Political risk in the UK and Eurozone is impacting negatively on sterling and the euro and subsequently the dollar has started to strengthen. The UK election polls continue to tighten and traders are increasingly questioning whether Prime Minister May can achieve her goal of an increased majority. This is diving a weaker sterling at the prospect of a result that would limit May’s perceived strength. The two main party leadrs in the UK underwent a television question and answer session last night, in which Labour’s Corbyn probably just edged. This will do little to calm the nerves over Labour’s improved showing in the polls. Two factors are impacting negatively on the euro, with concerns over agreement for Greece’s next bailout payment (yes, it is that time of year again), whilst there are also calls for a snap Italian election to be held around the same time as the German elections in late September. This would bring forward a risk factor that had been previously put out to grass. Subsequently the dollar is strengthening. This comes despite a drop back in Treasury yields. There is though also a strengthening of safer haven plays with the yen and gold also holding strength.
Wall Street was closed for Memorial Day yesterday and had an almost flat close on Friday. Asian markets have been all but flat overnight, whilst running with a more of a mild risk off theme today, European equities are mildly lower in early moves. In forex, the dollar is stronger against the euro and sterling, whist suffering against the yen. Gold is holding gains, whilst the oil price is looking to settle after last week’s huge volatility.
It is a quiet morning for the European trader with little significant data on the economic calendar. However into the afternoon the US data will be interesting with the Fed’s preferred inflation measure, Personal Consumption Expenditure. The US PCE is announced at 1330BST and fell to +1.8% on the headline last month, whilst the core year on year fell to +1.6% and is expected to grow by +0.1% for the month but would then drop further to +1.5% for the year. The S&P Case Shiller House Price Index is at 1400BST and is expected to drop back to 5.7% (from a two and a half year high of +5.9% last month). Finally the US Conference Board’s Consumer Confidence is at 1500BST and is expected to drop slightly to a still very strong 119.8 (120.3 last month).
Chart of the Day – EUR/JPY
Calling reversal patterns is a risky business in technical analysis, “the trend is your friend” tends to be a strong mantra to follow. However the momentum indicators on EUR/JPY have been suggesting the bull market has been slowing for a couple of weeks now and there is an increasing prospect that the market is rolling over now. Having posted a high at 125.80 a couple of weeks ago, the high from last week was again at 125.80 to the pip before failing again. The market has since posted a couple of bear candles and is developing a third today. The initial support at 124.10 has been breached and the subsequent 123.30 support is being tested today. However the real concern comes with the momentum indicators. There is a failure of the RSI (arguably a sell signal), with a bear cross on the MACD lines and Stochastics also sell signals too. A close below the support at 123.30 will be a real signal of increasing bear control as the negative signals continue to mount. This deterioration is reflected in the momentum indicators on the hourly chart and there is now a band of near term resistance between 124.10/124.50 which could begin to determine the near term outlook now. The correction would be confirmed below 122.55.
The market is beginning to drift lower as the consolidation has lost the momentum of the near term bull run. There have now ben three consecutive negative daily closes for the euro and early moves today look set to continue this decline. However this still has the look of simply a near term correction within the strong run higher. The long run pivot at $1.1100 is supportive initially however there is further breakout support at $1.1020 to also prop up the bulls. The momentum indicators reflect the corrective drift whilst there is a threat of this setting in, with the MACD and Stochastics lines close to crossing lower. However for now this is a near term slip, with the medium term positive configuration on these momentum indicators still intact. The hourly chart shows a small top pattern completed below $1.1160 with around 100 pips of downside projection. The neckline at $1.1160 is now resistance up towards $1.1190.
The key breakout support at $1.2775 is under pressure. This was the long term resistance that has become supportive, however the support was tested during Friday’s sharp bear candle and remains under threat now. The momentum indicators are reflecting this corrective move now, with the MACD and Stochastics lines in decline. If the RSI were to fall below 40 it would be a signal that the sellers were increasingly in control. For now the support at $1.2775 remains intact and it would be a significant disappointment to the bulls if it were to be broken. A decisive closing breach would open a further slide back towards $1.2600 support. The previous supports within the range now become a basis of resistance, with overhead supply now $1.2840/$1.2890.
Having spent much of last week consolidating around 111.60 the yen has started to trade lower again and the momentum is building for a retest of the recent low at 110.20. Momentum indicators that had previously looked to be stabilising are now starting to come lower again and the sellers are gradually forming control again. The support at 110.85 that had been holding throughout last week has been breached overnight and a close below tonight would certainly be a negative signal. The hourly chart reflects this bearish bias now with the hourly RSI failing in the mid-50s and the MACD lines also consistently below neutral. Initial resistance is 111.45 but the 111.60 pivot will continue to also be a gauge. A strategy of selling into intraday rallies is forming. Below 110.20 opens 109.35 and the key low at 108.10.
The closing breakout above $1261 looks to have been another key move on Friday. The resistance was an old pivot but seemingly now with the market holding on to the breakout, the bulls are building higher once more. The momentum indicators continue to improve with the RSI towards 60, whilst both Stochastics and MACD lines are positively configured. The corrective moves continue to be bought into at higher levels and any near term weakness should be seen as a chance to buy. There is now an initial band of support $1252.50/$1261. The next resistance is at $1271 and $1278 whilst a move to test the April high at $1295.40 should not be ruled out. A series of major public holidays yesterday resulted in a quiet day and limited volatility, however another closing breakout above $1261 today would give the bulls added confidence.
The big bear candle in the wake of the OPEC decision to extend production cuts by 9 months into Q1 2018 has left a significant legacy on the chart. A huge bearish engulfing candle continues to dominate and the resistance at $52.00 will now be a key level to watch in the coming weeks. An unwinding candle on Friday is subsequently being followed by a consolidation candle which threatened higher only to be pegged back. The bulls are now into the trading band $49.60/$51.20 which will also have a part to play in the outlook. The market is still settling down and the outlook is uncertain. However a drop below $49.60 would put more of a negative spin on the chart once more.
Dow Jones Industrial Average
The bulls remain in control of the outlook with the break above 21,070 which opened the all-time high of 21,169. The consolidation candle posted on Friday (ahead of Memorial Day weekend) was more of a confirmation of the breakout and the market looks set to use minor near term corrections as a chance to buy now. There is a gap still open at 21,023 which ideally still needs to be filled, so is a basis of support now. The bulls will be looking for decent entry points for a test of the all-time high now.