Oh dear Theresa, oh dear. The UK election has returned a hung parliament, pretty much the opposite of what current UK Prime Minister Theresa May was hoping for when she called a snap election. I say “current” as she may not be current for too much longer. There are a plethora of intriguing implications that this result has for UK politics going forward, however the market impact of the hung parliament has been for sterling to fall sharply on the result. Over 200 pips lower and it will be interesting if European traders continue to batter the pound today amidst the uncertainty that comes with a hung parliament. To be honest, the fall on sterling is currently not as much as perhaps it could have been and against the dollar is still above the level it was just prior to Theresa May calling the election (was around $1.2600 back in mid-April, although this speaks of the dollar weakness seen since then too). Trading FTSE 100 today will also be volatile. Initial calls are for a move higher as the sterling weakness has historically been supportive for the FTSE, but it will be interesting to see if this early rally continues.
Wall Street closed all but flat yesterday with the S&P 500 adding less than 1 tick into the close at 2434. The Comey testimony did not seem to implicate President Trump in anything that might lead to impeachment, so the markets can now move on. Asian markets have been broadly positive with the Nikkei +0.5%. European markets are also mixed to positive with the DAX and CAC both higher, whereas the FTSE 100 will be a volatile play today. In forex the US dollar is regaining ground as Treasury yields have picked up in the wake of the Comey testimony, whilst sterling is the clear underperformer. Gold is lower again on the weaker dollar, whilst the oil price once more remains under pressure, again marginally lower.
Clearly there are other things that traders are focusing on today but the UK Industrial Production could still have a (brief) impact. UK industrial production is expected to increase by +0.8% on the month which would (considering the +2.3% monthly growth in April 2016 dropping out of the statistics) mean that the year on year industrial production would drop to -0.2% (from +1.4% last month). The UK Trade Balance at 0930BST is expected to improve marginally to -£12.0bn (from -£13.4bn).
Chart of the Day – EUR/AUD
The Aussie has driven a significant improvement in recent sessions, coinciding with near term downward pressure on the euro. Subsequently the EUR/AUD market has broken its recent run higher and is beginning to show corrective signs. Since February the market has held on to every higher key reaction low however this week’s breakdown below 1.4925 has ended that run. There is no recognised top pattern as such, however this is a change of sentiment that could now begin to see downside pressure (or at least corrective pressure) grow. Yesterday’s candle showed a second close below 1.4925 and confirms the break. Furthermore, it is interesting to see that with a run of lower daily highs forming, today’s high at 1.4925 shows that old support is new resistance. The momentum indicators are increasingly corrective with the RSI at a 7 week low, whilst the MACD and Stochastics lines accelerating lower from a bear cross. An intraday pullback yesterday failed at 1.4950 leaving a band of near term resistance at 1.4925/1.4950. There will now be a near to medium term outlook of selling into strength which could easily result in the formation of a lower high below the key May high at 1.5225. A retreat towards the next key reaction low at 1.4670 could easily be seen.
The EUR/USD bulls have just lost control for the time in the wake of the ECB meeting (hit the euro) and the Comey testimony (strengthened the dollar). This put pressure on the near term support at $1.1200 throughout yesterday and this pressure has continued today. The move comes as the momentum indicators begin to roll over, with the MACD lines especially crossing lower and the RSI being back below 60. This means that the market is looking more corrective now. However there is strong support still at the long term pivot of $1.1100 and a correction will still be viewed as a chance to buy. Unless the $1.1100 support is decisively breached then the medium term bulls will treat this as a correction within the bull run which will help to renew upside potential. The hourly chart shows the drift lower with a consistent run of lower highs in the past few days. Initial resistance is at $1.1237 before yesterday’s high at $1.1268. A close below $1.1100 today would continue the correction.
The pound has fallen dramatically on a hung parliament in the UK General Election. A fall of over 200 pips in the wake of the exit poll at 2200BST last night has been sustained and it will now be interesting to see how sterling traders respond this morning. Technicals go out the window in this situation however there is an initial knee-jerk reaction resistance in place now around $1.2800/$1.2825. However, there is a degree of surprise that the loss has not been greater yet and conventional wisdom suggests that the uncertainty of a hung parliament would lead to further sterling losses today. There is historic support around $1.2600 which could easily be tested today if sterling traders still feel somewhat vindictive today. Once the volatility settles we can get more of an idea of the outlook, however the old floor around $1.2775 now becomes a strong basis of resistance as an area of overhead supply.
The dollar is looking to rally and has been helped higher by yesterday’s main event in the US where former FBI Director Comey’s testimony failed to mortally wound Donald Trump’s presidency. The dollar has now formed two consecutive positive candles (the first time this has happened since the latest decline set in four weeks ago) and has begun today’s session also with gains. The key is whether this is simply another near term rally that will be sold into. The downtrend of the past few weeks comes in at 110.90 today whilst in effect the market has merely unwound back into the overhead supply between 110.20/110.45. Momentum indicators have ticked higher but have not yet given any real bullish signals. For now this has to be a rally treated with caution. The bull candles are hardly strong and the trend is still lower. For now I am still a seller into strength on Dollar//Yen. Trading under the pivot at 111.60 certainly adds to this view. The hourly chart is back to 60 on RSI and a level where the bears tend to resume control. Initial resistance now at 110.72, with support still at 109.35 (the 50% Fib of 100.07/118.65).
The gold bulls have lost control now. A second consecutive strong ear candle has left the rally high at $1296 well behind as the profit takers have moved in. The question now is whether this is a correction that will force a new trend formation. The old pivot around $1261 will have a key role to play in this determination. The momentum indicators are reflecting the deterioration with the Stochastics lines rolling over, the RSI dropping below 60. The hourly chart shows s run of lower highs forming, whilst an old support around $1282.50 is forming as overhead resistance. With hourly momentum now correctively configured the downside pressure is growing. Another drop below yesterday’s low at $1271 would re-open the pivot at $1261.
The oil price has been under pressure for a couple of weeks now with intraday rallies being sold into. The intraday volatility yesterday should not detract from the continued outlook of further weakness towards $44.00 which has been expected following the early June breakdown below $48.00 support. The pivot that has been active over the past three months at $47.00 adds to the resistance overhead now. This also coincides with the Marabuzu line resistance of the strong bear candle of Wednesday (i.e. the mid-point of the bear candle which is $46.95). Momentum indicators remain bearishly configured on both the daily and hourly chart suggesting that rallies continue to be a chance to sell. Yesterday’s intraday breach of the support at $45.53 opened a full retracement back to the spike low of $43.75 from early May.
Dow Jones Industrial Average
The reaction of Wall Street to the Comey testimony would certainly suggest that the bulls are happy that there was no “smoking gun” that would drive a potential impeachment of President Trump. The market bounced on Wednesday as Comey’s opening statement had been released. Despite Comey’s testimony hardly being complimentary of President Trump (and effectively calling his integrity into question), perhaps there is not enough for grounds of impeachment. Yesterday’s move on the Dow reflects this. An initial run higher only to be retraced into the close. Nothing to see here, so no need to be a factor. This comes with the technical outlook of still buying into weakness, with the breakout band of old resistance between 21,070/21,112 the basis of new support now. Momentum remains strong and the bulls remain in control and although a new all-time high of 12,265 was retraced, the bulls will be eying this again. The key support near term is at 20,943.