Last updated: May 3rd, 2017 at 09:55 pm
Markets appear to have entered into a wait and see mode, with two key factors driving the cautious approach, being today’s OPEC meeting and the prospective dollar correction. Volatility in the oil market will be high as the bi-annual meeting of the Organisation of Petroleum Exporting Countries (OPEC) is held in Vienna. Suggestions are that the key players (Saudi Arabia, Iran and Iraq) are engaged in a game of poker, and the prospect of agreement seems to be increasingly in the balance. Broadly speaking, Saudi Arabia wants every country to cut, whilst Iraq and especially Iran are proving resistant as they look to ramp up production following years of sanctions. The last two years of market share grab will mean that the countries may struggle to come to an agreement. The other key market factor is that the recent bull run on the dollar has stalled and an increasingly mixed outlook is forming. The decline in Treasury yields have pegged back the bulls, but equally the Trade Weighted Dollar is finding support above 100.65 and is not yet ready to lose the hard fought gains. This is all driving consolidation across markets. The Bank of England also gave results of the UK banks stress tests at 0700GMT showing that Royal Bank of Scotland has failed and needs a new capital plan, meaning that 8 years after the financial crisis, UK banks are still not out of the woods yet.
Wall Street closed with muted gains (S&P 500 +0.1% at 2205, whilst Asian markets were also mixed overnight (Nikkei flat). European markets are also mixed in early moves and traders will continue to eye that near term breakdown of the DAX below 10,575. Forex markets show the dollar regaining some lost ground from yesterday, although the Kiwi is a slight outperformer. Gold and silver have held their ground this morning whilst the volatility in the oil price continues with a rebound of over 1.5% today.
The economic calendar is getting heavier as the week moves on. Today is the biannual OPEC meeting in Vienna for which traders will be waiting for any news and volatility is expected to be high on any announcements. Eurozone flash CPI for November is at 1000GMT and is expected to improve to +0.6% on the headline (from +0.5%) whilst the core CPI is expected to stay at +0.8%. ADP Employment change is at 1315GMT which is expected to be 161,000. The FOMC’s preferred inflation measure , the core Personal Consumption Expenditure is at 1330GMT and is expected to be +0.1% for the month. Pending Home Sales are at 1500GMT which are expected to rise by +0.2%. German Bundesbank president Jens Weidman speaks at 1600GMT whilst the Fed releases its Beige Book at 1900GMT.
Chart of the Day – AUD/USD
There are question marks over the corrective move on the US dollar and it will be interesting to watch the movement on the Aussie with this in regard. The Aussie has now unwound almost 200 pips of the 470 pips of correction in November, but has hit an area of overhead supply around $0.7500 and the rally has faltered. After some strong bull candles unwound the bear momentum towards 50 on the RSI it will be interesting to see if this is in fact a bear market rally or perhaps something more. Yesterday’s candle hit a second day’s worth of resistance just under $0.7500 before falling away to form a mildly negative candle and in the early moves today the resistance continues to be found at $0.7500. After yesterday’s muted gains and failure at resistance, this makes today’s move important for the recovery. The hourly chart shows the hourly RSI and MACD lines have lost the positive configuration of the recovery. Also, the low at $0.7428 will be seen as key near term as it forms the bottom of an uptrend channel for the past week. A breach of $0.7428 would also complete a small top with around 70 pips of additional downside.
A third consecutive positive candle is continuing to drive a potential recovery on the euro with the momentum indicators beginning to improve. The RSI is above 30 at a two week high, whilst the Stochastics have also crossed higher and the MACD lines are threatening the same. Yesterday’s trading showed the bulls strong into the close and has set up the market for a decisive improvement recovery today. The early dollar gains have dragged the pair lower but if the bulls can sustain a move above $1.0660 then the rally will be on. The hourly chart shows the importance of the pivot at $1.0660, a level that has held the bulls back on Monday and also overnight. However the hourly momentum is more positively configured now and the pressure is mounting. Although the market is ranging, the promising momentum suggests that this could turn into a base pattern. The support at $1.0560 is holding and a decisive move above $1.0660 would complete the base which would imply around 150 pips of further upside. Subsequent resistance is $1.0710 and $1.0800.
Cable is increasingly stuck in a range now as Monday’s bear candle has been unwound with a follow-up bull candle yesterday. However the problem is that traction is failing in either direction. The old neckline support around $1.2330 is the basis of the support, whilst the market has been consistently limited by the resistance at $1.2515 in the past couple of weeks. The daily momentum indicators remain neutrally configured whilst this is also now the case on the hourly chart with the RSI oscillating between 30/70. Another attempt at a breach of $1.2515 was rebuffed yesterday and the market has drifted back within the range once more. Until this range of less than 200 pips is broken the market will be very neutral and near term positions will constantly be retracing. There is minor higher support at $1.2385.
The dollar has picked up again as the corrective move has stalled. The strong bear candle posted on Monday has not managed to gain traction and the bulls hung on with yesterday’s positive close. However the candle also shows that the bulls did not have it all their own way and the market closed in the lower half of the candle suggesting that there could be more of a mixed outlook developing. The bulls need to work hard to prevent the momentum indicators rolling over. The hourly chart shows that a range play is now beginning to take hold as there is a series of choppy moves in recent days whilst the hourly moving averages have flattened and momentum indicators have begun to oscillate rather than trend. Whilst the market continues to find support above 111.35 the bullish outlook will remain on a medium term basis. The bulls will eye resistance around 113.30 today and a move through would re-open the high at 113.90. There is also a mild positive bias to the hourly momentum still, so although the market is ranging there is positive dollar outlook.
The safe haven plays against the dollar are really struggling to recover, and gold is no exception. The market has managed to rally off the $1171.20 support from last week, but the big overhead supply around $1200 is a barrier to gains. This stopped Monday’s bull candle from developing further, whilst yesterday’s negative close also shows the struggle. The daily momentum indicators are reflecting this struggle too with the RSI crawling back to 30 and the Stochastics unable to find traction in the recovery. It is also interesting that yesterday’s high at $1295 has again acted as resistance overnight and will be eyed today as the candle drops away. The hourly chart shows that rallies continue to be sold into with the RSI consistently failing around 60/65 and Stochastics again turning lower overnight. Expect a drift back to test the initial support at $1180.90 with $1171.20 now key.
Traders are increasingly concerned by the noises out of Vienna as we move into the biannual meeting of OPEC today. This will be a very nervous market which will move on rumour but the big reaction will be on any statement from the meeting. The size and fluctuation of the candles in the past three sessions just shows how nervous and headline driven the trading has become. Technically the fact that yesterday’s low at $44.82 came above the higher low at $44.55 and is a positive, however it is likely that the market will breach this level if an agreement over production cuts cannot be reached. The key low at $42.20 also comes into play in this scenario. On the flip-side, the bulls will be looking for positive signs of an acceptable agreement which would drive the price back to test the recent high at $49.20 again. Expect highly volatile moves today.
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