After years of squabbling self-interest and failure to act as a cohesive collective, the OPEC nations have finally agreed to act as one and move to cut oil production. Financial markets are reacting with improved risk sentiment as the oil price has shot higher. The agreement has come to reduce OPEC’s production from the current levels of around 33.24m barrels per day to between 32.5m and 33.0m. This was unexpected by a market which felt that even a production freeze was unlikely. The move higher on the oil was decisive and took prices higher by over 5%. However words are easy, not comes the tricky bit of implementing the agreement, we will know more at the next OPEC bi-annual meeting on 30th November. Once the dust settles, getting the countries to agree to cut output and actually seeing it done in practice will be difficult. There could be a large degree of cynicism over how strictly these levels will be adhered to. This would suggest that the price volatility may not be done quite yet. Still though, for now the market is taking it as a positive, with the safe haven Japanese yen under pressure. Equities closed strongly on Wall Street with the S&P 500 +0.5% whilst Asian markets were strong overnight (Nikkei +1.4%) and European markets opening strongly today.
It is interesting though in forex as it appears that the main winner has been the dollar, possibly due to the implications that a higher oil price could have on inflation. However the main underperformer is certainly the yen today, but after an initial strong move from the commodity currencies such as the Canadian Loonie, the moves are now unwinding and the US dollar is taking more strength. Gold and silver are mixed, whilst the oil price is trading around flat now.
Traders will be looking out for German CPI inflation which is released throughout the day with the countrywide number at 1300BST and is expected to improve to +0.6% (from +0.4% last month). The number is watched as it can give an indication of how the Eurozone data will be tomorrow. The final reading of US Q2 GDP is at 1330BST and is expected to see a mild upward revision to +1.3% (from +1.1% at the second reading). Weekly Jobless Claims are at 1330BST and are expected to be 260,000 (last week 252,000).
Chart of the Day – EUR/GBP
With a pullback from the key August high at £0.875 this week, is Euro/Sterling topping out again? The three week push higher formed a narrow and well-defined uptrend channel however, a strong bear candle on Tuesday was followed by a doji candle yesterday. This is putting pressure on the trend channel on both daily and hourly time frames, a move which seems to be breaking the trend today. The momentum indicators are also losing impetus in the rally, with the Stochastics crossing lower for a confirmed sell signal, just the third such signal in the past three months. Each of the previous confirmed Stochastics sell signals have called a corrective period for the pair. The RSI has also tailed off and the move higher on the MACD lines has also lost impetus. The hourly chart shows that the 144 hour moving average (currently £0.8622) has been supportive throughout the past three weeks but has now been breached and is looking to turn lower. The hourly RSI which had found support throughout the trend higher above 40 is now increasingly correctively configured, as are the MACD lines. The hourly chart also shows a near term resistance at £0.8640 but the main lower high is at £0.8693 and protects the key resistance around £0.8725. Watch for continued breakdown of the channel, whilst the bears would be grabbing control on a breach of the support at £0.8560.
The consolidation outlook does not change a great deal from day to day on EUR/USD, the market may move higher by a few bullish candles and then lower by a few bearish candles but the overall outlook remains very neutral. Until the converging trendlines have been broken there is little to really get excited about on the euro at the moment. The price is trading closer to the upper falling trendline which is currently at $1.1270 today so the bulls will be the happier, although it does also suggest that upside potential looks rather limited. However, the momentum indicators are very much neutrally configured and there is no real control from either side. The latest swing back higher could be on once more after an intraday rebound yesterday from $1.1180 has been backed by further mild gains today. The bulls will though need to break through the overhead supply around $1.1285 with the main resistance at $1.1325. I continue to expect the rough pivot line around $1.1200 to attract the prices and see this as a range play with a mean reversion back towards the pivot line. A break of $1.1180 would re-open the key near term low at $1.1120.
Whilst it may not be something to put the house on, I have noticed that in the past day or so, the outlook for sterling has begun to improve across some of the major crosses. This is showing on my chart of the day, EUR/GBP but also on Sterling/Yen and also to an extent on Cable. The market has been mildly recovering back towards the three week downtrend which is today around $1.3040. With rallies seen consistently as a chance to sell, normally I would be advocating the next sell signal. However, the improvement is coming across with a tick higher on the momentum indicators. The Stochastics are now beginning to turn higher, whilst the RSI has been steady above 40 for the past week and a half. The bears will point to the market continuing to trade under the pivot resistance at $1.3060, also yesterday’s doji candle reflects uncertainty, a position that is continuing today. The hourly chart again shows the market testing the downtrend and the pivot at $1.3060, indicators that need to be breached to open upside. Above $1.3060 would then need to break through $1.3120 resistance to suggest the bulls were really gaining momentum. Yesterday’s low at $1.2977 is near term supportive and a break below would ruin a sequence of higher lows on the hourly chart. The improvement is very nascent but could be something to watch.
Taken across the course of the past few weeks, the chart on Dollar/Yen looks extremely similar to that of Cable. However whilst the bulls are still procrastinating on Cable, Dollar/Yen is starting to make ground in a recovery. The recent consolidation that has held on to the support at 100 yen has started to pick up into a recovery. The gains overnight have pushed through the resistance at 101.20 and is now once more challenging the long term downtrend again which comes in around 101.85 today. The momentum indicators are also improving with the Stochastics beginning to cross higher and the RSI picking back higher. The hourly chart shows a burgeoning improvement throughout the early part of the session today and the bulls will now be eying 102.00 which has been an old pivot in recent weeks. The breakout at 101.20 will also be seen as a potential support area now today and if this proves to be the case then the bulls can begin to build. As with Cable, the bulls are looking to improve the outlook, but it is still early days.
The neutral medium term outlook on gold continues, however the long term bull trend arguments are being tested now and this consolidation that has been ongoing for the past few months could begin to scupper the bullish outlook. The primary uptrend that has been in place throughout 2016 comes in at $1321 today and is being seriously tested. Also the 89 day moving average has also been supportive of the past three big corrections and lies just below at $1317. Yesterday’s second consecutive bear candle is a concern now and turns the outlook more corrective, something that is backed by the momentum indicators that have rolled lower. Despite this, I continue to see the medium term range playing out and dips towards the bottom of the range under $1310 will be seen as a chance to buy. It is just that if the bull trend is broken the chances of an upside breakout from the range will also be reduced. The drop below the pivot at $1330 means this is now near term resistance with further overhead resistance at $1338 and the recent rebound high at $1343.60.
There was lots of volatility on the oil price yesterday as first the EIA inventories hit and then later in the session the announcement from Algiers that OPEC had comes to an agreement to cut production. This caused oil to surge higher by over 5% on the day. The price has burst through near term resistance at $46.50 and is now testing the downtrend resistance. Technically the move is very strong with RSI and Stochastics confirming the move, but we still need to be wary. I do not believe that the volatility will be over now a decision has been made to cut production, as the move still needs to be implemented by individual countries and there could be some scepticism over how this will work in practice. The hourly chart shows that there is a band of support between $46.00/$46.50 for a pullback and it will be interesting to see how quickly support forms on a corrective move. The hourly chart shows that the next resistance above yesterday’s $47.45 high is at $47.75 before $48.45 and the key high at $48.75..
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.