The oil price has pulled back higher again overnight, in the wake of Donald Trump’s key announcement on Iran, whilst the dollar has also looked to maintain its recent trend of strength. Despite the uncertainty surrounding the announcement, Trump’s decision to withdraw the US from the sanctions waiver on Iran is true to form and has been widely anticipated. The withdrawal now has 180 days before the US reinstates the sanctions, giving a period of time for consultation and perhaps (more hopefully) renegotiation. Although the US does not buy oil from Iran, many Asian countries do, and they may choose to consider their oil sources in light of this move from the US. This could impact overall Iranian oil supplies. Along with the increased tension that this brings to the Middle East (Saudi Arabia and Israel were both pushing the US to withdraw from the waiver), helps to underpin the oil price, leading to an intraday jump back higher yesterday and further gains today. Further out, a higher oil price has the potential to increase cost pressures and inflation, with bond yields pulling higher in response. With the renewed dollar strength still in the ascendency on interest rate differentials, this is helping to drive further dollar gains today.
Wall Street closed a muted session all but flat, with the S&P 500 losing 1 tick at 2672, whilst Asian markets were mixed to lower overnight (Nikkei -0.4%). European markets have begun the session equally unsure of direction. In forex, there is more of the dollar strength coming through again today, whilst it is interesting to see the yen being the main underperformer. In commodities, with this renewed dollar strength, gold is back lower by $5 and testing the $1300/$1310 support band again, whilst oil has continued its late rally from yesterday and is higher by more than 2%.
Traders will be focusing more and more on US inflation as the week progresses and today the step up take us to the US PPI, or factory gate inflation at 1330BST which is expected to slip marginally back to +2.8% for the headline PPI (from +3.0% last month) and down to +2.4% on Core PPI (down from 2.7% last month which was the highest since November 2011). The EIA oil inventories are at 1530BST and are expected to show a series of drawdowns. The crude inventories are expected to decline by -2.0m barrels (following the surprise build in crude stocks of +6.2m barrels last week), with distillates expected to drawdown by -1.5m barrels (from a drawdown of -3.2m last week) and gasoline by -1.0m barrels (+1.2m build last week). Finally, the Reserve Bank of New Zealand announces monetary policy at 2200BST which is expected to hold rates steady at +1.75%, but also the policy statement will be interesting being the first of the new Policy Targets Agreement looking to generate “maximum sustainable employment”.
Chart of the Day – GBP/JPY
Sterling has been under big selling pressure in recent weeks whilst the yen has looked more solid in recent days, and subsequently Sterling/Yen has now retreated back to a medium to longer term confluence of support. However with the outlook at a crossroads, is sterling ready for a rebound? The support of a 12 month uptrend channel uptrend is holding (today at 146.85) and it is interesting that this coincides with a pivot that has often been used since August 2017 around 147 which caught the key lows of October and November and also resumed significance in March. The last two sessions have tested 147 and bounced and it is interesting to see the market now starting to build higher. This is reflected in the RSI and Stochastics ticking higher, but the MACD lines are still slipping (albeit at a slower pace). Reaction to this near term move higher will be a key gauge for the recovery as the hourly chart shows Monday’s reaction high at 148.25 having been broken and if the market can begin to hold above it then a potential recovery can build. The hourly momentum is also improving, with the hourly RSI having previously found the bulls struggling around 50/60 and MACD lines struggling around neutral. This seems to be changing Is a recovery now building? Next resistance is 149.45 and then 150.00.
The market continues to trend decisively lower as the support of the January low at $1.1915 has been breached, with the downtrend now into its third week. Another solid bear candle pulled the market 60 pips lower and the decline continues today. Momentum indicators retain a decisively negative configuration as the RSI falls towards the low 20s, the MACD lines continue ever lower and the Stochastics are entrenched in bear territory. There is little reason to believe that this trend is running out of steam and a move to test the next support at $1.1815 and then the December low at $1.1715 is on the cards. The hourly chart shows a run of lower highs and lower lows, with old support becoming new resistance (latest at $1.1900 and $1.1930). The falling 89 hour moving average (currently c. $1.1930) has also capped recent rally attempts.
After the huge correction of recent weeks, the selling pressure seems to be on pause for now. The move that has cut almost 900 pips off Cable since the April high, is beginning to form a run of consolidation candles in recent sessions. Yesterday’s small candlestick body of just 10 pips down on a daily range of 110 pips reflects the near term uncertainty that is now forming. The move has now broken the sharp downtrend of the past three weeks. Although there is little real sign of a sustained recovery in sterling, for now the sell-off seems to have lost impetus. Momentum indicator are however still negatively configured and will need to see the RSI above 30 and Stochastics rising above 20 in order to even contemplate a potential rebound within this bear move. The hourly chart shows moving averages flattening and momentum indicators increasingly neutrally configured. Levels to watch near term are the reaction high of $1.3590 which needs to be decisively breached for the bulls, whilst the support at $1.3485 is now a near term floor that protects $1.3455.
The market continues to hold on to the bull trend of the dollar recovery as the bulls look to regain control above 109.00 once more. The support of the trend that is similar to the mid-April retreat as the momentum indicators look to renew their positive configurations from having sat at a crossroads yesterday. The RSI is looking to pick up again from around 60 , whilst the Stochastics are also looking to bottom again from around their mid-April levels. However the one to watch is the MACD, with the lines having converged. A bull kiss would be confirmation of a renewed trend higher. With the market building support above the reaction low at 108.60, a positive candle today in the wake of a run of neutral candles would suggest the bulls are regaining the ascendency. The test of 110.00 resistance would be renewed, whilst the next lower high from the early 2018 sell-off comes in around 110.50.
The market has held on to the long term pivot support above $1300 but the bulls are still sitting fairly precariously. The recovery from $1301.50 has been a stumble and a stutter, with resistance building at $1319 under the old April lows of $1321. Momentum indicators are also already beginning to falter, with RSI and Stochastics both limping, whilst MACD lines have also yet to even take off. The last two sessions have posted very neutral candlesticks, whilst the market is again trading back lower towards $1310 again early today. Yesterday’s low around $1306 is supportive initially, however the bulls will be concerned as to the lack of progress in their recovery. This suggests that $1300 may still not be safe. The hourly chart shows that for now there is a rather benign momentum configuration and this is a market still yet to make a decisive move.
With the impending Trump announcement, yesterday’s session was always set up to be more volatile than most. With $2.75 of high/low range (the Average True Range is currently c. $1.60) the market has certainly seen increased volatility. The jump back higher once more at today’s open reflects that the bulls are looking to build higher again, leaving yesterday’s low of $67.65 as a marker. Back above $70 again the bulls are eying multi-year highs again, with initial resistance at $70.85. Daily momentum indicators are strong and weakness is now a chance to buy.
Dow Jones Industrial Average
Despite having broken the two week downtrend on Monday, the market has been unable to generate momentum in a recovery and has turned lower from 24,500 which is an increasing near term resistance now. In the wake of the rebound from 23,531 there is a more improving configuration to the momentum configuration on a near term basis and breaking this lower high would put the bulls in a position to start looking at the April high of 24,859 again. However upside traction is difficult to maintain at the moment and a clutch of flat moving averages overhead reflects how neutral the medium term position is becoming. The bulls will certainly be looking at moving above 24,500 as a key barrier to break today, whilst a near term pivot support is growing in importance at 24,200.
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