Sterling in focus with Theresa May’s key speech on Brexit

Market Overview

The dollar is weaker once more, however focus will be on sterling today as Theresa May gives a speech that will lay out her plans for the UK in a post Brexit world. The impact of Brexit never seem to be too far away from the minds of traders, however it will be at the forefront today. Worried by the prospect, traders sold sterling yesterday to a level of below $1.2000 yesterday against the dollar which was a multi decade low, discounting the thinly traded brief spike lower during the flash crash of 7th October. May is likely to lay out plans to leave the single market to concentrate on controlling immigration and with no half measures on Britain’s exit from the EU, a “hard Brexit” is seen as sterling negative. This concern is playing into caution across markets and added to the worries over Trump’s protectionist stance for the US, safe havens are performing well. The yen and gold continue to strengthen, whilst we are seeing Treasury yields also lower again. The dollar which is also tied to the direction on yields is also tracking lower and is a key theme so far today, whilst the caution is cramping the rally seen on equities.

Theresa May Brexit speech

Wall Street was closed for Martin Luther King Day but Asian markets were mixed overnight, although the Nikkei was -1.5% and once more hit by the yen strength. European markets are mildly lower today. In forex, the dollar weakness is the early trend, with the greenback weaker against all the forex majors. Sterling has been pulled higher with the rest of the majors but this is likely to change with the high volatility surrounding Theresa May’s speech. The weak dollar is also helping to support commodities again, with gold continuing above $1200. Oil though continues to consolidate.

There is a big focus on the UK today. On the economic data front inflation is announced with UK CPI at 0930GMT, which is expected to increase to +1.4% (from +1.2%) on a headline basis, although core CPI is expected to stay at +1.4%. There is also another aspect of UK inflation data announced tomorrow which will also be watched and that is the UK PPI year on year input prices, which are expected to continue to rise sharply to +15.5% (from +12.%) which would be the highest since September 2011 and continue to point towards increased price rises being stored up further down the line. However this announcement will pale to insignificance on the speech by Theresa May on Brexit at the World Economic Forum in Davos. This will be a high volatility event for sterling, Gilts and also UK equities. Other than that German ZEW Economic Sentiment is announced at 1000GMT which is expected .

 

Chart of the Day – AUD/USD

The Aussie has had a strong opening to 2017, with a run up a 5% rally from the lows at the beginning of the year. However there is key resistance around the $0.7500 area which is now being tested which is an old pivot from the key October low, and the November/December highs. The market has been stuttering for the past few days around this $0.7500 resistance area but is looking to have another go higher this morning. It will be interesting to see whether the bulls can sustain the charge as every rally in the past six months has floundered between 60/65 on the RSI. The RSI has today moved to 66, whilst the Stochastics have been threatening to roll over. The hourly chart is interesting to watch as the market has consistently found support around the rising 89 hour moving average currently $0.7480) since the 4th January and again this has helped the bulls higher. A close above $0.7515 would open the bull run once more with $0.7580 before the key November high at $0.7777. The initial support at $0.7445 is growing in importance now as another higher low, with a near term top pattern forming below it that would imply 60 pips of correction but also open a move back to the pivot at $0.7350.

AUDUSD 17012017

EUR/USD

After a pause in the recovery during the past two days the bulls are looking to come out of Martin Luther King Day in the US with a renewed positivity. The consolidation candle that formed yesterday with a mild drift lower is understandable with the US public holiday but the trend has been higher in the past couple of weeks and the market is pulling higher once more. The momentum indicators are maintaining their positive configuration with the RSI once more eying the 60 level which would take it into strong territory, whilst the Stochastics are also tracking higher into bullish configuration. I spoke yesterday about the pivot around $1.0600 and although there was a brief dip to $1.0577 essentially this is now the next key higher low. The aim for today on the bull side is a close above $1.0670 and also a push above $1.0710. This would then open the market for renewed upside recovery towards $1.0870 which was the December high. Continued consolidation above $1.0577 would not be terrible as the hourly chart maintains its strong configuration on momentum. Sub $1.0577 is support of the pivot at $1.0500 and $1.0450.

EURUSD 17012017

GBP/USD

Expect a lot of volatility on Cable today around the speech by Theresa May that is setting out her priorities for Brexit. Yesterday we saw the pound spending almost the entire session trading below the previous key range low at $1.2080 with a close at $1.2043 being the lowest since 7th October and the flash crash where prices briefly spiked to $1.1450 (on Reuters charts). The technical outlook is set up for selling into any strength and the push higher early today could be an opportunity. Any sign of an intraday high below the resistance at $1.2230 is likely to be used as the move is simply a technical bear market rally, a move back below the $1.2080 old low could also be taken as a sign of a rally rejection. The caveat will be the volatility around the speech. Expect a “hard Brexit” stance to drive a retest of $1.2000 again with the low at $1.1980.

GBPUSD 17012017

USD/JPY

The bear market candles continue to stack up as the move back into the safe haven yen continues. The market is now dropping back for a test of the reaction low at 112.84. Momentum indicators are continuing to deteriorate with the RSI below 40 and the Stochastics into strongly negative near term territory. The support at 111.32 remains the key trigger for this turning from a bull market correction into something entirely more negative. Hourly indicators are entirely negative and rallies should be seen as a chance to sell. Yesterday’s intraday high at 114.37 means there is now a resistance band 113.65/114.35 and any intraday unwinding moves that pull the hourly RSI towards 50 are seen as a selling opportunity. The resistance at 115.45 is now key near term.

USDJPY 17012017

Gold

Yesterday’s candle may not look especially strong, however it contained the key factor that was a close above $1200. This is a significant psychological move that now opens the upside once more. The bulls have continued this move and are now testing the $1211 resistance o the 50% Fibonacci retracement of the $1047/$1375 move. However it is the momentum indicators that are looking so strong now that confidence will come from. This is a trending move now and the RSI back above 70 is a sign of strength with the MACD lines pushing above neutral and the Stochastics still strongly configured. A second confirmed close above $1200 today would add strength to the conviction of the upside breakout. The hourly chart shows the move higher coming early in the European session and intraday corrective dips are being bought into. The bulls will take heart from the use of $1200 as a basis of near term support (having previously been a basis of resistance on Friday). The key reaction low support at $1187.50 will now be watched as a turning point for the outlook.

Gold 17012017

WTI Oil

The movement on WTI through yesterday was limited with the US on public holiday for Martin Luther King Day, so the outlook has changed little and remains somewhat mixed on a near term basis, just as it did as it closed last week. Momentum indicators are dropping away near term leaving a series of lower highs, just as the price has done in the past few weeks. However, this comes as the market has lifted from the support at $50.70 which was above the $49.60/$50.00 support band, suggesting that whilst support at $50.70 and resistance at $53.50 is intact, the levels are converging as the market consolidates. Until these are breached the market will be increasingly neutral. Intraday support at $52.12 will be watched early today.

WTI 17012017


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