The world’s central banks are trying to get a grasp on the market turmoil that 2016 has brought. The ECB has already noted that it will be considering further easing measures at its next meeting, whilst the Federal Reserve is “closely monitoring” economic developments. However in an unexpected move it has been the Bank of Japan that has made a firm step towards easing monetary policy. In an extremely tight decision, the BoJ voted 5-4 to engage a negative interest rate of -0.1% for banks that hold funds at the central bank, and also left the door open for further easing. This surprise easing from the BoJ has significantly weakened the yen amidst some incredible volatility. This created wild swings on Japanese equities, with the Nikkei closing around 2.8% higher. European markets are moving more on the mildly positive close on Wall Street which saw the S&P 500 up 0.6%, whilst the overnight gains on oil are also supportive for risk appetite.
In forex markets the big movers are clearly any of the Japanese yen crosses, however the general further improvement in risk as oil recovers by another 2%, which is helping to drive the commodity currencies higher, but also sterling too. The US Treasury yields are sharply lower as the actions of the BoJ further call into question whether the Fed will be able to hike in March. Gold is consolidating today.
In terms of economic announcements due today, the big focus for the morning session will be on Eurozone flash inflation data which is at 1000GMT and is expected to pick up to 0.4% (from 0.2% last month). The Advance reading of US Q4 GDP will then dominate, at 1330GMT with an expectation of a rather drab +0.8% annualised to end the year on (down from the final reading of 0.2% in Q3). The revised Michigan Sentiment is at 1500GMT and is expected to be 93.1 (a slight downward revision from 93.3 at the preliminary reading).
Chart of the Day – GBP/JPY
It sounds easy to say it after the event, but Sterling/Yen has been building for a recovery for a while and with last night’s closing break above the old resistance band 170.00/170.60 has completed a base pattern. Obviously the overnight announcement from the BoJ has helped to pull the pair higher is a volatile manner but there is further room for gains according to the base pattern which suggests around 600 pips from the neckline. This puts the implied target at over 176.00. As with Cable, the movement on Sterling/Yen has been incredibly choppy since the BoJ announcement, however look to use corrections now as a chance to buy. The hourly momentum is stretched near term but as it unwinds then the opportunities will arise. Already there is a support band 171.20/172.00 which has formed. All indicators on the daily chart are also improving strongly (even before the BoJ) with the RSI strong, a MACD bull cross and strong improvement in the Stochastics. The next old pivot resistance comes in around 175.00.
After both central banks have announced monetary policy in the past week there is still no breakout from the range. The rally over the past four days has taken the euro from just under $1.0800 up to the top of the near term resistance band $1.0950/$1.0990, at which the overnight move suggests the buying pressure is beginning to lose momentum. On the daily chart the outlook is increasingly rangebound. The marginal bearish bias to the momentum indicators has been undone by the four day rally and with moving averages so neutral, the daily Bollinger Bands flat and no leading signals on the momentum it is difficult to have an outlook anything other than once that plays the range. There is a minor pivot level around the middle of the trading band, in the $1.0860/70 area, but as I continue to say, until we see a decisive signal on the euro (a decisive close below $1.0800 or above $1.0990) then it is difficult to really play for any trending move.
Cable continues to exhibit an excellent example of a chart conforming to support/resistance trading. The daily chart has now achieved a confirmed break of the 7 week downtrend and the recovery is building. The daily momentum indicators are now all decisively improving and finally the bulls seem to be getting some traction. However, it is the hourly chart that is showing such strong technical improvements as the old key pivot levels that had been resistance on the way down are now coming back in to act as support. The hourly chart subsequently shows a head and shoulders base reversal pattern with a move above $1.4350 confirming the move yesterday. This is old pivot line has become the neckline which has been tested and held overnight. The implied target from the base is around 270 pips which puts Cable back above $1.4600 again. The hourly momentum indicators are far more bullishly configured and the corrections should be seen as a chance to buy now. As long as another higher low is formed above $1.4235 then the outlook will remain positive for a recovery. The next resistance levels are $1.4445 and $1.4490.
I have been discussing the potential for a bull flag pattern pulling a recovery higher but I did not expect the move to be so quick. The easing actions of the BoJ have driven a sharply weaker yen and spiked the Dollar/Yen pair to an overnight high of 121.35. This is well beyond the flag target of 120.40 and drastically changes the chart outlook. Momentum is now clearly bullish. However the move needs to settle down before we get a proper technical assessment of the outlook. The reaction since the BoJ announcement has been incredibly volatile with huge swings in response. There seems to be a slight pivot around 120.00 area on the 1 minute chart, but for now this may be one just to watch.
The bulls had a little bit of a reality check yesterday as a strong bear candle slashed over $10 from the price. There is now a real test of the bull credentials now as there is a confluence of technical signals all clustered around here which can question the improving outlook again. The first is the longer term indicator of the supporting 144 day ma (at $1108.50), as an instant break back below would be a disappointment for the bulls. There is also a crossover on the daily Stochastics which if confirmed could also pull the price lower. The hourly chart shows the recent bullish uptrend channel is being tested. The breakout support around $1110 held yesterday, with the uptrend today coming in around $1112. I am looking at the hourly RSI for a potential early warning sign with a drop towards 30 (or even below) being a concern now as it would suggest momentum is turning negative. The bulls have used these minor corrections as a chance to buy in the past couple of weeks. A move above yesterday’s intraday high at $1122.10 would re-engage the bulls once more to retest the $1127.80 high and continue the channel. A decisive breach of $1110 would seriously question the channel with a move below $1105 would confirm the breakdown.
And the roller coaster continues. The rumour mill was in overdrive yesterday as suggestions that an OPEC production cut circulated, pulling oil sharply higher. However, as this rumour was scotched by the Saudis, the oil price fell sharply back again. The volatility remains extremely high and means that trading oil is certainly not for the faint hearted. It would appear that the Fibonacci retracements of the January sell-off from $38.40 to $26.20 are still a decent gauge, with the 50% retracement at $32.30 arguably a key level to watch for support. This is because it is also very close to the pivot band $32.00/$32.15. The sequence of higher lows is still intact for now and the bulls should look towards this, with the latest key low at $32.20 but also $31.75 a basis of support from yesterday’s low. Momentum indicators are still broadly positive on the hourly chart and buying into the corrections is a brave but probably correct call if you take the price action over the past week. The old pivot at $34.00/$34.35 is still a level that needs to be decisively breached for the bulls to continue higher, with subsequent resistance now yesterday’s high at $34.80. Beyond that the $35.75/$36.00 range comes into play.