We are finally at the day the Federal Reserve decides to hike interest rates by 25 basis points and makes a positive move on monetary policy for the first time since 2006. Or at least that is the belief of the market anyway. There are still sizable hurdles to surmount (such as at least four or maybe even five FOMC members changing their long held stance), however the market seems to be convinced there will not be a repeat of September and it will happen today. However there is enough uncertainty over the speed of tightening that will drive a volatile reaction for sure tonight both on the policy announcement and also during Janet Yellen’s press conference.
However, after US inflation picked up (as expected) yesterday and with an improvement in oil prices, market sentiment picked up strongly across the board. This drove equities significantly higher, Treasury yields were strong and not only that the dollar clawed back recent losses. The move suggests that the market is ready for a rate hike from the Fed, however the volatility will be around how many hikes we see in 2016, something for which I feel we may see a cautious move from the Fed which would drive a weaker dollar near term.
US markets were positive into the close last night with the S&P 500 up 1%, driving Asian markets positive across the board (Nikkei up 2.6%), whilst European markets have again started on a positive note. Markets are likely to settle down though as the day progresses and the Fed announcement nears. The outlook on forex shows a little bit of a mixed outlook across the majors with a bit of jostling for position in front of the Fed. Gold has bounced a touch whilst oil has also fallen back slightly.
Aside from the FOMC decision tonight at 1900GMT there are a few pieces of data that may drive markets in the run up. The Eurozone flash manufacturing PMIs are at 0900GMT and are expected to be flat at 52.8. The UK employment data is at 0930GMT and could be volatile for sterling with unemployment expected to be flat at 5.3% but the average weekly earnings growth (ex-bonus) is expected to dip to 2.3% (from 2.5%). Eurozone final inflation is at 1000GMT with +0.1% expected to be confirmed. There are also US housing starts (1.14m exp) and building permits (1.15m exp) and Industrial Production (-0.1% exp) and capacity utilization (77.4).
Chart of the Day – Silver
If the price of silver is anything to go by, the gold bugs should be concerned. In the past week or so the price of the precious metal (that also has industrial uses) has been under pressure. In that time the market has closed on a two day basis at multi-year lows and the outlook looks increasingly bearish. Despite an element of support yesterday which formed a small positive candle, there is little to suggest there will not be further downside in the price in due course. The big move came below $14 support but the momentum indicators show that there is further downside potential with the RSI still above 30, however the MACD lines have just turned lower again and the Stochastics are also showing bearish momentum. The little rebound has continued today but I would be looking to use rallies as a chance to sell now and there is a strong band of overhead supply now between the old support around $14 and up towards $14.40. The next support to the downside does not come in until the Q4 2009 low around $12.50 and then the key reaction low at $11.80. Initial support is Monday’s low at $13.60.
A strengthening dollar pulled the euro lower yesterday and normally I would spend some time talking about the bearish engulfing candle/bearish key one day reversal bar which resulted. However to take this as a decisive signal at this stage in front of the Fed would either be incredibly brave or foolish. The market has settled over night and is likely to remain so now as the FOMC decision is announced at 1900GMT. What the signal may give is an indication that the market is getting confident about the Fed, as theoretically it is signalling a change of outlook and one of more dollar strength that will drag on EUR/USD. I am not sure this will be the case. However in front of tonight’s decision there is now near term support at $1.0900. More useful will be for me to say that the key support comes in at $1.0810 for a rate hike that comes with an upbeat statement (unlikely), with resistance in at $1.1050 on a dovish/cautious hike. At a push I favour the latter but with much volatility.
The two strongly bearish candles in the past two days shows Cable as once again backing away from the big four month downtrend which currently sits around $1.5235. The near term outlook on the hourly chart shows the head and shoulders top pattern did complete below $1.5105 and gives a downside target of around $1.4980, whilst intraday rallies should now be seen as a chance to sell with momentum indicators negatively configured on the hourly chart. However the main event on traders’ minds will be this Fed meeting announcement tonight and to say that this will be a volatile event would be an understatement. There could subsequently be some big levels tested on different scenarios. The key supports that could come under pressure on an upbeat Fed rate hike would be instantly $1.4955 and the key low at $1.4893. The technical downtrend will be tested again on a dovish/cautious hike with resistance at $1.5240 and key resistance at $1.5335.
The recovery on Dollar/Yen in the past couple of days is looking to test the key upside resistance at 122.20 once more. The rebound which in some circles could even have been described almost as a “Morning Doji Star” 3 candle pattern (strong bear candle, doji at the bottom, strong bull candle) which is improving what looked increasingly like a corrective outlook. The momentum indicators remain in medium term corrective territory, but with the improvement on the Stochastics this is an interesting turn around. The hourly chart shows a near term base pattern completed above 121.25 which gives just under 100 pips of upside implied target. This interestingly puts Dollar/Yen testing the 122.20 key medium term pivot now. The dollar is strengthening in front of the Fed tonight as the market has regained confidence once more. The key levels to watch on the Fed announcement are the resistances at 122.20 and then the big resistance up at 123.67, whilst on the downside is the 121.25 near term neckline but then the recent reaction low around 120.30.
The gold price has continued on this bearish drift lower over the past few days and goes into the Fed meeting tonight still with an outlook that rallies are a chance to sell. On a technical basis the outlook remains negative and even this minor rally overnight has come up into a band of resistance $1065/$1070 and the downtrend channel of the past week is still a net drag on the price. The near term key resistance comes in at $1079.60. However if the last few days have been relatively quiet and arguably sedate trading for gold, expect this to all change tonight. The gold price tends to react strongly to major US data and this is certainly no exception. The market is balanced on the side of a stronger dollar dragging gold lower. Even the safe haven status of gold has been unable to make any headway despite the market toils in recent days. Key levels to watch for an upbeat Fed hike would be the support at $1045.85, whereas if the Fed somehow disappoints then the overhead resistance at $1088.70 and maybe even $1098 could see some action.
The recovery continues and we are now getting some near term positive signals coming through on the technicals. From a low of $34.55, WTI has engaged a decent rebound which has given a classic RSI cross buy signal, the Stochastics have crossed higher (still needs confirmation though) and some of the oversold momentum is now being unwound. However there is now some considerable overhead supply to contend with which could be a barrier to the recovery. The initial resistance at $37.75 which was the old key floor was tested yesterday before the move ran out of a bit of steam at $37.88. If the bulls can regain the impetus again today there could be a move towards a test of the band of resistance between $38.50/$39.00. Within the recovery on the hourly chart a falling wedge can also be measured over the past couple of days that derives an upside target of around $38.20 which would also take WTI towards those upside resistance levels. There has been some near term support formed around $36.00 which needs to remain intact. I am not calling a major bottom quite yet, but at least it is something for the bulls to go on.