Last updated: May 3rd, 2017 at 09:58 pm
Markets are in cautious mode ahead of tonight’s announcement of monetary policy decision from the FOMC. Although no rate hike is expected, with the Fed chair Janet Yellen set to guide markets on the possibility of the next move by the bank, there seems to be little appetite to take a view with the uncertainty ahead of a potentially high volatility event. Despite this, there is still an air of slight dollar strength with outperformance again all of the major currencies today. With another day of little real direction on Wall Street the equity markets in Asia were rather subdued (although the yen strength pulled the Nikkei lower by 0.8%). European markets are mildly higher in their opening moves.
Forex markets show the euro continuing to drift lower and the yen unwinding some of the strength following the BoJ policy meeting yesterday. The biggest direction is coming with sterling which remains under pressure due to fears once more of a potential Brexit. The oil price has formed some support after a couple of days of weakness and this is helping the commodity currencies find a little support today (and also the support for equities should not be discounted either).
Aside from the Fed, it is a busy day for UK traders, with the key unemployment data at 0930GMT. The headline rate is expected to stay flat at 5.1% but the greater interest will be taken in the average weekly earnings growth (ex bonus) which is expected to improve slightly to 2.1% (from 2.0%). It is also the day of the UK Annual Budget announcement where Chancellor George Osborne announces government spending plans at 1200GMT, which can impact on sterling, Gilts and UK equities. From the US there is also the announcement of US CPI inflation at 1230GMT which are expected to drop to +0.9% on the year on year headline (from +1.4%) but stay at +2.2% on the core basis. There is also US industrial production at 1315GMT which is expected to show a -0.3% decline on the month , with capacity utilization dropping back to 76.9 (from 77.1). The weekly EIA crude oil inventories are expected to show another build of 3.5m barrels.
Chart of the Day – USD/CAD
The fact that the recovery in Dollar/Loonie has come as the oil price has started to correct is no coincidence as the Loonie has a very strong correlation to oil. The USD/CAD chart has subsequently started to turn higher. The interesting technical perspective is that the downside target (of 1.3170) from the descending triangle breakdown was hit almost to the pip prior to leaving support of a potential key low at 1.3165. There has subsequently been a breach of the downtrend and there is now the prospect of a recovery. This is very early days still, but there are several technical indicators that need to turn around before we start seeing a serious recovery. Watch the RSI (which has a small bull divergence) looking to push above the mid-40s (not seen since early February). Watch also for the MACD lines crossing higher and also a traction in the Stochastics as a buy signal looks to confirm. The resistance at 1.3455 which held back attempted rallies in early March is also key overhead. The hourly chart shows an interesting pivot level has been formed at 1.3310 which may now be seen as a basis of support for a recovery. Overhead near term resistance is in at 1.3400 prior to 1.3455.
The euro remains attracted to the $1.1100 support area as the market prepares for the announcement of the FOMC monetary policy today. I continue to see the pivot band $1.1050/$1.1100 as the watershed for the bulls and a breakdown would turn the medium term outlook neutral once more within the $1.0800/$1.1050 range. Momentum indicators have just lost the upside impetus of the post-ECB spike higher and is appears likely that traders will be sitting on the fence ahead of the FOMC. Yesterday’s candle was very restrained with just a 55 pip range on the day and there is little sign that today will be any different in front of the announcement at 1800GMT, with the hourly chart shows a continued slight negative drift to support around $1.1065. A hawkish performance from Fed chair Yellen would drag the pair back into $1.0800/$1.1050 range but a dovish Yellen would see the key post-ECB resistance at $1.1217 tested again.
Amazing as it may sound, sometimes technicals are not the key driver behind the markets. The threat of Brexit continues to hover like a dark cloud for sterling traders and reports of strengthening support for the leave campaign hit Cable hard yesterday. With almost 150 pips lost on the day this was the strongest bearish candle since 22nd February (the day of the last sharp downside break on Brexit fears). The downside pressure has subsequently continued overnight and is now breaking through the support at $1.4115 which was a key reaction low post-ECB and really does stoke the fears of downside for sterling. The Stochastics have a confirmed crossover sell signal which is accelerating lower, whilst the concern is that the MACD lines are also close to a bear cross. The daily chart shows the outlook is now open for another move towards $1.4000 and a potential retest of the low now at $1.3833. The hourly chart shows a decisive shift into negative momentum configuration and all hourly moving averages falling in bearish sequence. Rallies are now a chance to sell. There is now resistance in the band $1.4160/$1.4195, whilst $1.4250 is now key. Add in the UK Budget and the FOMC meeting tonight and you have the cocktail for another volatile day.
It is difficult to get overly excited about Dollar/Yen on a daily basis as once more we seem to be in a phase of one day up and one day down. There is very little traction on either side and the outlook is increasingly rangebound. The BoJ decision to stand pat, strengthened the yen, only for a late intraday bounce to set in yesterday which tempered the downside momentum, a move which has seen mild dollar strength continue today in front of the Fed. There is almost no signal that can be taken of any note from the daily chart now, trading around the flat 21 day moving average (at 113.25) and the 23.6% Fib level at 113.50. The hourly chart shows the support at 112.60 held yesterday and a mild respect shown to the pivot around 113.15. It is still interesting to note the reluctance to buy the pair through 114.00, with key resistance at 114.55 for the Fed meeting today. Key support is 112.15.
The outlook for gold remains on the corrective path in front of the Fed. With the two strongly bearish candles followed yesterday by a more sedate but yet still negative candle. The momentum indicators certainly confirm the deterioration in the outlook with a corrective outlook on all three RSI, MAD and Stochastics indicators following a period of bearish divergences. The hourly chart shows a consolidation is now forming that could run into the Fed announcement tonight. There is around a $10 band of resistance at $1237 to $1247.50 which should contain any bulls in front of the meeting. Key levels to watch though come in at $1224 and then $1211.20 as support, with resistance at the pivot of $1260.60.
The oil price is coming under increasing pressure as WTI corrected around 7% off its high at $39.00 towards yesterday’s low around $36.00. The market is now threatening to form a top pattern which would complete on a decisive move (and close) below the $36.00 level now. A close below $36.00 would break the first key reaction low in the old uptrend and to complete a top and imply a correction back towards $33.20. Despite the overnight rebound, the bulls seem to be losing the upside impetus with a bear crossover on the Stochastics close to a near term confirmation sell signal and the RSI having lost its positive momentum. Pressure is growing on the neckline support of this top pattern and the way the market is shaping up this could easily play out as a pullback to the neckline of the old key breakout of the big double bottom at $34.80. It is on the hourly chart where you really get the flavour of the recent correction, with the moving averages all turning lower in bearish sequence and the increasingly corrective outlook on the hourly momentum. A loss of the support around $36.10 opens that $34.80 support, with subsequent support at $34.20 and $33.35. The resistance is now in place with a lower high at $37.45, whilst I will also watch the 89 hour moving average (c. $37.60) which having previously been an excellent basis of support could be falling to become the basis of resistance.
At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.