Last updated: May 3rd, 2017 at 09:55 pm
The fundamental and newsflow events are beginning to already rack up and drive significant uncertainty into the minds of traders. Sterling is coming back under pressure as the UK looks set to trigger Article 50 but also a new Scottish Independence referendum is now a real possibility. The Brexit Bill went successfully through the UK Parliament yesterday but now the task falls to actually trigger Article 50, something that could happen as soon as today, but could be more towards the end of the month. With the Scottish Nationalists again pushing for a second Scottish Independence referendum the political risk has been elevated in the UK once more. Sterling is subsequently under pressure today. Today beings the two day meeting of the Federal Reserve which is almost certain to culminate in another 25 basis point rate hike. However the uncertainty will surround the FOMC’s economic projections and “dot plots” which could point towards a sharper tightening of monetary policy. There is also the added impact of a general election in the Netherlands which could set the tone for populism within the Eurozone in 2017. All this has added up to the dollar again finding support. Equity markets seem to be in consolidation mode as we await some of the more high volatility events to play out. Adding to the uncertain outlook was a mixed batch of Chinese data overnight. China Industrial Production improved slightly to 6.3% (+6.2% exp, +6.0% last), with Fixed Asset Investment also better at +8.9% (+8.2% exp, +8.1% last). However Retail Sales was disappointing at +9.5% (+10.5%exp, last +10.9%), especially given the focus on economic rebalancing.
Equity markets on Wall Street had another session of consolidation and this was mirrored in Asian markets and in early moves in Europe today. In forex markets, the dollar is stronger against its major pairs, whilst the underperformance in sterling is growing again. Gold and silver are mildly weaker with the dollar strength whilst oil is also mildly lower again.
After a quiet Monday, traders have a little more to go on today. German ZEW Economic Sentiment is at 1000GMT and is expected to improve to +13.2 which would be an improvement on the +10.4 last month. US PPI is at 1230GMT (don’t forget the US time shift) with the factory gate inflation expected to show inflationary signals continue to increase with the headline year on year expected to be +1.9% from +1.6% last month, with the core year on year expected to increase to +1.5% from +1.2%.
Chart of the Day – NZD/USD
After such a strong decline over the past couple of weeks, the Kiwi has started to build support again, but will it last? The key long term technical development was once more the old key level at $0.6900 which has come in as a key market turning point and seems to be a longer term pivot that the market pays attention to. The traded low on Thursday last week was $0.6887 which was above $0.6860 but the key was that the market did not close below the key $0.6900 level. This comes as the RSI is looking to now bottom again just below 30. The rebound has tested $0.6950 in the past couple of sessions but this has so far prevented a recovery, having also been an interesting pivot around the turn of the year. The market is still a longer term range play and within this, the Stochastics have been an interesting signal to watch for the bulls. Each of the previous times in October, November and December, that the Stochastics have crossed higher to confirm a buy signal, it has been the precursor to a sustained rally. However, as the dollar has strengthened this morning, the market is heaping pressure back on $0.6900 once more. The hourly chart shows momentum configuration has rolled over and the test of $0.6900 is key once more today, with the market on a knife edge. This needs to hold for the bulls to retain a sense of recovery and continue to play out the longer term range. Resistance is now at $0.6950 and $0.6980 near term. Below $0.6887 opens $0.6860 and then the May 2016 low at $0.6675.
The recent improvement in the euro came in the wake of the hawkish lean of Mario Draghi’s ECB press conference, however the move has hit the buffer around the old key level of $1.0710 to fall away again. Closing yesterday within a handful of pips of the low of the day puts the bulls back under pressure and this is reflected in the early losses today. The outlook for a sustained recovery remains difficult and I am still a seller into strength, however the improvement in the near term outlook is still in place with the Stochastics improving and the MACD lines having crossed higher. However the hourly chart shows a retreat back to the support of a previous breakout at $1.0640 means the recovery is now being tested. A decisive move back below $1.0620/$1.0640 would suggest the bulls are losing their way. The caveat would be that the market will also now be looking towards the FOMC meeting which will be a high volatility event. Support is $1.0570 with $1.0523 being key.
Yesterday’s bull candle may have improved the outlook, but with so much newsflow surrounding moves on both sterling (possible Brexit trigger, renewed prospect of a second Scottish referendum) and on the dollar (FOMC meeting and Trump), it is difficult to trade with high conviction. The bulls looked to be getting a foothold once more, however the selling pressure is back on this morning and the move is unwinding yesterday’s gains. This has also bolstered resistance around $1.2250 which had already been used previously as an old support turned into new resistance. It is far too early to suggest momentum indicators are showing any sustainable improvement, in fact they have taken a turn for the worse once more. The hourly chart shows the support building around $1.2195 has been smashed this morning Despite this, the support at $1.2135 remains intact and will be seen as key to the outlook near term. A breach would open the medium term range lows again $1.2015 and $1.1980.
The pressure that the dollar has been under has dragged the market back to test the recent trend of higher lows and higher highs that has taken the pair back to test the 115.60 key resistance. However the market is developing into a consolidation which is threatening the uptrend, without having yet broken it. The tight configuration of the candlestick bodies suggests that the market has a higher degree of uncertainty now, not surprising given the FOMC meeting tomorrow. The hourly chart shows the market leaning back towards dollar positive today, with a mild bullish bias to the hourly momentum. Support held in the band 114.25/114.45 yesterday and this is becoming a key level near term. The bulls will have one eye back on the 115.60 resistance again, but it would be surprising to see any real direction in front of the FOMC.
It is interesting to see that the bulls could not grasp the control yesterday as the prospect of a mini recovery just cannot get up that head of steam needed to break the downtrend and charge the upside. Momentum indicators have started to show consolidation traits rather than any real recovery signs, something that should not be unexpected, given the FOMC meeting tomorrow could drive huge volatility. The market has drifted back to the old psychological level around $1200, meaning that there is growing support at $1194.50 whilst also the resistance now at $1211.20. With the downtrend intact there is still a bearish bias and the early move is mildly lower today. Whilst it is unlikely that the market will take a conviction view ahead of the FOMC, a breach of $1194.50 re-opens $1180.
A day of consolidation was seen yesterday which will come as a welcome relief for the bulls as the selling pressure has slowed after the last three days of significant downside pressure. However, the market now seems to have entered into a new phase as the break below $50 implies a move back towards $45 could now be seen. The near term momentum indicators are a touch stretched and this could be part of the limited selling pressure yesterday, but there is now a large amount of overhead supply between $49.60/$50.00 that will be seen as limiting any oversold rally. The hourly chart shows that $48.60/$48.80 has even limited during yesterday’s session, suggesting that perhaps a sell-zone is now between $48.60/$50.00. Initial support is $47.90 whilst there is still little real support until $44.80.
Dow Jones Industrial Average
The consolidation on Wall Street that has pulled the Dow back to the support of the breakout and gap higher at 20,812/20,850. This is now turning into an increasingly important phase of trading despite the lack of real move in the market. After such a long run of bull candles throughout February, March is turning into a drag on sentiment. A sequence of bear candles is now into its eighth consecutive session and the momentum indicators are corrective. There is room for this consolidation to continue without any major impact on the medium term bullish outlook, however, the market continues to consolidate back to an uptrend that has been in place since November and there is little real sign that the bulls can break the shackles. Friday’s reaction high at 20,940 is becoming an increasingly important near term resistance as a potential lower high below the all-time high at 21,169. The hourly chart shows a lack of conviction in the recent market move but the bears will start to gain serious traction on a breach of support at 20,692/20,734.
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.