The increasingly positive market sentiment remains on track as the Federal Reserve begins its two day meeting today. This prospect could begin to pull traders to the side-lines over the next day and a half, but for now there is a risk positive theme running through the markets. This comes as the safe haven assets continue to be shunned. This is marked in Treasury yields which have increased sharply in recent days. In just over a week the 10 year yield has pulled higher from 2.02% to 2.22%. This move has helped to strengthen the dollar, whilst also driving weakness on gold and the Japanese yen. Equities have held up strongly with this move, but are now starting to consolidate in front of the Fed. Aside from the dollar, there has been a big move on sterling which has driven increased volatility in recent days as rhetoric from the Bank of England continues to move the market. Governor Mark Carney noted yesterday that interest rate moves would be “limited and gradual” for the UK, which could easily be taken to mean “one and done” to unwind the emergency 25 basis points rate cut following Brexit. Sterling fell almost 100 pips against the dollar but has since started to stabilise. In other central bank related news, in recent meeting minutes from the Reserve Bank of Australia were positive about the economy but remained concerned about household debt, the lack of wage growth and the strength of the Aussie.
Wall Street closed in yet further all-time high ground with the S&P 500 +0.1% at 2504. Asian markets were also broadly higher with the Nikkei +2.0% as it played catch up following a public holiday on Monday. European markets are a touch more cautious though in early moves with very slight losses. In forex markets, the yen remains a key underperformer, whilst the euro and sterling have also pushed higher, whilst the higher risk commodity currencies (Aussie and Kiwi) are also performing well. Gold is now teetering on the brink of a break below $1300 but for now is holding up, whilst oil continues its consolidation from yesterday.
Traders will be on the lookout for the German ZEW Economic Sentiment at 1000BST today. The market is expecting a slight improvement to +12.3 (from +1.0 last month), however the sentiment indicator has been in decline now for the past three months and interestingly has missed expectation for four months in a row now. There is a positive correlation to German growth from the ZEW with German Bunds and the euro likely to be reactive. Into the afternoon the US current account is at 1330BST. Consensus expects a mild improvement to the deficit to -$115.0bn (from -$116.8bn) for Q2, with a positive surprise being dollar supportive. The US Building Permits are at 1330BST which are expected to remain at 1.22m, whilst the Housing Starts are expected to improve slightly to 1.18m (1.16m last month).
Chart of the Day – AUD/NZD
Since early July the Aussie has been performing strongly against the Kiwi, however with the market dropping back from 1.1143 earlier in February, a sharp negative candle on Friday has signalled a reversal in sentiment. The trend higher on AUD/NZD has been broken by a strong bearish engulfing candle that has left a lower high at 1.1092 and closed to breach the 10 week uptrend. The move has been exacerbated also by yesterday’s session trading entirely below the rising 21 day moving average (today at 1.1017) for the first time since early July. The similarities that this chart has with that of both gold and silver pose the question as to whether this market is a proxy for gold. The momentum indicators have turned decisively corrective now with the MACD lines having posted a bear cross and the Stochastics in decline have just also shown a “bear kiss”. The initial support is at 1.0925, but breaching this would also confirm the market below the 23.6% Fibonacci retracement of 1.0367/1.1143 at 1.0960. This would then open further retracement to the 38.2% Fib level at 1.0847 which is around the breakout support at 1.0845/1.0878. With rallies now being sold into, the old uptrend now become a basis of resistance, as does the 21 day ma as the market starts to form lower highs and lower lows.
As the FOMC meeting approaches, EUR/USD has resumed its drift higher once more. There has now been a run of three positive sessions put together and the early move today is again higher. This has helped to bolster the support that has held throughout September at $1.1820, whilst the five month uptrend channel support comes in at $1.1810 today. The RSI has picked up again and is moving towards 60, whilst the Stochastics have started to also rise again. This all paints a picture of stability for the pair with the continuation of the medium term trend and the near term correction of last week having played out. A move above $1.2000 would be a near term resistance breach and also a psychological boost for the bulls, re-opening the $1.2092 high. The hourly chart reflects this stronger momentum configuration now with intraday corrections being bought into. Holding above $1.1820 remains key but the market is looking set to be positive moving into the FOMC meeting.
After adding 370 pips in just two sessions, Cable was always likely to be at risk of a near term pullback. It is just how the bulls react to the pullback that is the key to the outlook. Traders spent much of yesterday digesting the comments from BoE Governor Carney that rate hikes would be “limited and gradual”. Sterling fell on the news and although a bear candle was formed (with a 99 pip loss on the day), interestingly the old breakout support band $1.3445/$1.3480 has contained the move. Support has come in overnight and if this can now continue to build around a $1.3445/$1.3480 as a basis then the bulls will be fairly happy still. Furthermore, technically the old resistance of the uptrend channel will provide a basis of support, currently at $1.3430. For now, momentum indicators remain very strong, with the RSI still above 70, MACD lines rising and Stochastics positively configured. Once the price has settled we can see if the market is accepting the new levels for Cable. Resistance is now $1.3618 with little in the way until $1.3835 and $1.4000.
The bulls are now in control again. The closing breakout above 111.00 has been a key move for the bulls and this now confirms that the yen is weakening across the medium term time horizon. Clearing such a key resistance at 111.00 has arguably opened a move back towards the key highs from May and July above 114.00. If the momentum indicators are anything to go by, this will be the case. The RSI is rising above 60, MACD lines about to break above neutral and Stochastics strongly configured. This now all suggests that corrections are a chance to buy, The old 111.00 resistance becomes supportive and there is a band between 110.60/111.00 which will be seen as a near term “buy zone”. The only real resistance that lies between here and the 114.50 key July high is at 112.20. The hourly chart shows the strength of near term momentum and intraday corrections being bought into. The bulls are looking confident now moving into the FOMC.
As the safe haven outflows have continued this week, gold is now breaking its key technical support levels. Since topping out at $1357.50, the corrective momentum on gold has developed. We have now seen a breach of the 10 week uptrend support and also the 21 day moving average. That means that the final (but most important) basis of support is now being tested. For over almost 18 months now, gold has been using the pivot band $1300/$1310 as a basis of support and resistance, and is once again testing the support. A closing breach of $1300 would confirm the bulls having lost control and the market increasingly corrective again. The momentum indicators are certainly pointing to this with the RSI falling below 50, MACD and Stochastics also bearishly in decline. The market is increasingly failing at lower levels as rallies are being sold into and pressure is growing to the downside. A close below $1300 opens support levels within the old uptrend meaning $1278.50 initially. The old uptrend also becomes a basis of resistance now at $1320, whilst another lower high below $1334.70 would be expected. The support at $1300 is key.
The week began with a day of consolidation yesterday as the market has again struggled to break above the $50.50 resistance. An almost doji candle around the mid-point of the session suggests caution, but this is still likely still to be a mere pause within the recovery move higher (certainly given the strength of Brent Crude in breaking through equivalent resistance in recent days). The daily momentum indicators remain positively configured, with the MACD lines rising and positive configuration of the RSI. Corrections remain a chance to buy with daily chart showing a decent band of breakout support $48.75/$49.40. This can be tightened on the hourly chart which shows the market finding support around $49.25/$49.40 yesterday.
Dow Jones Industrial Average
There is no stopping the Dow at the moment. Another positive session has seen the Dow closing at yet another all-time high. The original breakout above 22,179 implied 500 ticks of upside and 22,680, which remains well within range. The momentum indicators a strongly configured with the MACD lines accelerating strongly and the RSI having only just moved to 70. Having spent well over a week above 70 during the August rally, there is little reason to believe that a trending move should be hampered yet by stretched momentum. Despite this, corrections remain a chance to buy, with anything finding support above 22,179 being a chance to buy.