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Prospect of further global monetary easing renews the gold bull run


Market Overview

The feeling of hope that came in the immediate wake of the G20 summit has dissipated quickly. Whilst President Trump talks about trade negotiations resuming with China, markets seem to be increasingly sceptical. Perhaps there will be a resolution in the long term, but the economic data is painting an increasingly gloomy picture in the here and now. PMIs, which are forward looking growth indicators, continue to deteriorate, whilst central banks look increasingly cautious. The Bank of England seemed to be somehow holding on to the hope of rate hikes, if only Brexit were to be done in an orderly fashion. However, Governor Carny struck a dovish tone yesterday over his outlook for the global economy and a no deal Brexit scenario, leading to the potential need for further stimulus. Markets took that as yet another signal for concern and another leg of retreat back into the safety of the yen, government debt and of course gold. Add in that emergence of Christine Lagarde, head of the IMF and seen as a monetary policy dove, who has been chosen to be the replacement for outgoing ECB President Draghi, and the prospect for upside on gold (and renewed negative pressure on the euro) just took another shot in the arm. Loretta Mester’s non dovish comments (she is a non-voting hawk on the FOMC) seem to have done little to change the narrative. Focus today comes with the services PMIs and if they also take a turn for the (even) worse, then expect further yen strength, yields tumble and gold breaking to new multi-year highs.

Gold bull

Wall Street closed with a decent gain last night with the S&P 500 +0.3% at 2973. However, US futures are slipping by -0.1% and Asian markets have been cautiously negative with the Nikkei -0.5% and Shanghai Composite -1.0%. In Europe there is more of a mixed open in prospect, with DAX futures flat, but FTSE futures adding +0.2%. In forex, three is a continuation of moves that formed yesterday. JPY strengthening on risk aversion, whilst GBP weakness following terrible PMIs and Carney’s dovish lean continues. In commodities the run higher on gold extended early in the session and although remains higher on the day, it is $10 off the earlier highs. Oil has managed to muster some sort of support after the huge decline yesterday, but the bulls are yet to decisively return.

On a busy day for the economic calendar, the services PMIs take key focus today. The  Eurozone final Services PMI for June is at 0900BST and is expected to be unrevised from the 53.4 at the flash (53.4 flash, 52.9 in May), with the Eurozone final Composite PMI holding at 52.1 (52.1 flash, 51.8 in May). The UK Services PMI for June is expected to remain at 51.0 (51.0 in May) which takes on added importance in the wake of such disappointing reading on Manufacturing and Construction PMIs. The US ADP Employment change for June is at 1315BST and is expected to improve to +140,000 (from +27,000 in May). The US Trade Balance for May is at 1330BST and is expected to see the deficit widen further to -$54.0bn (from -$50.0bn in April). Weekly Jobless Claims have been brought forward a day due to the Independence Day public holiday on Thursday and are expected to improve slightly to 223,000 (from 227,000 last week). The US ISM Non-Manufacturing PMI is at 1500BST and is expected to slip slightly to 55.9 in June (from 56.9 in May). The US Factory Orders at 1500BST are expected to decline by -0.5% for the month of May (-0.8% in April). Finally, the EIA crude oil inventories are at 1530BST and are expected to show another inventory drawdown of -2.5m barrels (-12.8m barrels last week).

 

Chart of the Day – EUR/JPY    

As the recent rally has rolled over, momentum is building for renewed downside once more. Throughout 2019 there has been a key pivot band between 123.35/123.75, which has played as a band of resistance for the past seven weeks. It played a role in restricting the market in both May and then June. With a couple of bear candles coming since Monday’s bull failure at 123.35, the downside momentum is growing again. This comes with a sell signal on Stochastics and RSI back under 50. Given the MACD lines are also losing traction under neutral, suggesting near term rallies are still a chance to sell, this look to be renewed selling pressure forming. There has now also been a breach of initial support at 121.65 and a retreat back to 120.75 looks increasingly on now. The hourly chart has taken on an increasingly negative momentum configuration, with near term resistance 122.15/122.50 a sell-zone now.

 

EUR/USD

The outlook for the euro has deteriorated with the big bear candle of Monday. However, although losing almost 90 pips in a session has negative implications, the broader outlook is only mixed still. The old breakout band of support at $1.1265 remains intact and whilst momentum has been hit, the configuration is, for now, fairly mixed. The RSI for example has unwound to 50 and is hovering now. Yesterday’s failed rally which lost around 35 pips from the day high to form a long upper tailed doji, would have been a disappointment for the bulls. Also failing under the $1.1325/$1.1350 neckline is a concern too. However, the marker appears to be fairly stable today, albeit with a slight negative bias. This is reflected in the hourly chart indicators, with the RSI and MACD lines stuck in negative configuration now. The bias is for further scrutiny of $1.1265 support, whilst the outlook will take another step in deteriorating if $1.1265 is breached as support (would open $1.1180 key higher low).

 

GBP/USD

Having lost the near term support at $1.2650, Cable is now edging ever lower towards the key $1.2505 June low again. Momentum indicators are increasingly negatively configured again, but with added downside potential. The RSI falling below 40 has room to run back to 30, whilst the Stochastics continue their bearish decline. A run of lower highs and lower lows in the past week shows that intraday rallies are seen as a chance to sell. The hourly chart shows $1.2650 is a basis of resistance now, whilst hourly RSI is consistently failing around 50/55 now, along with MACD below neutral. Initial support at $1.2570 but a test of $1.2505 is increasingly likely now.

 

USD/JPY

The bulls have quickly backed off into retreat with the formation of a strong bear candle yesterday. The move has not decisively broken the potential of a recovery, but it means that the reaction today is all important. A break above the old nine week downtrend and above the 21 day moving average looked to have been a really strong signal, but all the encouraging signs of the last week are now in danger of being undone. The bullish breakaway gap from 107.90 has now been closed (which is negative), whilst the market is back under the 21 day moving average (today at 108.05) again to scupper the improvement. However, the key bearish confirmation would be a closing breach of the higher low at 107.55 which would  confirm renewed bear control. This is threatening already this morning. Daily momentum which had been on a decent path of improvement is now slipping back again. Having previously been a band of breakout support, 107.95/108.15 is now initial resistance. Furthermore, the resistance around 108.50 has certainly been strengthened too. Another bear candle with a close below 107.55 today would put the bears back in control and re-open  the key low at 106.75 again.

 

Gold

Gold has taken off again. It looked throughout much of yesterday’s session that the price remained under pressure. However, after dovish comments from the Bank of England’s Carney, the price soared over $40 in the space of just ten hours. An incredible move which has re-ignited the bull control of the market. The gap at $1406 was not only closed, but was seen as an irrelevance in the face of such strong momentum. This move has saved momentum indicators from deterioration. Once more, the high at $1439 is back in range today. The move overnight just shows how nervous market participants are right now and a move into gold is seen as a default for any sign of elevated fear. Can $1439 be broken? A first test this morning has been rebuffed at $1435, to quickly unwind. Hourly momentum is subsequently turning lower and a move back under $1421 (initial support) could see a quick unwind again in what is a fast moving market. Once again the $1400 area will be seen as a basis of support (23.6% Fibonacci, along with old price support and psychological).

 

WTI Oil

After a failure in recent days to breach the 50% Fibonacci retracement (around $59.60), oil has now moved into sharp reverse. A decisive bear candle saw oil fall by almost 5% yesterday, now the third negative candle in a row and a move lower is building traction. Having closed decisively below support at $57.75, the market is now threatening renewed downside. With momentum indicators rolling over, another negative candle today would confirm the renewed corrective pressure. A bear cross on Stochastics looks set to confirm a sell signal today, whilst the RSI has swung lower below 50. Deterioration turning into bear control. The hourly chart shows a basis of resistance to watch around $56.75 as the market eyes the 38.2% Fib retracement at $55.55. If the bulls fail to recover $57.75 (which is now increasingly resistance) then the outlook will continue to deteriorate. A retreat back into $54.85 support area is possible now. Resistance between $59.60/$60.30 is strengthening.

 

Dow Jones Industrial Average

Another positive close on the Dow (a third in a row) but this time, also with a positive candlestick too. This comes as good news and with a close at the session high, really helps momentum too. The tick higher in recent days is being reflected on the Stochastics with a bull cross, but also the RSI rising again above 60. This is also the highest close on the Dow since October and the second highest close ever! The bulls are set up for that test of the all-time high at 26,951 now. Intraday weakness is being seen as a chance to buy now. Higher lows in each of the past three sessions, meaning initial support is at yesterday’s low at 26,632. Intraday resistance to overcome at 26,890/26,908. The support at 26,465 is increasingly strengthening in importance too.


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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.