Volatility has ramped up on markets as we move to within a week of not only a crucial meeting of the FOMC but also the Bank of Japan as well. Market moves are becoming increasingly erratic as traders struggle to figure out how to be positioned. After a fairly serene phase of trading over the past few weeks, equity markets are starting to jump around far more. However it is interesting that even though the chance of a rate hike from the Fed at its September meeting are still between 15%/20%, the dollar is stronger and is driving key moves across forex and commodities. Aside from a minor pulback today the dollar is still driving the show. Additionally there is a feeling now that the Bank of Japan could be set to impose further moves into negative deposit rates and to steepen the yield curve, which is weakening the yen. There are still a few key data points between now and the FOMC with US Retail Sales and CPI this week ad this could add to the volatility. However the UK becomes the initial focus in the next day or so, with key employment and earnings data, retail sales and the Bank of England.
After another jumpy move, Wall Street closed sharply lower, with the S&P 500 down 1.5%. Asian markets were also broadly lower but not with the same degree of losses, with the Nikkei -0.7%. European markets are taking support as oil has bounced overnight, but can the gains be sustained? Forex markets show little real direction, although there is a mild improvement in risk sentiment with the majors slightly outperforming the dollar, although the big exception is the yen which is continuing its slide from yesterday. Gold and silver are looking to unwind some of yesterday’s weakness.
Traders will be looking out for the UK employment data at 0.930BST, with UK unemployment expected to stay at 4.9% including an increase in the claimant count of 18000 jobs. However, more interesting will be the average weekly earnings (ex-bonus) which are expected to just dip slightly to +2.2% (from +2.3%) on a year on year basis. Sterling is the big mover here. Also expect volatility on WTI oil with the EIA oil inventories are at 1530BST with the crude oil stocks expected to show an inventory build of 4.0m barrels (after last week’s unexpectedly large drawdown of -14.5m barrels), whilst gasoline stocks are expected to rise by 1.5m barrels.
Chart of the Day – EUR/GBP
Euro/Sterling has been trading broadly in a range (albeit with a mild upside bias) for the past few months since the huge volatility in the immediate aftermath of Brexit began to subside. There have been periods of euro strength but also then sterling strength within this move, however I discussed last week that the three week trend of sterling strength back from the high at £0.8725 was coming to an end. The chart has now taken another step forward in this move back towards the bulls favouring the euro again with a strong bull candle that was posted yesterday. The move took Euro/Sterling clear of a medium term pivot line around £0.8490 which has consistently provided support and resistance over the past two months. Although not deadly accurate the number of highs and lows posted between £0.8480/£0.8500 suggests that a pivot line around £0.8490 is a fairly strong gauge for the near term outlook within the range. Yesterday’s bull break means that this line now becomes supportive (the level is holding in the early moves today) and the upside is open. Interestingly this also has coincided with a move back above 50 on the RSI, whilst the Stochastics already pulling strongly higher following their bull cross last week. The immediate resistance now to be tested is £0.8570 and if this can be breached there is upside potential for a test of the August high of £0.8725. The pivot range between £0.8480/£0.8500 is supportive now for a pullback, whilst the bulls are in control above the support at £0.8415. The amount of fundamental data in the next couple of days is likely to drive significant volatility across the pair.
There is a mild drift lower on the euro as a slightly negative candle was formed yesterday. The euro has also now made it three days in a row of lower highs with the latest at $1.1260 and the move is putting pressure on the near term support around $1.1200. For now the support remains intact with the small gains that we have seen overnight. However on a medium term basis the momentum indicators are still very neutral and hardly giving any indication of direction. A breach of $1.1200 which has been tested on a couple of occasions now would open $1.1120 but the euro shows little real sign of any decisive bearish intent. The hourly chart shows the very mild negative bias to the near term outlook but only negligible. I believe that the way the market is forming, it could easily range up until the FOMC next week, although key US data in the next couple of days (Retail Sales and CPI) is a caveat, although there is nothing of any note today so expect the range to continue.
Cable may be range bound now on a medium term basis, but the near term corrective momentum is building. Yesterday’s firmly bearish candle of over 140 pips of downside broke through the near term support around $1.3250 and suggests that on a near term basis sterling is finding rallies being sold into. This means that there is near term resistance at $1.3345. The daily momentum indicators are increasingly corrective with the RSI below 50 again, and the Stochastics at a three week low. The hourly chart shows that the old pivot levels are working very well as turning points on Cable. The pair is now back to testing the next pivot at $1.3160 (the overnight low has been $1.3165) before a minor bounce has set in to help unwind some stretched hourly momentum. The sellers will be looking to use this bounce as a chance to sell, with the key resistance near term now at the previous breakdown resistance around $1.3237/$1.3250. I expect that a rally is likely to be sold into an further pressure back towards the medium term pivot within the range at $1.3060.
The near term bulls have turned around the outlook once more since yesterday afternoon to pull the pair higher again. The daily chart shows how the longer term downtrend channel is again being tested as there has been a continuation of yesterday’s recovery overnight. The move has pushed back above 103.05 and if it is backed the bulls could push towards the key reaction high at 104.30. With the two potentially momentous central bank meetings just a week away Dollar/Yen could be at a crossroads as the support at 101.18 has been bolstered by another higher low at 101.40. The hourly chart shows the improvement and if the bulls can hang on to 102.40 (an overnight pivot) then confidence will begin to build further. A decisive break above 103.05 (Friday’s high) has yet to be seen and this will be the aim today.
Gold continues to correct within the medium term range and is now pulling away from the $1330 near term pivot band. The price has now fallen for five days in a row and the strength of yesterday’s bear candle suggests that the sellers are still firmly in control. Having also decisively broken the support at $1225 this now opens the possibility of a move back towards the range lows between $1300/$1310 again, with intraday rallies being sold into. The old support at $1225 and pivot at $1330 also now become an area of resistance for the early gains that we have seen today. The intraday hourly chart shows how the hourly RSI is now failing between 50/55 and MACD lines failing around neutral so look for any unwinding move for the next opportunity. I am though still medium term neutral (within the range) and long term bullish on gold. The long term uptrend now comes in at $1306. The overnight low at $1315.20 is initially supportive.
Another session yesterday showed another highly volatile move on oil. The sharp selling pressure in yesterday’s session came as once more fundamental newsflow drove the direction of the trade (this time the IEA stating that it saw oil surplus running into 2017 in addition to a cut in oil demand forecast for this year). A strong bear candle is subsequently a drag on the near term outlook with the momentum indicators turning lower. The daily chart also shows that the bear candles are more substantial than the recovery bull moves which suggests that rallies are a chance to sell near term, especially with the negative cross on the Stochastics. The sequence of successive positive and negative candles with strong intraday direction continues, and if this is the case today then we could be due for another rebound move. The hourly chart now shows that the uptrend in place throughout September is creaking. The support band $44.55/$45.75 is therefore key near term and a breach would open the reaction low at $43.85. Hourly momentum is also now increasingly corrective with the MACD and RSI now far more correctively configured and rallies are being sold into. The hourly chart shows the resistance in place at $46.50 is strengthening and will be seen as a key barometer for oil in the coming days.