With bond markets seemingly taking the summer off, the dollar is taking its lead from the direction of the yuan. Since the PBoC decision to raise the reserve requirement ratio last week, the yuan has stabilised but also has begun to edge a touch stronger against the dollar. This is cramping the move higher on the Dollar Index, which is latterly consolidating. The tit-for-tat moves in this US/China trade dispute continues as China has announced the implementation of 25% tariffs on $16bn of US imports into China, on the exact day, 23rd August, as the US implements similar tariffs. This move by China has impacted on markets, as by targeting (amongst other things) fuel goods, the demand for US oil could be hit, and oil prices suffered a 3% hit yesterday. The yen is also beginning to also find a bid ahead of US/Japan talks amid suggestions that the weakness of the yen will be a theme in the discussions over trade tariffs. Outside of the trade fears, the big forex fall guy is sterling, which has come under increasing pressure in the past week in spite of a Bank of England rate hike, political vices expressing increasing fears of a “no deal Brexit”. Markets are having to price for this elevating potential. The Chinese yuan may also be finding support from the China inflation data for July which came in mildly above estimates, but broadly suggested that the tariffs are yet to take an impact on prices, with CPI slightly higher than expected at +2.1% (+2.0% exp, +1.9% in June) and PPI also a shade above at +4.6% (+4.4% exp, +4.7% in June).
Wall Street closed mixed in a day of consolidation yesterday, with the S&P 500 all but flat (-1 tick at 2857) and futures only +0.1% higher today. The Asian markets have been mixed, with a big rebound of almost 2% on Chinese equities, but the Nikkei -0.2% lower. In European markets, the outlook is equally mixed, with the weakness of sterling allowing a FTSE 100 rally to continue, whilst the DAX is marginally weaker. In forex, there is a slight air of dollar strength. However, the big mover on the day is the slide on the New Zealand dollar which has been smashed following a surprisingly dovish outcome from the Reserve Bank of New Zealand last night with the RBNZ surprisingly committing to keeping rates at record lows of 1.75% until 2020 as a result of disappointing economic activity. In commodities, with the mixed moves of the dollar recently, gold has managed to build a degree of support and this continues early today, whilst oil has stemmed the selling pressure overnight but has so far failed to make a serious recovery from yesterday’s sell-off.
Continuing the inflation theme, traders will be watching out for US factory gate inflation for July with the US PPI at 1330BST. Consensus expects headline PPI to stick at +3.4% (+3.4% for June) with core PPI expected to stay at +2.8% (+2.8% in June).
Chart of the Day – EUR/GBP
The underperformance of sterling in recent weeks, even before the Bank of England rate hike, has been remarkable. Euro/Sterling has been trading in a sideways range broadly between £0.8600/£0.9000 for the past 11 months, but since the selling pressure stabilised in May, the market has been forming a burgeoning uptrend channel that has now broken out of the range and through a major psychological level. Aside from a few intraday forays above £0.9000 in October and November the market has only closed once above £0.9000 but this was very quickly reversed. The difference this time is that throughout all the time of the range, momentum has not been backing a breakout, with the RSI consistently restricted around 60. However, after a strong run of candles since the BoE decision, the market has decisively broken higher on strong momentum. The RSI is above 70 reflecting momentum strength, whilst the MACD and Stochastics lines are also strongly configured to suggest intraday weakness is a chance to buy. There is a band of support £0.8950/£0.9000 now in place as a near term “buy zone”. A move above £0.9033 (the October 2017 high) with a second close above £0.9000 would confirm the breakout which has very little real resistance now until £0.9200 and the multi-year high of £0.9306.
The euro has been threatening a rally against the dollar in the past couple of sessions, but the question is, do the bulls have the heart for it? Tuesday’s bullish candle helped to forge support at $1.1525 but a rather uncertain session yesterday questions the intent of the recovery just as the overhead supply around $1.1620/$1.1650 kicks in. The early moves in today’s session have also added some further questions as the market has consolidated. Interestingly the momentum indicators suggest that this could be a near term crossroads too, with the RSI stuttering around 45 (an area where previously had been a buying trigger for the bulls, but now could be a barrier to upside. The MACD lines barely show any imprint from the rebound either. The hourly chart shows the rebound has just waned in momentum too but with support forming around $1.1570 again, this is becoming an increasingly important near term crossroads.
Sterling remains under significant bear pressure as Cable continues to slide ever further lower. Breaking clean below $1.2955 support the market is moving to the lows of the ten week downtrend channel. Minor support at $1.2850 seems to be holding initially but realistically the market is moving for a test of the key August 2017 low at $1.2770. Momentum indicators are deeply negatively configured but it will be interesting to see how the market reacts now the RSI has hit 30 and the market has again hit the channel support. Although the April/May selling pressure saw the RSI below 30 for about a month, since then the RSI has tended to bottom around 30. This suggests that there could be a technical rally just round the corner. Any rebound would though be a chance to sell, with $1.2955 being the immediate barrier to gains. The hourly chart shows resistance $1.2915/$1.2975.
All the questions surrounding the continuation of the uptrend have been resolved by a decisive bear candle posted yesterday. This move has ended the notion of a 4 month uptrend and now threatens the support at 110.60 which would turn a sideways consolidation phase into a burgeoning bear phase. Below 110.60 would mean a lower high at 112.15 and then lower low. For now though the 55 day moving average is still propping up a corrective phase (currently around 110.70) whilst the RSI is also still holding on to 45. If these three technical levels give way then the market would turn far more corrective again. Initial resistance is now the old pivot band 111.15/111.40, with 111.80 then showing on the hourly chart. The hourly also shows 60 now limiting on the hourly RSI and neutral limiting on the hourly MACD lines. Below 110.60 opens 110.25 and the next key reaction low within the old uptrend at 109.35.
The consolidation on gold is finally breaking the upper limit of the seven week downtrend channel. The support of the key December low has been looked at on a daily basis for the past week, but has held firm. Now with another positive candle yesterday and trading mildly higher today, the trendline (that comes in at $1210 today) has been broken. The next step for the bulls is to move from a consolidation to a recovery, as for now the market is simply moving sideways. The momentum indicators could be key to this, as the RSI has been limited to 40 for several weeks and any sustainable rebound would need strengthening momentum. Initial resistance at $1220 needs to be broken, whilst the $1236 old key low and subsequent pivot is the important level to negotiate. The hourly chart reflects the marginal improvement in momentum but is still not positively configured. There is though the move above the 144 hour moving average which has limited rallies for the past couple of weeks. Gold is taking small steps to fight back against the bears, but more is still needed to be seen to turn a consolidation into a recovery.
Once more the market has failed in a rally attempt but the aggressive bear candle formed yesterday now suggests the bulls are losing their medium to longer term control on the market. The bear candle cut over 3% off the price yesterday and saw an intraday breach of not only the 11 month uptrend but also below the key medium term pivot support around $67. Although the market bounced from $66.30 to close around the pivot again, this is a real warning shot. Add in the bear cross on the Stochastics and the MACD lines ticking back lower, this is the bulls losing their way. Another bear candle today would confirm a breakdown and suggest a retreat to the next key higher low of $63.60 from June. The hourly chart shows a more corrective momentum configuration now, whilst initial resistance is now $67/$67.85 and a failure to quickly recover would put the bulls under real pressure.
Dow Jones Industrial Average
The Dow formed a consolidation candle yesterday, which was an inside day, as the market now sits in the middle of what can now be regarded as a six week uptrend channel. Having broken out above 25,587 to the highest level since the February high of 25,800 the bulls remain in control of the push higher, but have just taken a pause for breath. There is strength I the momentum indicators and also upside potential (RSI in the mid-60s) to suggest that near term corrective moves remain a chance to buy for a test of not only the February high but also the 76.4% Fib retracement at 25,845. There is a band of near term breakout support 25,500/25,587 whilst the 61.8% Fib retracement is the main support area now at 25,367. The channel support is a 25,325 today.
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