Although forex markets appear steady this morning in front of the ECB, there is still a trend of dollar strength still playing out in the markets. The dollar bulls have taken on renewed strength as the market continues to take an ever more hawkish view of US interest rates. The yield on US 2 year Treasuries broke to thei highest level in almost 8 years yesterday above 1.36% with the 10 year yield also pushing strongly higher. The ADP employment change is often seen as a harbinger for Non-farm Payrolls and the ADP number smashed expectations yesterday by over 100,000 jobs and puts the positive expectation for Friday’s key payrolls data firmly in focus. The dollar strength is impacting across markets with interest rate differentials impacting across forex majors with commodities also affected, whilst a corrective move on equities is gradually now playing out. Focus will turn to the European Central Bank today with focus on how the Governing council will react to the recent improvement in economic data.
Wall Street closed lower again for a third straight session with the S&P 500 -0.2% at 2363. Asian markets were mixed to negative, although there has also been the unexpected divergence of Chinese inflation data with the PPI storming to +7.8%, whilst CPI unexpectedly dropped to +0.8%. The Nikkei was up +0.3% helped by a stronger dollar. European markets are lower in the early moves. Forex majors show some mild dollar strength again, but little real moves yet in front of the ECB, whilst gold and silver are also quietly flat. Oil has looked to form support after a huge decline of around 5% last night in the wake of the jump in EIA crude inventories.
The ECB monetary policy decision will dominate trading decisions in Europe today, with the rates announcement at 12245GMT followed by Mario Draghi’s press conference at 13330GMT. The Governing Council is expected to hold the main refinancing rate at 0.0% and the deposit rate at -0.4% for. However in the press conference, the market will be looking at how upbeat Draghi is in light of recent improvement in economic growth trends (PMIs) and uptick in headline inflation to the 2.0% level. Key questions will be over whether the Governing Council are beginning to consider the tapering of asset purchases, especially considering the scarcity of bond supply in the Eurozone. Aside from the ECB, traders will be looking for the US weekly jobless claims at 1330GMT which are expected to tick higher to 235,000 (from 223,000) but this would continue the trend of strong numbers.
Chart of the Day – Silver
Silver has broken decisively lower as the market has been significantly impacted following the market re-pricing for what now seems to be the almost certainly of a March rate hike from the FOMC. The uptrend channel that had been pulling the price strongly higher in the past 10 weeks has now been broken. The trend channel was around $0.95 cents of depth and the downside projection of the trend break provides us with an implied target of $16.75. The magnitude of the bear candles reflects the selling pressure with the momentum indicators giving a range of key sell signals. The medium term chart outlook shows that time and time again in recent months the MACD lines bear cross sell signals have been decisive whilst the selling pressure is often precipitous in response. Also when the RSI goes below 50, as it has recently done so, will also tend to go to below 30 in the bear phases too. The market will be paying regard to some key signals around here now. The January upside breakout above $17.25 would have been seen as a key support level but this has been broken. The next key support to be tested is the 89 day moving average (currently $17.07) which over the past 12 months has been used as support for key turning points. A breach would put the bears back in decisive control for a test of the support at $16.59. There is now a band of near term resistance $17.60/$17.70 ($17.70 is the 38.2% Fibonacci retracement of the $21.10/$15.59 sell off.
The pair continues its slide back towards the support at $1.0490. The bearish candles are racking up once more, now with three consecutive daily bear moves lower. The selling pressure may not be precipitous however there is still a negative bias to the outlook. The momentum indicators remain negatively configured to show that rallies are a chance to sell. The hourly chart shows a trend lower again with negative hourly momentum. A breach of $1.0540 now opens the key lows at $1.0490 again. There is an initial band of resistance between $1.0560/$1.0600, with the resistance strengthening at $1.0640. The ECB meeting is though likely to drive elevated volatility today, whilst the uncertainty is likely to be why $1.0490 has not already been tested. A breach of $1.0490 re-opens $1.0450 initially with $1.0340 the major long term support.
The slide back towards $1.2000 continues with yet another completed bear candle yesterday. The momentum in the run lower is extending with the MACD lines accelerating lower, whilst the Stochastics remain deep in bearish configuration and the RSI (at 33) still has downside potential. There is little reason why a move back towards the key January low at $1.1980 will not be seen. Intraday rallies continue to be sold into with the hourly chart showing a well-defined downtrend formation. Furthermore, old support continues to be used as new resistance with $1.2300 and $1.2210 the main levels of overhead supply in the near term. Yesterday’s low at $1.2138 is now initial support that protects $1.2015 and the key $1.1980 low. The resistance of the major intra-range breakdown at $1.2345 is the main barrier to a recovery.
After a period of consolidation, could it be that the dollar bulls are again ready to take a step forward. The range 111.60/115.60 has been in place for the last two months with a pivot around 114.00 a consistent turning point throughout. However, yesterday’s upside break above 114.00 has re-energised the bulls who are now looking at the resistance band 114.75/114.95. With yesterday’s bull candle followed by a positive open today, the market is well positioned for an upside breakout. The momentum indicators are positively configured with the RSI pushing now towards 60, whilst Stochastics are at their strongest level of the year. The hourly chart shows strong near term momentum and the old 114.00 pivot will be seen as a level of support to build from. Support is growing also now at 113.55. Above 114.95 opens 115.35 and the key medium term range high at 115.60.
Gold remains under pressure and continues to be dragged lower. The outlook is becoming increasingly negative once more as the market has broken the uptrend, the key support at $1220 and is now on the brink of a move below the $1200 psychological level. Momentum is increasingly negative with the RSI now well below 40, with the Stochastics below 20 and both are at their most negative levels for around 10 weeks. A retest of $1180 now seems to be well in process now and rallies will be seen as a chance to sell. Having broken decisively below $1209 which was the 38.2% Fibonacci retracement of $1122/$1264, the next retracement of $1193 is in sight. The old support of $1220 now becomes the basis of new resistance, whilst the trend lower of the past nine sessions also comes in at around $1223 today. The hourly chart shows that initial resistance is around $1211/$1213.60 today.
The EIA oil inventories showed a much larger than expected build in crude oil inventories (+8.2m barrels, the 9th consecutive week of crude oil build) as US oil stocks continue increase. The market subsequently took the news badly and the price saw it largest one day decline since the bear market days of 2015. With a series of higher lows having been broken, the bottom of the big trading range between $50.00/$55.25 is now under serious scrutiny. The support around $50.00 has held initially however there will need to be a positive reaction today to prevent a serious bear breakdown and change of outlook. The initial signs are positive with a mild rebound However, can this now save the market from a break lower? There is now overhead support with old key levels of support turning into resistance between $50.70/$51.20.
Dow Jones Industrial Average
The consolidation on Wall Street is turning into a mild corrective move as traders prepare for the ECB today but more pertinently the Non-farm Payrolls data tomorrow in front of next week’s FOMC decision. The market has now fallen for three consecutive sessions as it drifts back towards the gap which remains open at 20,812. The move has also now unwound into the support of the previous breakout high at 20,850. Momentum indicators have now rolled over and there is now the issue of bear crosses on the MACD lines and Stochastics. These are near term profit taking signals within the big bull trend which is rising around 20,630 today so there is still room for a further unwind. This is more a reflection of the consolidation than big sell signals for now, however this could change is the bear candles continue to expand and accelerate. The hourly chart shows resistance at 20,986/21,018.