Financial markets are set to pause for breath on Wednesday with the US off for Independence Day and traders take stock ahead of Non-farm Payrolls on Friday. There is still an underlying concern over global trade tensions, but for now there is a degree of consolidation setting in. It was interesting to see that the US dollar bulls looked to be losing their grip on markets yesterday and this has continued today in the absence of US traders. US Treasury yields remain muted, but interestingly the yield curve continues to flatten. The 2s/10s spread is now back at just 30 basis points. One key market that could be more reactive than most to a dollar correction coming amidst elevated trade tensions is gold, which has been so weak recently, but could be setting up for a technical rally. Watch for a break above $1260 to open for a near term rally. However, it will also be worth watching the services PMIs for the UK and Eurozone today as any positive surprises in a thin market could give the euro and sterling a boost too. We have already seen decent services data out of Japan and China overnight. The China Caixin Services PMI came in at 53.9 (52.7 ex, 52.9 last) which was a four month high.
Wall Street closed lower on the session as a lack of decisive direction continued (S&P 500 -0.5% at 2713) whilst Asian markets were also weaker (Nikkei -0.3%). The European markets are more cautious to take a view with the US on holiday today and are mixed to slightly lower. In forex there is a weakness on the dollar that began yesterday and is permeating into today’s early moves. This is helping to support the Australian and New Zealand dollars. In commodities the dollar weakness is helping to pull a gold rebound, whilst oil is still finding support from the API crude drawdown.
Today the focus for traders looking at the economic calendar will be on the Services PMIs. The final Eurozone Services PMI is at 0900BST and is expected to be confirmed at the flash reading of 55.0 (which would be higher than the 53.8 reading of last month). The Composite Eurozone PMI is also expected to be 54.8 which would be an improvement from the 54.1 last month. At 0930BST the UK Services PMI is expected to remain at 54.0 (54.0 last month) but after the UK Manufacturing and Construction PMIs both beat earlier in the week then if services (which account for around 80% of the UK economy) could also beat then sterling would really be supported. The 4th July is a US public holiday for Independence Day, meaning that there is likely to be reduced volumes, something that could have an odd impact on volatility today across markets.
Chart of the Day – GBP/JPY
The bulls are beginning to mount a challenge for a recovery. The downtrend that has been in place since the middle of April is being seriously tested in the past few days. Friday’s bull candle has put the market right in contention to make a significant test, with a couple of neutral candles completed this week. Both sessions have tested for a breakout above the downtrend but both have failed to complete the move. A close above 146.65 would also complete a small head and shoulders bottom pattern would imply 290 pips of recovery and put the market right into position for a test of the 148.10 June high. There is a clear configuration where the RSI struggles around 50 whilst the MACD lines are stuck below neutral. However the rising Stochastics are encouraging for near term improvement and this is reflected on the hourly chart where in the past few days there has been a shift in sentiment. With the market trading above hourly moving averages, hourly RSI above 40 and hourly MACD lines above neutral the outlook is no longer as negative. Holding on to support at 145.20 would keep up the improvement, with initial resistance 146.50.
The consolidation continues into mid-week as another very neutrally configured (small candlestick body and small candlestick range of just 54 pips) formed yesterday. The sellers may have been unable to break through the support at $1.1505, however the bulls seem unable to grasp control either, failing under $1.1700/$1.1720. The bulls will though be looking at the gradual improvement in the momentum indicators such as the MACD and Stochastics lines as a reflection of an increasingly confidence. The hourly chart shows initial support of the pivot at $1.1600 holding and a very slight positive bias. Today’s US public holiday may well mean another day of consolidation and lack of direction today, however the bulls will be eyeing the $1.1700/$1.1720 resistance and a closing breakout would be a strong indication of building a larger base pattern.
There is a gradual technical improvement underway on Cable as the market has built a mini run of higher daily lows in recent sessions. This move has seen the market put increasing pressure on a two and a half week downtrend which, with today’s early gains, is breaking to the upside. A degree of perspective needs to be retained though as the market has been sold consistently and since mid-April, any near term rallies have been used as another chance to sell. However, if the first hurdle of the resistance of the old low around $1.3200 can be decisively overcome (on a closing basis), then the bulls will gain in confidence. The market seems to be at a near term crossroads now with the RSI again ticking up towards 44 (which limited the gains in June). The first higher low is at $1.3315 with the main key June high resistance at $1.3450 still to be tackled. The hourly chart reflects a near term improvement and a decisive move clear of $1.3200 opens for recovery. Initial support is $1.3155 with $1.3090 a higher low protecting $1.3050.
For the past few sessions I have been concerned about the lack of momentum in the run higher and the potential for profit-taking towards the highs of the medium term range 108.10/111.40 and yesterday we saw the first sign that the dollar bulls have taken a step back. After five (almost identical) positive candles, the market fell around 30 pips and the move has continued into today’s session with the dollar on a corrective slip. Leaving resistance at 111.13 the momentum indicators have rolled over. The Stochastics crossing over at 80 and continued subdued MACD lines are the main concern now for the bulls. On the hourly chart, the five day uptrend has been broken, whilst a near term pivot at 110.50 has been breached and could now become a basis of resistance. Momentum indicators are also now more correctively configured. A slip back towards 110.00 could now be seen. Initial resistance at 110.50/110.70.
For gold, it is still all about the negative correlation with the dollar, and a correction on the dollar is helping to support the gold price now. A technical rally could now be seen. The downtrend has been breaking over the past couple of sessions but was confirmed yesterday by the strongest bull candle (including a gain of $11) since early April. This move has continued early today and the momentum of a rebound is gathering steam. The RSI which has been below 30 for over two weeks has now pulled back above for a basic RSI buy signal. The Stochastics are close to confirming their own buy signal, whilst the MACD lines are also threatening a bull cross. There is initial resistance now to negotiation at $1260 which is a near term pivot and reaction here will determine the potential scope of the rebound. The fact that the recovery is coming from the confluence of support above $1236 should not be discounted. Above $1260 opens $1272.50 as the next resistance and then key overhead supply coming in around $1282. The hourly chart shows the near term improvement and that $1251 is now a higher low that needs to be held.
There are signs that the bull run higher is losing steam, but for now the market continues to build higher. Yesterday’s long tailed doji denotes uncertainty with the prevailing trend and momentum indicators are just beginning to roll over. Resistance is in place at $75.25 and although the bulls are looking higher once more, there is a sense of potential profit-taking creeping in. The support band at $72.50/$72.85 has already been tested once and a breach would now trigger a corrective move. After such a strong bull run the stretched momentum indicators just look to have lost their impetus now. The RSI is now just hovering around 70, whilst the Stochastics have started to tick slightly lower which will be a concern for the bulls. The resistance at $75.25 protects the 61.8% Fib retracement at $76.50.
Dow Jones Industrial Average
An incredible run of alternating candles continued yesterday with another negative candle to follow up Monday’s bullish recovery. The downtrend was broken last week and since then there has been a tug-of-war that is showing that no-one is able to feel in control now. The moves have been broadly between the 23.6% Fib (at 24,117) and 38.2% Fib (at 24,595) but latterly there seems to be a tightening which could almost be the market developing into a consolidation triangle. The momentum indicators are no longer in decline and are increasingly in consolidation mode on a near term basis (even if they are still negatively biased on a medium term basis). This would suggest this is an important phase for the market as the next move could be key for direction. Yesterday’s decline of half a percent (c. 130 ticks) is again putting pressure on supports, but for now the consolidation continues. Important support is now at 23,997 and a closing breach would be very negative now. However, equally resistance at 24,569 is significant for a bullish break. Initial support of a higher low is at 24,078, whilst 24,510 is initial resistance now.
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