with $1.1979 a minor resistance below the $1.2069 August high. Expect elevated volatility to take hold this afternoon, especially during the press conference at 1330BST. A dovish disappointment (big reduction in inflation expectations with no talk of preparation for a taper) would see the euro sharply correct, likely below $1.1820. The big uptrend comes in at $1.1725 today with $1.1660 key support. A hawkish surprise (big upgrade in growth expectation, little downgrade to inflation, definitive talk of taper to begin in October) would pull EUR/USD above $1.2000 and test the high.
Sterling is pushing higher against the dollar but the bulls will have been a touch disappointed in the close yesterday which was well below the mid-point of the session. Despite this, momentum on Cable is still positive with the MACD lines rising strongly, Stochastics into bullish configuration and RSI up to 60. The market did though just fail to close above $1.3050 which is an old key resistance and this is still needed to suggest the bulls are fully backing the continuation of this rally. Yesterday’s reaction low at $1.3017 adds to support now above the psychological $1.3000 support and for now corrections remain a chance to buy. This is reflected on the hourly chart with the market just unwinding some near term stretched momentum to help renew upside potential for the rally. A decisive close clear above $1.3050 would certainly help the bulls, opening $1.3165 initial resistance but also bring the $1.3265 key high back into view. $1.2905 is supportive, with $1.2850 now key.
This phase of trading remains key for the medium term outlook as Dollar/Yen remains on the brink of a major potential breakdown. The band of support 108.11/109.00 has caught major lows throughout 2017 and once more it is interesting to see the bulls fighting back yesterday. The market closed back above 109.00 in similar fashion to how it did in August and April. This could therefore still be part of the market forming another key low. On a medium term basis, the momentum indicators suggest that if this support holds once more then the bulls could be in prime position for a recovery. However a breach of 108.11 support would be a key break, especially on a closing basis. It is interesting to see that the hourly momentum has a negative bias but is certainly not bearishly configured. The initial gauge is 109.00 with the hourly chart showing intraday support at 108.70 and then 108.45 from yesterday’s low. A move above the 50% Fib of 100.07/118.65 at 109.35 improves, with 109.80 a key near term pivot resistance.
Gold spent much of yesterday in consolidation mode and that feeling has continued into today’s early trading. The market is holding on to its move above $1330 with the support of Tuesday’s low at $1227. Throughout this bull rally the market has used old resistance as new support for consolidations and there is a sense that this consolidation is again just a pause for breath. The momentum indicators are very strong still and as yet there are no real signs that would point towards an impending correction. The hourly chart shows bullishly configured momentum just unwinding back to levels where the buyers have resumed control in recent sessions. Look to use support in the band $1227/$1331 as a chance to buy for further pressure on the recent high at $1344.20, whilst the 2016 higher of $1375 remains a potential target. With the ECB meeting today there could be added volatility, with support at $1316 and $1301 fr any spikes.
The bulls are back in the control of the market again with what is now a fourth bullish candle. Furthermore, the move that has taken the market well clear of the lower high at $48.75 has now re-opened the key August high of $50.43. There is a decisive improvement also being seen on momentum indicators with the RSI rising at a four week high, Stochastics confirming and the MACD lines posting a bullish cross buy signal. There is now a potential for the market to rally to test the overhead technical resistance of the six month downtrend which comes in today at $49.80. The hourly chart shows consistent recovery in the past few sessions, with positive momentum configuration and an uptrend which is supportive today around $48.50. That coincides with the old $48.45 pivot from the daily chart to give a near term buy zone $48.45/$48.75.
Dow Jones Industrial Average
Markets remain volatile and in the wake of Tuesday’s sharp sell-off yesterday’s rebound does little to clear the muddied waters. Despite the strong rebound at the open, the bulls could not carry on with the recovery and a somewhat tepid looking (almost) doji candle has formed. There is an uncertain look to this market now although it has held well above the 21,600/21,674 support, but daily momentum indicators are difficult to ascertain a decisive outlook from. Perhaps looking on the hourly chart gives more clarity now, especially with the Fibonacci retracements of the 22,179/21,600 correction playing such a prominent role. The 76.4% Fib level at 22,042 capped Friday’s rally, whilst the 23.6% Fib at 21,737 has been a good basis of support. Throughout late August the 50% Fib level at 21,890 has played an important turning point and should be watched as resistance for a recovery now as the market consolidated for yesterday’s session around 38.2% Fib at 21,822.. A failed rally would now put the sellers back on alert again. However, until the market puts together a string of candles, the volatility will be difficult to trade on a daily basis.