Markets are increasingly cautious ahead of what could be a crucial meeting to discuss the possibility of an oil production freeze in Doha on Sunday. The meeting that contains OPEC and Non-OPEC (most importantly Russia) members has been anticipated for a while and traders have had plenty of time to position themselves ahead of it. However that makes the likelihood of a rather cautious session today and the outcome of the meeting could have significant implications for risk appetite and sentiment across asset classes. Wall Street closed almost dead flat on the day with the S&P 500 up less than half a point, whilst Asian markets have also been cautious overnight. There has though been a clutch of Chinese economic data which has so far done little to drive sentiment. The GDP for Q1 came in as expected at +6.7%, whilst the sector data was a little stronger, with Industrial Production at +6.8% (+5.9% exp) and Retail Sales +10.5% (+10.4% exp). This data should give a bullish bias to risk today however the uncertainty of the Doha meeting seems to be just holding traders back a touch.
In the forex markets there is a mixed picture, with a marginal dollar strength against euro, sterling and the yen, whilst the commodity currencies are reacting more to the China data. The Aussie is higher, whilst the Kiwi and Canadian Loonie are both also outperforming. The gold price has just started to pare some of yesterday’s losses, with the oil price continuing to consolidate as it has done for the past couple of days.
Traders will be looking mostly towards the US now for any catalysts within today’s session, with a mix of industrial data (tends to be dollar negative) and consumer data (which tends to be more supportive). The New York Fed (Empire State) Manufacturing is at 1330BST and is expected to remain back above the zero line with 2.2 forecast. The Industrial Production data is at 1415BST and is expected to show -0.1% for the month, whilst Capacity Utilization is expected to remain flat at 75.4. The preliminary Michigan Sentiment is at 1500BST and is expected to improve slightly to 92.0 (from the upwardly revised 91.0 last month).
Chart of the Day – EUR/JPY
The outlook for Euro/Yen remains under pressure but the pair is once more at a crossroads. The long term outlook has been bearish ever since topping out in December 2014, with consistent downside and negative momentum meaning that rallies have continued to be seen as a chance to sell. The latest rally failed at 128.20 a couple of weeks ago and the sellers have been putting pressure on ever since. However, in the past week there has been a band of support that has been holding between the early March lows at 122.05/123.00. Despite the bearish configuration on momentum indicators this band of support has formed a consolidation. The daily candlesticks have been rather indecisive during this consolidation with yesterday’s candle being the third time in five sessions that the open has been within two ticks of the close (effectively three doji candles). The intraday chart shows that this consolidation has used a basis of support between 122.55/123.00 whilst hourly momentum indicators have now turned into a far more neutrally configured set up, as if waiting for the next catalyst. The trend is your friend and throughout the bear phase over the past 10 months the sequence of lower lows has dragged the price lower. I favour a downside break, with the near term resistance band 124.00/124.20 key.
The near term outlook took on a far more corrective configuration in the wake of the breakdown below $1.1325 which opened a retracement back towards $1.1200. The consolidation over the past 36 hours has not changed that view, simply helping to renew some of the near term downside potential for the move. The daily momentum indicators are sliding back now with the Stochastics and RSI both falling at 5 week lows and the MACD lines having also turned lower. I continue to see this as a near term pullback towards a band of support above the old long term range pivot at $1.1100, and ultimately I expect there to be the next buy signal probably between $1.1100 and $1.1200 for a likely retest of the range highs. For now though the correction is underway, although I do not expect it to last too long.
The downside pressure towards the support around $1.14050 continues. The daily chart shows a second consecutive bearish candle that helps to confirm the downside momentum continues. The daily momentum indicators have all once more turned lower and there is further downside potential in both the Stochastics and the RSI. There is a minor caveat in that yesterday’s candle, despite being bearish, also had a late rally to close around the mid-point of the day. This could act as a warning sign for the sellers that perhaps they are not quite as strong as they could be. That makes today’s candle more interesting, as a positive close with some conviction could start to question the bear control. Yesterday I discussed the resistance band now in place between $1.4170/$1.4195 and this seems to have been the near term barrier as the late rally set in from $1.4088. I am still expecting a negative bias, with rallies seen as a chance to sell, and I see $1.4170/$1.4195 as a good “sell zone” right now. A move above the near term resistance at $1.4280 would ask serious questions of the bulls.
The unwinding technical rally continues to drift higher but I do not see this as being the start of a big dollar recovery. The near term signals (RSI crossover, Stochastics buy signal) suggest a near term rebound, but I believe that it will be a rally that gives another chance to sell. The daily chart shows a significant resistance between 110.65/111.00 and this would be an ideal sell-zone. The intraday hourly chart shows the near term base pattern completed above 109.10 which implies 110.60 as a recovery target. The creeping gains of the past couple of days suggest much caution in the move higher and there is much overhead supply, with the next resistance between 109.85/110.00. The neckline of the base pattern is providing an area of support back to yesterday’s low at 108.90, however if this were to be breached now the bears would be back in control again for 108.40 and the low at 107.60.
A third consecutive negative candle has put the pressure back on the downside, however I think this will not result in too much further weakness for gold. I continue to see this as a choppy sideways medium term range now, without any real traction forming and with some significant support below I think that the selling pressure will begin to dissipate. The momentum indicators have rolled over again to reflect the corrective outlook, with the Stochastics in decline, but the RSI is back around the neutral 50 area and the MACD lines are all rather benign so this continues to look like a range play. The hourly chart shows a downtrend formation in the past few days with the resistance for yesterday’s high again coming in around the $1243 pivot. Once more I expect these old pivots from March/early April to kick in, and the support yesterday was again around the $1225 pivot. I am not expecting any decisive trading now ahead of the weekend (with the big risk factor of the Doha OPEC/Non-OPEC meeting on traders’ minds) so this could be a quiet one today. Subsequent support is around $1216 and $1208.
In front of the crucial Doha meeting on Sunday the WTI price has started to settle down. A rally back to the old March high could not sustain the upside momentum and has seemingly stalled around $42, posting a high at $42.42 with the $43.50 resistance and base target still overhead. A couple of rather neutral candles in the past two sessions suggests that traders are now positioned, ready for Sunday’s news and unless there is an announcement or any news today, I would expect more of the same in today’s session. The market initially looked to be correcting back yesterday, but a mid-session rally put paid to any thoughts that the bears might have and the supports of the recent trend higher remain intact. The truth is that Sunday’s meeting could have a huge impact on oil. My feeling is that the market in rallying from the low of $26 on the expectation of this production freeze has now seemingly priced in much of the move (apart from perhaps a bit of uncertainty still). So whilst there could be an initial pop to the upside on news of a production freeze, I do not see significant upside. The significant upside would come with a production CUT (which looks to be unlikely at this time, especially according to the Saudi Arabia comments recently). No deal would generate a significant sell-off. Expect huge volatility. Initial support band is between $39/$37.75, with $35.25 key.