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The glass is half full as consolidation sets in ahead of the FOMC minutes tonight


Market Overview

The geopolitical tensions have begun to subside and with an upside surprise in US data yesterday there has been a more positive sentiment coming through the markets. A mild consolidation greets traders this morning ahead of the FOMC minutes, but the glass seems to be one that is half full. This comes as several of the major markets are again nearing a crossroads as key levels are eyed that would require traders to then take a view. Treasury yields have spiked higher recently, certainly helped by the better than expected US Retail Sales and New York Fed Manufacturing data yesterday, helping to support the dollar. However, the FOMC minutes for the July meeting are released later today and traders will be looking for clues of the next rate hike. The minutes for the meetings where there is just a statement and no press conference can often drive decisive market direction, so this could again be one to watch. The UK Government continues to publish its papers on the logistics of Brexit, with today being on the difficult topic of the EU border between Northern Ireland and the Irish Republic. “Frictionless” travel being achieved between the two countries would be a signal for a softer Brexit and benefit sterling.

Federal Reserve symbol

Wall Street closed almost flat on the day yesterday with the S&P 500 just one tick lower at 2465, whilst Asian markets have been mixed to higher overnight (Nikkei -0.1%). European markets are mildly higher in early moves as the improved sentiment continues to support indices in recent days. In forex, there is a degree of consolidation with almost no direction across the major currencies today other than a slight outperformance from the Aussie after overnight wage data. In commodity markets, gold is all but flat, whilst oil is around 0.5% higher after the drawdown in API crude stocks.

Focus will undoubtedly be on the FOMC minutes due tonight, but in front of that there are a few important economic releases to drive markets. Initially, UK Gilts and sterling will be looking towards the UK Unemployment at 0930BST which is expected to remain at 4.5%, however the real move will come on the Average Weekly Earnings Growth which is expected to remain at +2.0% on an ex-bonus basis. A second look at Eurozone Q2 GDP is at 1000BST which is again expected to remain at +0.6% for the quarter (and +2.1% for the YoY). US Building Permits are at 1330BST which are expected to stay at 1.25m whilst Housing Starts are also expected to remain at 1.22m. The EIA oil inventories always drive volatility for the oil price later in the day with the announcement at 1530BST. Crude oil stocks are expected to drawdown by -3.4m barrels (-6.5m last week), whilst distillates are expected to drawdown by -1.0m barrels (-1.7m last week), whilst after a surprise build last week the gasoline inventories are expected to drawdown by -1.5m barrels. The FOMC minutes for the July meeting will be key late in the session , released at 1900BST. How will the Fed frame the reduction in the balance sheet that is expected to begin “relatively soon”? Also, with inflation now running “below” the 2% target, the market and Fed speakers alike are increasingly focused on the path of recovery towards the target, so indication of the direction and length of time until a turnaround will be seen as key.

 

Chart of the Day – USD/CHF

The reversal in the safe haven bid and rebound in the US dollar has all added up to a recovery on Dollar/Swiss. The market is now eying a test of the key medium term resistance which has been limiting the rallies of the past couple of months. On several occasions the market has tested the resistance at 0.9770 only to fail and retreat, however this means that a large base pattern has subsequently developed and would now complete on a close above 0.9770. A competed base (arguably an inverted head and shoulders pattern) would imply around 335 pips of upside target in the coming months. The market shied away from the test yesterday but the reason why this is now looking more likely is that the momentum indicators are looking increasingly positive. If the RSI can begin to push decisively above 60 this would confirm a breakout, whilst the MACD lines are just engaging in a “bull kiss” above neutral, whilst the Stochastics have crossed higher again in strong configuration. The hourly chart shows a band of support now forming between 0.9670 (a near term pivot) and yesterday’s low at 0.9700, whilst hourly momentum is taking a more positive configuration. The strength of the resistance at 0.9770 would clearly suggest waiting for the breakout, however near term buying into weakness is increasingly working. A move above 0.9770 opens the old floor of the first few months of 2017 at 0.9850 as the next resistance.

EUR/USD

Although the correction is yet to take old, the downside pressure continues to build. The dollar recovery of the past couple of days has pulled EUR/USD marginally lower but the market still appears reluctant to make a decisive move below the old key breakout at $1.1711. There have now been three slight intraday breaches of this support in the past week and none have resulted in a closing breach as the buyers have supported. However the corrective momentum continues to mount, with the RSI falling below 60, whilst both the RSI and Stochastics are falling at seven week lows. This all suggests that $1.1711 will remain under pressure and a breach would open $1.1614, another key long term breakout, whilst the support of the four month uptrend comes in at $1.1550 today. There is an early consolidation today with the hourly chart showing initial resistance $1.1770/$1.1790 which comes in below the lower reaction high of $1.1845.

GBP/USD

Everything was working against the Cable bulls yesterday, with lower than expected UK inflation and the US Retail Sales that beat. This has now driven a decisive breach of the support at $1.2930 and now completes a breakdown and arguably a top pattern. The deterioration in the momentum  indicators backs up an increasingly corrective look to the near to medium term outlook now. A test of the July low at $1.2808 is now on, whilst the long term breakout support at $1.2775 is also open. I still see this as being a corrective move within a medium to longer term recovery and is likely to be similar to the June breakdown which found support around $1.2600. For now though near term and intraday rallies are a chance to sell, with the $1.2930/$1.2950 old support now a basis of overhead supply. The hourly chart shows the negative momentum configuration now in place. Initial support is at $1.2845, whilst $1.3030/$1.3060 is bolstered as a key resistance now.

USD/JPY

A huge strong bull candles has changed the outlook and the bulls are suddenly sitting far more confidently. The strength of the recovery candles is now to an extent at which the bulls are on the brink of a key near term breakout. Several indicators are on the cusp of a key move, but there needs to be that little push to decisively turn the sentiment into something sustainable. The resistance at 111.00 is the basis of an old pivot that is also the first key reaction high in the previous downtrend. A breach on a closing basis would be a key signal for the bulls. The momentum indicators are also improving now with the MACD lines on the brink of crossing higher, the RSI close to moving above 50 (which would be a four month high) and the Stochastics beginning to find bullish recovery traction. However the hourly chart needs to maintain the momentum, with the previous near term resistance band 109.80/110.20 now supportive. Above 111.00 opens 112.20.

Gold

After two days of corrective pressure the gold price is beginning to consolidate. It will be interesting to see if this is the beginning of support coming in as the momentum indicators are on the brink of turning into a more negative near term configuration. This comes with the RSI having unwound back to the mid-50s (sub 50 would be a 4 week low), the MACD lines are close to crossing lower and the Stochastics have also turned lower. The support of a shallower 5 week uptrend (a steeper 4 week uptrend was broken by last week’s dip) comes in at $1264 today. The hourly chart shows the market breached the $1271/$1274 initial support band yesterday and this will be watched today as a potential area of resistance initially today. The hourly chart also shows a phase of selling into strength now with a band of further resistance $1278/$1281 and unwinding moves on hourly RSI and MACD lines being sold into. Initial support is yesterday’s low at $1267.20 but a retreat to the medium term pivot at $1260 cannot be ruled out.

WTI Oil

The oil price has remained under pressure as the momentum becomes increasingly corrective. The bulls would have been disappointed to breach the support of the 8 week uptrend yesterday, and the key support at $47.00 is now under threat. This support has been a key turning point and consolidation throughout the past six months and is also around the 50% Fibonacci retracement of $52.00/$42.05. The concern comes though with the accelerating bearish momentum, with the MACD lines having crossed lower, the Stochastics a real downside force now and also the RSI in decline below 50 to a 6 week low. Intraday rallies are now being sold into, so it will be interesting to see how the market deals with the overnight rebound in the wake of the bigger than expected API crude drawdown. The hourly chart shows the breakdown of the old support of the previous range at $48.00/$48.50 is an area of overhead supply. It is interesting to see yesterday’s low almost bang on the $47.00 key support again.

Dow Jones Industrial Average

The gap higher from Monday seemed to bring the bulls back to a position of control, but there was a slightly disappointing candle yesterday that has left the market slightly underwhelmed. Perhaps it is just a pause for breath as the uptrend has remained intact, however there is still a need for the bulls to rebuild momentum after the recent correction. The MACD lines are still falling and the Stochastics are just looking to turn up again. That makes today’s session important for the bulls to take hold once more. The hourly chart shows momentum indicators need to just push on otherwise there could be a risk of falling over around selling areas again (c. 60 on hourly RSI and neutral on hourly MACD). Support is 21,945/21,972.


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