There are still mumblings of trade disputes and the geopolitical risk of escalating tensions in the Middle East certainly cannot be discounted, however, for now there is a sense that markets are moving (albeit with less intent) on fundamentals. Earnings season in the US has started well, with Goldman Sachs and Netflix the drivers yesterday supporting Wall Street in its continued recovery, a move that is helping markets in Asia and also the Eurozone. Furthermore, there is regard being given to Fed speakers, with the comments of San Francisco Fed’s (and next in line to be the New York Fed’s) John Williams. Williams is traditionally a hawk and is a voter in 2018 and has been talking about inflation moving to the Fed’s 2.0% target and remaining there or just above for the next couple of years. This is broadly in line with the views of the FOMC (in the March economic projections) but has helped to drive the 2 year yield to a decade high of 2.40%. However, longer dated yields are struggling to match the rise at the shorter end of the curve and the yield curve continues to flatten, something that is dollar negative moving forward. There has been an improvement in risk sentiment overnight with Trump’s comments about progress with “Very high level” talks with North Korea, which has hit safe haven plays such as gold and the yen. Focus in Europe this morning is on inflation, with both the UK and Eurozone releasing CPI numbers.
Wall Street moved strongly again yesterday with the S&P 500 +1.0% at 2706 and with futures again supportive today this has allowed Asian markets a strong session (Nikkei +1.4%). European indices look to be more reticent today and are only showing cautious gains. In forex, the dollar looks mixed, as a risk positive outlook hitting the yen and Swissy, whilst it is interesting to see sterling finding support after yesterday’s slip. The Canadian dollar is also a touch weaker after Trump’s cautious comments on the TPP and ahead of the Bank of Canada. In commodities the hope of talks between the US and North Korea is weighing on gold, whilst the API inventories drawdown is helping to boost oil.
The UK is in focus again this morning for traders. After yesterday’s unemployment and wage growth data (which was +2.8%), the market will be looking at the UK CPI at 0930BST to see what the outlook for real wages is. Expectation is that the UK headline CPI will remain at +2.7% having fallen sharply last month, whilst the core CPI is expected to tick mildly higher to +2.5% (from +2.4%), all of which would means real wages starting to pick up. Also look out for the PPI Input Prices which are forecast to pick back up to +4.3% from +3.4% last month (which was the lowest reading since Brexit). Final Eurozone inflation for March is at 1000BST and is expected to be confirmed at the flash readings of +1.4% for the headline CPI and +1.0% for the core CPI. The Bank of Canada is the bother key factor of the day, reporting monetary policy update at 1500BST. The BoC is not expected to change rates from +1.25% but with light at the end of the tunnel on the NAFTA renegotiations the BoC could allude to this in a more positive outlook. There are further FOMC speakers today with Bill Dudley (voter, centrist) at 2015BST and Randy Quarles (voter, mild hawk) speaking at 2115BST.
Chart of the Day – French CAC
The major Eurozone equity markets are showing strong recovery gains in recent weeks. The question is now whether the breakout can be achieved. The French CAC index pushed through the March reaction high last week, leaving the key late February resistance at 5363 as the final hurdle to be overcome in the recovery following the huge early February sell-off. Although an intraday move to 5370 was seen yesterday, the move could not be sustained into the close. However, momentum indicators are certainly backing the market for a decisive break higher, with the RSI into the 60s, the Stochastics in strong bullish configuration and the MACD lines rising back above neutral. The market has also recovered through to trade above the moving averages. There has been a run of higher lows in the past three weeks and with Monday’s low at 5299 there is now a good basis of support around a 5300/5310 pivot band. Yesterday’s strong bull candle reflects near term strength and corrections should be seen as a chance to buy. A closing breakout above 5363 opens the next resistance around 5442 but more importantly is a strong signal the market backs a continuation of the recovery.
Once more the euro bulls have failed to grasp control of the market as an initial move to break higher has been curtailed. A disappointing German ZEW sentiment pulled the reins on yesterday’s early upside and a mild negative candle resulted. The small body of this candle reflects the ongoing inability for the market to make decisive headway. There is a very mild positive bias to the momentum indicators however this is almost entirely due to the rising Stochastics (RSI and MACD lines are barely showing any signs of life at all). The long term uptrend is still shadowing the upside drift, being supportive around $1.2300 which coincides with a stepped higher low from last week. However upside remains painfully difficult to come by, with resistance from yesterday’s high at $1.2413 protecting the March high at $1.2475.
With yesterday’s negative candle coming as Cable has been straining for a breakout, the concern for the bulls is that this begins to usher in some profit-taking. The momentum indicators which have been so strong are beginning to tail off now and although remain strongly configured, this is a move that now needs to be treated with a touch of caution. The market is stable as the European traders take over today but it is likely to be that UK inflation this morning will be a key near term driver. Any surprise could see traders take the opportunity to lock in profits which would pull Cable back. The hourly chart shows that this move is already at risk. There is an uptrend channel of the past seven days that is seeing support tested, however hourly momentum indicators have lost their positive configuration. A loss of yesterday’s low at $1.4280 would imply some further slippage back towards $1.4210 support. An unwinding correction would not necessarily be a bad situation for sterling bulls as it would allow another chance to buy for medium term gains. Right now though the market is at risk of a correction. Resistance at $1.4375 is now the highest level since Brexit.
There is still very much of an uncertain feel to the outlook of Dollar/Yen. Trend channels (down) an trendlines (up) are being broken as the market continues to trade sideways over the past couple of weeks. The support at 106.60 is growing in importance but equally the bulls have been unable to break the resistance band 107.50/107.90. Momentum indicators in the recovery have tailed off in the past few sessions, with the RSI and MACD lines now neutrally configured on a medium term basis. It certainly feels that Dollar/Yen continues to stand at the crossroads but is unable to decide on the next destination. A positive reaction has been seen early today on a further unwinding of geopolitical tensions between the US and North Korea, but the hourly chart shows the market again around 107.40 where several of the rallies recently have struggled. There is minor support now at 106.85.
The market has been increasingly uncertain over the last couple of sessions, with candlesticks showing long upper and lower shadows but small candlestick bodies. This suggests that the market is testing both higher and lower but cannot make a decisive move. The early reaction today is lower on a safe haven unwind but there is support of higher lows which is gradually building above $1321 and latterly above $1333.50. There is also a mild positive bias within the range which continues to show on momentum indicators. However, this is not a market that is showing any real sign of imminent move outside what continues to be a sideways range since the beginning of January. Rolling over again this morning adds to the sense of building resistance at $1349/$1350 under the key resistance band between $1356/$1366.
With Monday’s strong negative candle still running a legacy in this market there is a risk that a near term corrective move would set in. Although the long and medium term trends remain strongly positive there could be a near term unwinding move that brings the market back into the near term support $64.40/$65.40. The initial drop has bounced from $65.55 (on an unexpected API crude oil drawdown) and it will add volatility to today’s EIA data. However momentum indicators are beginning to look less assertive now, with the slipping Stochastics being the main threat for the bulls. The last two crossover sell signals from February and March both called a near term corrective move. A bear cross has been seen but confirmation is still yet to come. However the hourly chart shows a rally back above $67.00 this morning means that this is a range now between $65.55/$67.75. The bulls need to breakout above $67.75 to re-engage upside impetus.
Dow Jones Industrial Average
The market has been building consistently higher in the past two weeks and now a decisive breakout has been seen. Not only has the ten week downtrend resistance been broken but also the pivot resistance at 24,650 has also been broken. This now opens initially 24,978 but more importantly the March high at 25,450 is the next key resistance. Momentum indicators continue to improve, with the RSI rising into the mid-50s (a 7 week high) whilst the MACD lines also continue to accelerate higher. The 2 week uptrend comes in today at 24,520 whilst the breakout above the pivot band 24,450/24,650 now becomes a basis of support.
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