Market reaction to a remarkable end of the G7 summit has actually been rather surprisingly risk positive. Donald Trump may well be firing off Twitter based salvos at the US’s supposedly strongest allies, but in spite of this rather worrying stance taken from the US President, market sentiment has been fairly positive this morning. In forex, the safe haven plays, the Japanese yen and Swiss franc are underperforming across the majors, whilst the euro is rebounding and the commodity currencies are holding up well. The only real exception to this is the underperformance of the Canadian dollar. Justin Trudeau has taken much of President Trump’s post-G7 ire and the rhetoric does not bode well for an amicable agreement for the NAFTA negotiations. Other asset classes also show a fairly sanguine response, with bond markets showing yields higher, with early gains on equity markets too. However, market attention will switch quickly to a more profound geopolitical event for risk appetite, the summit between Trump and North Korea’s Kim on Tuesday. It may well be that traders lose willingness to take a view ahead of such an uncertain event.
Wall Street closed with decent gains on Friday (S&P 500 +0.3%) whilst Asian markets have reacted well today (Nikkei +0.5%) and European indices are also initially positive. In forex, the underperformance of the yen is the most obvious mover, with the dollar looking more mixed, whilst the euro is making good ground again after dipping back on Friday. The Canadian dollar is also a significant underperformer in the wake of the G7. In commodities, the mixed look for the dollar and uncertain outlook ahead of the Trump/Kim summit means that gold continues to lack direction, whilst oil has dipped slightly in early moves.
It is a quiet start to the week on the economic calendar, but UK traders will be watching out for UK Industrial Production for April at 0930BST which is expected to show monthly growth of +0.2% whilst the year on year is expected to slip slightly to +2.7% from +2.9% in March.
Chart of the Day – GBP/AUD
The Aussie has been looking increasingly susceptible to a correction in the past week across major pairs, and against sterling there is a key technical development forming. The downtrend channel that has been a feature of the chart since late April is now on the brink of being broken to the upside. An intraday break of the downtrend could not hold initially on Friday but there was also a move above 1.7722 the first key reaction. Although these moves could not sustain, the tests may not be in isolation. The momentum indicators are turning a key corner now, with the MACD lines posting a bull cross as the Stochastics pull back higher and the RSI is also in good recovery. The hourly chart shows an improving configuration, whilst there is a near term pivot support at 1.7600 which is holding as weakness is now being bought into. Whilst a higher low at 1.7470 remains intact then the prospects for a recovery remain in process. A close above 1.7722 would open 1.7795, however the medium term key pivot at 1.7900 would be a likely recovery target.
The bulls started to question the recovery on Friday as a negative candlestick formed, however buying pressure seems to have resumed once more today as the bulls have looked to simply bolster a near term breakout. A move above a clutch of resistance between $1.1710/$1.1750 last week left this as a basis of underlying demand and acts as support now. The intraday low of $1.1725 during Friday’s corrective candle suggests that the bulls are looking to use corrections as chance to buy as the market has pulled back higher again this morning. Daily momentum indicators are still ticking higher but it is also important for the bulls to regain control again today. The slip on Friday has just seen the Stochastics start to question the longevity of the run higher, and a second successive bear candle would add to this uncertainty today. The hourly chart shows positive momentum configuration may not be as decisive now and the $1.1725 reaction low needs to remain intact. The resistance band $1.1820/$1.1840 needs to be breached to re-open the upside for $1.2000 again.
The recovery has just begun to stall a touch in the past few sessions. This is coming around the old key lows at $1.3450 which is the first real basis of resistance that the recovery needs to breach. That makes this an important moment for the bulls and a key test of their strength. Momentum indicators have just shown signs of tailing off, with the RSI plateauing and the upswing on the Stochastics decelerating. However the small bodies of the last three candles reflect uncertainty rather than renewed bear pressure. Friday’s low at $1.3350 of a slightly negative candle will be important to watch initially, however there are signs that the recent consolidation will just continue today as the lack of real direction continues. A close above last week’s high of $1.3470 would break the shackles but today could be another day of quiet consolidation ahead of the Trump/Kim summit.
With the market falling over at 110.25 last week there is an increasing sense that the move is simply noise within a larger consolidation range that is building between 108.10/111.40. The momentum indicators certainly point towards a lack of conviction either way now, with the RSI spending the last two weeks oscillating between 40/60, MACD lines increasingly flat and Stochastics levelling off around 50. There is a very mild positive bias, which is certainly helped this morning by the positive early move. This could now add pressure back on 110.25 again. Leaving a low around 109.20 on Friday (and again early today) is helping to strengthen support at 108.10, whilst the hourly chart shows how this early rebound needs to be sustained in order for the bulls to build again. A close above 110.25 would re-open 111.40 once more.
The continued consolidation and lack of direction has now broken the downtrend of the past eight weeks. However the small bodies of the candlesticks shows how traders are unwilling to take a view ahead of tomorrow’s crucial Trump/Kim summit. The market is certainly gravitating around $1300 which is the long term pivot but is unlikely to veer too far from here until the fallout from this summit is known. The resistance band $1300/$1310 is still a key area of resistance, with support at $1289/$1290 protecting $1281.80. The wait for direction continues.
The choppy outlook of recent sessions continued on Friday as the market started to fall back once more. The failure to find traction in the recovery has been consistent in finding resistance in the pivot band $65.80/$66.65 and this looks to be continuing. However, even though the bulls have failed to take off in a recovery, there is an interesting hint of a build up of support, with the market posting a succession of daily higher lows over the past few sessions. However, although the momentum indicators are showing little sustainable sign of leading the market higher. The overhead supply is prohibitive to a rebound, and until resistance at $68.65 is breached then this would simply be a consolidation within the correction. Support at $64.25 is holding but any breach would simply re-open $61.80.
Dow Jones Industrial Average
Despite an uncertain outlook forming across global equity markets in recent sessions, the Dow has continued to climb. Following the breakout above 25,086 to multi-month highs the market has been trending higher now for the past seven sessions. The uptrend is supportive around 25,130 and is now above the key breakout. Momentum indicators are improving still with the RSI rising into the low 60s at four month highs. This confirmation is encouraging for the continued trend higher with buying into weakness now elevating. The next resistance at 25,449 is now in focus with the key February reaction high at 25,800 coming ever closer. The breakout at 25,086 with the recent trend higher at 25,150.
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