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Forex markets wait for Yellen although the yen remains weak


Market Overview

Forex and equities markets seem to have entered into another bout of wait and see trading as the moves of recent days begin to settle down. This comes ahead of some key market moving events towards the end of the week, with Yellen’s Congressional testimonies in addition to US CPI and Retail Sales on Friday. There is one key market that is still moving though, as Dollar/Yen has broken out above its key May high. The Bank of Japan reinforced its intent to remain dovish last week and this means that with other major central banks such as the ECB and Bank of England seemingly moving away from their policy of ultra-loose monetary policy, interest rate differentials are a big driver here. The US yield curve is steepening as global yields have risen but the JGBs remain muted. During the time in which the Japanese 10 year yield has added just 5 basis points, the US 10 year Treasury yield has risen by 26 basis points. The yen is under pressure. Another key market to watch could be oil which is starting to form support again after a few days of resumed selling pressure. Suggestions are that there could be some pressure put on OPEC members Nigeria and Libya to engage a curb to production. These countries had been exempt from the agreement to cut production as they were getting their production up and running again after a local issues had previously impacted on production.

Trader relaxed

Wall Street just leaked earlier gains into the close to end the day around the flat line, with the S&P 500 +0.1% at 2427. Asian markets were generally higher with the Nikkei +0.6%, whilst European markets are mildly higher. Forex shows a mixed outlook across the majors, with the underperformance of the yen still a significant issue. In commodities, gold is dropping back again after yesterday’s late rebound into the close. Oil is mildly higher in early moves.

It is another rather quiet day for economic announcements. The only major economic data due is the US JOLTS jobs openings at 1500BST which are expected to show a  2.5% decrease to 5.89m (from 6.04m). However there are a number of central bankers set to speak. The Bank of England’s Haldane will be of interest at 1100BST as he recently switched from a dovish position to one of potentially being a voter for a rate hike in the coming meetings. The BoE MPC’s Broadbent (centrist) will also be of interest when he speaks at 1200BST.the FOMC’s  Lael Brainard speaks at 1730BST.

 

Chart of the Day – EUR/GBP

Euro strength and a renewed slip on sterling (as UK economic data has continued to underwhelm) has driven Euro/Sterling back towards the key resistance once more. Since November the market has been trading in a broad 550 pip trading banc between £0.8300/£0.8850. In the past few weeks since the UK election, the market has been putting consistent pressure on the resistance at £0.8850 but failed to achieve a closing breakout. The last two candles have shown continued pressure on this resistance, but for now it is not yielding. Momentum indicators are strong with the MACD lines and Stochastics turning higher once more with the RSI only in the low 60s. This all suggests there is upside potential in a move. The support has held firm for a couple of weeks around £0.8750 and a closing breakout would imply at least 100 pips of initial upside. Furthermore, corrections are increasingly being bought into at higher levels, with moves in the past month effectively forming a bullish ascending triangle that would imply 200 pips of upside and imply around £0.9050 in due course. That means that the early dip lower today could provide us with another chance to buy. The hourly chart is strongly configured and there is a good near term old resistance now supportive at £0.8810 meaning a buy zone of £0.8810/£0.8850.

EUR/USD

As a sense of calm starts to take over, the market is forming a mild corrective drift once more. Another small daily range, of 37 pips (the average true range is currently 67) with little real direction has come after the euro has just rolled over underneath the near term resistance at $1.1445. This seems to be just a period of reflection for traders but the medium term bullish outlook remains in place. Momentum indicators are still bullishly configured with the RSI above 60 and Stochastics above 80. However there is still potential for a near term pullback towards the breakout support at $1.1300, whilst the support of the three month uptrend is at $1.1270 today. The hourly chart has a very mild negative slant to it, but continue to view corrections as a chance to buy for a retest of $1.1445 and the breakout target of $1.1500.

GBP/USD

With the June rally peaking at $1.3030 a lower high has been left at $1.2982 which becomes a key near term level. Posting a lower low also means that a new near term corrective trend is beginning to form. This is reflected in the momentum indicators which are turning lower and increasingly corrective with the Stochastics tracking lower and the RSI dropping back towards 50. The prospect of a retreat towards the old medium term pivot at $1.2775 is increasing. Yesterday’s mildly negative candle was a second close back below the near term low of $1.2890 and suggests that near term rallies are now a chance to sell. The momentum indicators of the hourly chart are now more negatively configured with the RSI falling over around 50, whilst all the hourly moving averages are falling in negative sequence. Expect another lower high to be formed under $1.2982. Yesterday’s low at $1.2853 is initial support but the pivot at $1.2775 is a likely target now.

USD/JPY

The support of the four week trend continues to track higher and the market has now broken out of the key May high at 114.35. This is a key move as it also begins to take Dollar/Yen clear of the 23.6% Fibonacci retracement of 100.07/118.65 rally at 114.27. If the market can now confirm the breakout then the prospect of this trend being sustainable will increase enormously. The RSI had previously rolled over around 73 with the May high but having broken through this resistance the RSI confirmed the breakout. MACD lines and Stochastics are also very strong. However, the market is now into a band of overhead resistance between 114.35/115.50 which stands in the way of a full retracement to the 118.65 December high. The hourly chart shows strong configuration with intraday corrections being bought into. Initial support is 113.70/114.00.

Gold

The market has been trending lower for several weeks now and wit the price closing for two sessions now below the key May low of $1213.80 there has been a confirmation of the breakdown. However, on the daily chart, with the rebound from yesterday’s low at $1204.50 an interesting daily candle has arguably been posted, a bull hammer candlestick. However, the continued deterioration in the momentum indicators means that this is the first positive signal and needs to be treated with caution. Today’s move subsequently becomes key for confirmation. If the selling pressure resumes then it is difficult to back a recovery, and currently the market has turned back lower again. The hourly chart suggests that yesterday’s rally was simply a pullback into the resistance band $1213.80/$1217.10 and has simply unwound momentum back into an area where the sellers tend to resume. The hourly RSI is failing in the 50/60 area and the hourly MACD lines are rolling over around neutral. Expect the selling pressure to remain and to resume for a retest of $1204.50. $1200 is a psychological level of support with the key support $1194.50 and $1180.

WTI Oil

A mild recovery candle poses a few questions now for the resumed sell-off on oil. An almost doji candle (at least with a very small positive candlestick body) suggests uncertainty with the resumed decline. The bounce has come on suggestions of possible OPEC pressure on Nigeria and Libya to curb production growth. This means that the bounce from around the support at $43.75 should be watched. On the hourly chart there is a band of near term resistance $44.80/$45.05 which if broken to the upside would complete a small $1.15 base pattern. This could still be playing out a consolidation within the resumed sell-off but the potential base needs to be watched. Buying pressure has previously been snuffed out fairly quickly. Above the $44.80/$45.05 resistance opens the $46.53 high from Thursday.

Dow Jones Industrial Average

The range play continues. For the past two weeks the market has traded between 21,197/21,563 with a whole mish-mash of daily candlestick patterns. Essentially though, stepping back the market is moving sideways and momentum is reflecting this consolidation as the indicators such as the RSI and Stochastics both track slowly back towards 50. Recent trading shows initial support in at 21,305 but resistance is at 21,505 with candles trading ever tighter within themselves. The hourly chart indicators reflect that the range is a neutral outlook and extreme moves within the hourly RSI should be a chance to play the range for now.  Ultimately the market is looking for direction, but near term trading presents opportunities to sell with the hourly RSI 60/70 and buying with the RSI 30/40.


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