Just over nine months after the momentous EU referendum, the UK is set to trigger Article 50 today. This means that around 1230BST the UK will have officially served the EU the letter that signals its intention to leave the European Union. Traders have known that this day was coming for a couple of weeks now, but still it seems that sterling is under some selling pressure as the day has dawned. The move has not been helped by a vote in the Scottish Parliament to formally ask for another Scottish Referendum, whilst at the Bank of England, Ian McCafferty (who has been seen as the next member to move hawkish after Kristin Forbes) seemed cautious in his assessment of the UK economy. The rally on the dollar has also certainly not helped. It seems that the downward pressure on Treasury yields, the dollar and risk assets is beginning to reverse after a series of factors yesterday afternoon. An enormous reading on the US Consumer Confidence (the highest since 2000) has buoyed the dollar bulls, with comments from Fed vice chair Stanley Fischer suggesting that two more rate hikes were “about right”. The yield on 2 year Treasuries has pulled sharply higher and the dollar has rallied across the major pairs. Furthermore, US equities have also started to rebound on Wall Street. That makes today’s session important as the momentum in the recovery needs to be sustained in order to prevent the profit takers simply quashing the move once more.
Again it is a very quiet day of economic data, with little really to impact during the European morning. The US data in the afternoon comes in the form of Pending Home Sales at 1500BST which are expected to improve by 2.3%. The EIA oil inventories have a tendency to drive oil price volatility, at 1530BST. The crude oil stocks are expected to show a build of 2.0m barrels and would be the twelfth build in the past thirteen weeks, whilst distillates are expected to drawdown by 1.1m barrels and gasoline stocks are expected to drawdown by 2.0m barrels. The Chicago Fed President Charles Evans (dove/centrist) is set to speak again at 1420BST.
Chart of the Day – EUR/AUD
Has the rally within the channel again failed at key point? The big downtrend channel that has been pulling the pair lower in the past 10 months but once more the market appears to have failed at the key test. This comes with the rally being hit with a strong bear candle from yesterday’s session. A run of five strong bull candles was broken by a sharp decline on the day, with the resistance around 1.4300 once more a key level as it has been throughout 2017. This also coincides with the resistance around the falling 144 day moving average (today at 1.4286). Momentum indicators remain strong however the RSI has turned lower from the low 60s again, where previous rallies within the trend channel have failed. The hourly chart shows a loss of momentum with a break below 1.4200/1.4215 suggesting the rally has lost its way. Furthermore, continues failure below the previous support at 1.4150 would add to the corrective outlook and open a test of the key near term support at 1.4050, which is just under the long term pivot at 1.4070.
The dollar regained some strength yesterday afternoon and this has hit the prospects of EUR/USD. The corrective candle that fell around 50 pips on the day was the largest bear candle in two weeks and could begin to question the bull control. The market will now be looking towards the support of the reaction low at $1.0760 as a key point for holding the continuation of the trend of higher lows. Momentum indicators are stuttering a touch with the Stochastics rolling over and RSI moving back below 60. This all makes today’s candle important. Another solid bear move today would really begin to question the strength of the bulls, especially if $1.0760 were to be breached. The long term downtrend was tested but never confirmed on a break so this will add to the concern of the bulls should the market continue to come lower. The hourly chart shows an uptrend of two and a half weeks is now being seriously tested today and with the hourly momentum beginning to deteriorate, the bulls need to fight hard. The initial resistance is $1.0845/$1.0870 with $1.0905 now key.
So, here it is, the day that the UK formally serves divorce papers on the EU by triggering Article 50. All eyes will be on sterling for the reaction. Initial signs are that sterling is beginning to come under pressure. Yesterday’s big bear candle has flipped the outlook once more on its head within the range. A reversal of over 100 pips on the day has broken the recovery uptrend and now with further losses today, the corrective pressure is growing. Cable remains a range play and the latest retracement looks to be underway. The momentum indicators are beginning to deteriorate, with the Stochastics ready to post a sell signal and the RSI close to moving below 50. The hourly chart shows a sharp change in outlook since yesterday afternoon with the hourly indicators negatively configured. The failure of the support band $1.2430/$1.2460 now means that the support between $1.2320/$1.2340 is now key within the range. Another strong bear candle today below the support would open $1.2250. The initial resistance is the $1.2430/$1.2460 old support. There is likely to be increased volatility today, but considering traders have had a while to prepare for this day, much should be contained.
Dollar/Yen may not have had the reversal signals that other major pairs have had against the dollar, but there are increasing signs that there could be a near term recovery preparing. A second positive candle in the past three sessions has started to lay the groundwork for a possible bounce. The sequence of lower daily highs has been broken early this morning and there will be a keen focus on the resistance at 111.60 now. For now this is a consolidation, with the momentum indicators mildly ticking higher, but certainly more needs to be seen to consider a technical rally being underway. This is reflected in the hourly chart which has shown signs of improvement in the outlook with the hourly RSI and MACD lines, but without any major breakout. A move above 111.60 would open 112.50. The near term breakout at 110.82 needs to now become a basis of support today.
As with Dollar/Yen, the dollar improvement is impacting on gold but without any confirmation of a change in outlook yet. The negative spinning top candle is a mildly corrective move and followed by a slight drop again today the bullish outlook is being questioned. However, for now, this is still playing out as a consolidation above $1240 support. The momentum indicators are just plateauing rather than any significant sell signals, whilst there is also an absence of significant selling pressure. The hourly chart shows the 89 hour moving average has now been breached but the momentum indicators are more reflecting a ranging market than bearish. The bulls will want to quickly regain minor resistance around $1252 today, with a slightly lower high around $1258 under the $1261 high from Monday. A breach of the support at $1240 would suggest a loss of bull control.
The support is now starting to come in for oil. A second positive candle in three sessions has now broken a two week downtrend and bolstered the support that comes in around $47.00. The bulls have also now pushed through resistance at $48.30 and also $48.50, whilst a close above $48.50 would end a sequence of lower highs and re-open the key resistance around $49.60. The momentum indicators are looking to take on an improved outlook with the RSI beginning to show signs of improvement, but also now close to a Stochastics buy signal and a bull crossover on the MACD lines. This would make the bulls far more confident in a recovery. The hourly chart shows the broken downtrend whilst the old resistance at $48.30 has become a basis of support today. Looking further out, the next chart feature the bulls need is a higher low above $47.00, with a near term band of support $47.60/$47.90 for a move back above the next minor lower high at $48.50. As ever, watch for the EIA oil inventories to drive volatility today.
Dow Jones Industrial Average
Despite closing lower on Monday, across the trading session the market actually formed a positive candle, and being followed up by another positive candle yesterday, there is now a basis of support at 20,413.. However, is this merely a technical rebound within the corrective phase? There is a downtrend that currently comes in around 20,860 today however the market will be looking at the resistance of Thursday’s rebound high at 20,757 and neckline of the old support at 20,777. These two levels now form a band of near term resistance that the bulls will need to overcome to change the outlook. Momentum has ticked higher on yesterday’s strength but a move above 50 on the Stochastics would be needed to suggest a sustainable rally. The hourly chart still shows a market simply looking to unwind to renew downside potential with the hourly RSI around 60 a chance to sell. Initial support comes in around 20,520 but if the rally fails again today a retracement towards the December/January old trading range below 20,125 is still likely in due course.