Just when it looked as though there was some direction coming into financial markets, a retracement has set in. A number of factors have conspired to see the dollar jump higher again having looked previously set up for increasing correction. However, the question is whether this bounce for the dollar will last. Political uncertainty in Germany is elevated with the potential for new elections growing (this is now Angela Merkel’s preferred choice) since the talks to form a coalition government broke down at the weekend. Mario Draghi also came across in dovish mood in a speech yesterday, suggesting that the Eurozone recovery was still “heavily reliant” on ECB monetary policy support; which hit the euro. Furthermore US data was also supportive with the better than expected Leading Indicators reading. This all drove the euro lower and Treasury yields higher which in turn helped a dollar rally in a move that saw gold especially hit. However, all the while, the US yield curve continues to flatten, with the 2s/10s spread falling ever further. With the 2 year yield soaring on short term rate hike expectations, the spread is now down around 60 basis points. Can yesterday’s dollar bounce continue with concerns over the flattening yield curve, or is it just another chance to sell? With slow progress on tax reform, I am leaning towards the latter.
Wall Street closed higher but lacked the decisive move that would have put the bulls back in control. The S&P 500 was +0.1% at 2582, whilst Asian markets followed this lead with broad gains (Nikkei +0.7%). However European markets are cautious today after the fluctuations of the past couple of days. In forex, it is interesting to see the dollar bounce has started to peter out into the European session, but with little real outperforming currency other than sterling. In commodities, this dollar slip is also seen in a mild bounce on gold (which seems closely linked again to moves on the dollar), whilst oil is mildly higher too.
It is another quiet day of economic data, starting with the UK’s Public Sector Net Borrowing level for October which is at 0930GMT and is expected to be +£6.6bn and would be slightly higher than the +£5.3bn iof September. However, it could be central bankers that give markets some direction. UK traders will be watching the testimony of Bank of England Governor Mark Carney to Parliament’s Treasury Select Committee on the UK Inflation Report. Gilts and sterling will be key movers on what Carney has to say, with Brexit factors clearly under the microscope. Again, on the data front, US Existing Home Sales are at 1500GMT and are expected to improve by +0.7% to 5.42m (up from 5.39m last month). Much later in the session FOMC President Janet Yellen speaks at a conference at 2300GMT and this could have an impact across markets.
Chart of the Day – EUR/JPY
The potential for a decisive breakdown of the multi-week range, below the old breakout high of 131.70 has been discussed several times on these pages. Each time the market makes an intraday breach of the support, the break fails and the euro is bought once more. Once more, as the bearish candles have racked up in recent sessions, the downside pressure on the support has mounted. In the past three weeks it is as though the sellers are leaning further and further over the cliff edge without ever falling off. Yesterday’s session was the latest with a 55 pip breach of 131.70 support that was subsequently unwound to hold the support on into the close. An almost doji candle was the result and questions the recent decline now. The RSI is again around 45 but it is interesting to see the MACD and Stochastics lines increasingly struggling on a medium term basis. The MACD lines barely even registered last week’s bounce and are back around neutral, whilst the Stochastics have just posted a bear cross with downside potential. The breakdown seems to be increasingly likely but is it this time? A closing breach of 131.70 would make the break and imply 280 pips of downside towards 129.00. Yesterday’s low is initial support at 131.15 before 130.60 and 129.35. The hourly chart shows 132.35 is an initial pivot with 132.35/132.60 a near term sell zone today. Reaction here could be key for the potential for the breakdown. Key resistance is at 133.15 near term.
The euro suffered yesterday in the wake of the German political uncertainty and dovish comments from ECB President Draghi. This has taken some of the steam out of the upside breakout of last week on EUR/USD. The bulls are now being tested. There is a band of support between $1.1730/$1.1660 which comes in above the neckline of the head and shoulders top pattern. As the market has dropped away in the last few sessions, this support is now being tested. This comes as momentum indicators have tailed off, but interestingly the MACD lines are tailing off around neutral. This suggests that the euro is now testing the lower bound of what has become a neutral zone between the neckline at $1.1660 and the right hand shoulder resistance at $1.1880. A break either way will provide the next direction. The hourly chart shows the hourly RSI oscillating between 30/70 but with a slight negative bias forming now. Resistance initially at $1.1810 with yesterday’s low of $1.1720 initially supportive.
The market continues to drift higher, as it has done for the past few sessions. A sequence of small bodied candles that are adding 20/25 pips per day shows a drifting move higher within the six week range. For now this does not reflect a market that is building up to a decisive upside break above the key resistance at $1.3335. Momentum indicators have a mild positive bias to reflect the gains within the range but lack the conviction of a decisive swelling of bull control. The resistance starts to mount around $1.3270 and grows more important around $1.3300 and up towards $1.3335. Watch the hourly chart for potential clues of failing momentum in the push higher. Currently there is an uptrend pulling higher lows and the support at $1.3183 is the first higher low to watch. Hourly RSI and MACD lines remain positively configured for now and the near term bulls are happy controlling. The uptrend support comes in this morning around $1.3215. However, given the overhead resistance the potential for a reversal is elevated. Cable is also still highly politically driven, so watch for newsflow too.
After such a decisive bear candle formed on Friday last week, the bulls have reacted positively. However is this enough to turn around a corrective outlook? Not yet, there is much more that needs to be done. The market continues to trend lower over the past couple of weeks, with a downtrend resistance coming in today at 113.25, meaning the run of lower highs is intact. Yesterday’s rebound recovered to 112.72 but the market has since started to stall. The rally high from last week at 113.33 is now key near term resistance. The hourly chart shows the momentum indicators rolling over and giving corrective near term signals for today’s session. The reaction to yesterday’s recovery will be interesting. There is support at 112.20 and a higher low above there could begin to build a near term basis of a low. However there is much that needs to be done. This is a market that looks to be in a transition phase for now which could lead to some messy near term moves.
The prospect of a sustained rebound on gold was emphatically shattered yesterday as Friday’s strong bull candle (which was the strongest up day since late August) was met by even greater selling pressure. Questions now need to be asked whether the long term pivot band $1300/$1310 which has seen lower key highs in recent months has again affected the market. So we are back into this range once more and the outlook is probably even harder to call than it was before now. Near term there is support at $1274.90 from yesterday’s low, however daily momentum indicators are now giving us nothing to go on, other than ranging configuration. The hourly chart shows a choppy outlook, and with the fluctuations of recent sessions, traders will need to settle down before any decisive signals can be ascertained. Resistance initially at $1288/$1289 under $1297.Support at $1270.60 is key near term.
After such a strong bull candle on Friday, the bulls failed to grasp the initiative yesterday. Gains were pared and a corrective move has once more threatened. How the market reacts to an initial bounce today could be key. Another failure under yesterday’s high of $56.75 and the resistance grows with the prospect of a new downtrend formation. Medium term momentum indicators remain positively configured though. The correction supported at $54.80 which is a building support now too and the hourly chart shows that the market is building support at $55.50. Momentum is looking a touch more questionable now though with the choppy moves of the ast few days, and there needs to be a settled period of trending in order to find decisive direction once more. The treatment of this nascent downtrend could be key, with $56.75 now key.
Dow Jones Industrial Average
The uncertainty of recent sessions which have been increasingly choppy suggests that traders are unsure of the outlook now. Taking a step back the market has been trading in a sideways range between 23,243 and the all-time high of 23,602 for the past few weeks. The market has posted another contradictory candle from yesterday’s session and there is an increasing feeling that there is increasing indecision that has replaced the decisive bullishness seen a few weeks ago. A small higher low has been formed at 23,356 above the key near term support of 23,243. There is though a near term pivot overhead around 23,485 which is now a gauge for trading outlook within the range. The momentum indicators have been correctively configured as the uptrend has been broken but the Stochastics have now begun to tick higher again whilst it is interesting to see the RSI holding above 50. A move above 23,485 would re-open the high at 23,602 but another failure under the pivot would increase the downside pressure once more.