Market sentiment has started to consolidate with little real direction on forex or equities ahead of tomorrow’s Non-farm Payrolls report as a sense of calm has taken over markets. The near term knee-jerk dollar negative reaction to suggestions that Donald Trump could be considering a more dovish choice for the next Fed chair was countered yesterday by another extremely strong ISM reading. The ISM Non-Manufacturing (services PMI) was at more than a decade high as the ISM Manufacturing reading had been a couple of days ago. This positive data has helped to stabilise a move lower that had been developing on Treasury yields and the dollar. It also helps to settle traders ahead of payrolls who are now unlikely to take much of a view, unless something happens to materially affect the geopolitical or macro outlook in the coming hours.
Wall Street closed mildly positively with the S&P 500 +0.1% at 2538, whilst the Nikkei was 1 point higher overnight. The consolidation is filtering into the European open with little real direction across equity markets, although FTSE 100 is mildly outperforming on sterling weakness. In forex, there is a very mild positive dollar bias which is being helped by underperformance on sterling, whilst the Aussie is also lower in the wake of disappointing Australian retail sales. In commodities the consolidation is moving gold sideways, whilst oil still looks to be under corrective pressure as US oil exports rise with the wider WTI/Brent spread.
It is a fairly quiet European morning for economic data and it is not really until the afternoon when the US Trade Balance is announced 1330BST that traders will begin to get interested. The trade deficit is expected to improve slightly to -$42.7bn (from -$43.7bn last month). The Weekly Jobless Claims at 1330BST will add further detail to the labor market picture at 1330BST and is expected to improve slightly to 266,000 (from 272,000 last week). US Factory Orders at 1500BST which is expected to grow by +1.0% on the month (-3.3% last month) will also give a gauge of how positive the forward thinking in industry is. Central bank speakers will also be a key factor later in the day, with FOMC speakers including Jerome Powell (voter, mild dove) at 1410BST and Patrick Harker (voter, hawk) at 1500BST. However there will also be a couple of Bank of England members speaking with Ian McCafferty (hawk) and Andy Haldane (expected to turn hawk soon) at 1800BST.
Chart of the Day – USD/CHF
The strength of the US dollar in recent weeks has had a significant impact across major markets, and Dollar/Swiss is no exception. The move is now close to completing a significant medium term breakout that would signal a turnaround on the outlook. The resistance at 0.9770 has been strong over recent months, having been tested on several occasions. On Tuesday the resistance was breached on an intraday basis only for the market to reverse and subsequently form a candlestick that is arguably a bearish shooting star. Coming at such a key crossroads this could have induced some consternation amongst the bulls, and initially the market fell yesterday. However the dollar bulls produced a strong reaction and formed a counteracting positive candle to leave the prospect of a base pattern in play today. The momentum indicators are positively configured (especially the MACD lines) in the recovery with the RSI challenging the key 60 level. A run of higher lows in the past two weeks has formed an uptrend which remains firmly intact with yesterday’s intraday bounce and the bulls are well positioned approaching Non-farm Payrolls. A close above 0.9770 would complete the large base patter with a move above the late May high at 0.9808 confirming a move that would imply 1.0100 in the coming months. The RSI pushing above 60 would also confirm this breakout. The hourly chart shows near term buy signals today as the rally from 0.9707 has developed.
The pair seems to be consolidating now as we move closer to tomorrow’s payrolls report. The last two sessions have shown little conviction either way although a slight recovery has formed for the euro. This does though still come within the backdrop of a top pattern that completed below $1.1820 last week and is still guiding a corrective near to medium term outlook. This consolidation seems to be a wait and see moment, with the payrolls report now likely to be the key near term driver. The market has picked up off $1.1695 from Tuesday’s low and the key medium term support at $1.1660 remains intact as a result. However the momentum indicators still have a corrective configuration with the MACD lines now below neutral and Stochastics below 20. This support at $1.1660 has the feeling of a key crossroads with the RSI having not closed below 40 since the big recovery trend began in April. The hourly chart shows a near term sideways trading banc $1.1695/$1.1830 with the neckline resistance of the top at $1.1820 still very much a key overhead supply. I remain a seller into near term strength.
Just with the euro, Cable also remains corrective even though the market has looked to consolidate. The trend lower of the past two weeks has brought the pair back to the confluence of support around the 50% Fibonacci retracement of the Brexit sell-off at $1.3247 and the support of the key August high breakout at $1.3265, whilst also hitting the implied 200 pip downside target at $1.3250. However, near term momentum indicators remain corrective with an early dip back today and if there were to be a close below Tuesday’s low at $1.3220 then the market could continue to slip back towards the old pivot at $1.3050. However, I continue to believe that this is a correction counter to the medium term recovery trend on sterling (which comes in around $1.2940 today). Near term rallies are still being sold into, even in yesterday’s session with a close not far from the day low which has left resistance now at $1.3290. The hourly chart shows a negative configuration with the hourly RSI failing around 60 and hourly MACD lines struggling around neutral. Resistance is added to around $1.3350.
As with several of the pairs I cover on a daily basis, Dollar/Yen is looking to now consolidate in a move that could continue into the payrolls report on Friday. A correction had threatened early yesterday but the intraday rebound for the dollar held on to the support at 112.20 and means that a range of around 100 pips has been seen for over a week now. The daily momentum indicators reflect this position with the MACD lines just losing their impetus, but the momentum remains strongly configured for now with RSI above 60 and Stochastics above 80. This is reflected on the hourly chart with a trading range formation on the flat moving averages and on momentum indicators, shown by the hourly RSI oscillating between 30/70 for several days now. A close either way above 113.25 or below 112.20 would imply a breakout and target an initial move of around 100 pips. Trading with the support of higher lows, the recent support of buying into weakness favours for an upside break and a move towards 114.50 in due course. Holding above the medium term pivot at 111.00 maintains the positive outlook.
Rallies within the downtrend channel remain a chance to sell. Daily momentum indicators are negatively configured with the MACD lines tracking below neutral, the RSI struggling below 50 and Stochastics below 20. Although the market has picked up marginally in the past couple of days from the support at $1267 there is a lack of conviction in the recovery. Yesterday’s candlestick had a close well below the mid-point of the session and suggested that the resistance band $1277/$1290 is a significant barrier for the bulls. The failure at $1281.70 adds to near term resistance whilst the downtrend channel today comes in around $1287. Expect the bears to regain the control to retest $1267, with a downside break opening the next support at $1251.
Fundamentals had a mixed impact on WTI yesterday as the correction lower remains on course. Initially bolstered by the EIA inventory report with a larger than expected crude drawdown, WTI then suffered by the announcement of larger than expected US oil exports. The market subsequently formed another negative candlestick and continues the downtrend of the past five sessions. Closing consistently below $50.50 adds the downside pressure but the market I still needs to breach the support at $49.20 which is around the support of the old medium term downtrend. However, the pressure is on as there is a bear cross on the MACD line and the Stochastics in decline. This makes today’s session very important for the bulls as this near term correction could begin to run away if the support is breached.
Dow Jones Industrial Average
The Dow has now hit the upside breakout target of 22,675 with another positive session. The strong run of bull candles is yet to be broken and the market continues to push towards the highs of the recent trend channel (currently 22,775). The daily momentum indicators remain strongly configured whilst the RSI at 76 reflects the strength of the trend rather than an extreme overbought market. The upper 2.0 SD Bollinger Band comes in at and intraday corrections remain a chance to buy. The hourly RSI has been above 70 now for the past two days, but considering it spent 8 days in September above 70, this should not be considered stretched in the rally. The previous breakout support is at 22.420.