The dollar is once more gaining ground across the major pairs today as Treasury yields continue to push higher. The news that President Trump and Steven Mnuchin met with former Fed governor Kevin Warsh last week has also helped to drive yields higher. Warsh is being touted as a potential replacement for Fed chair Yellen and is a hawk on monetary policy. The continued increase in the US Treasury 2s/10s spread is a reflection of a steepening yield curve and is dollar supportive. With the Bund/Treasury yield spread widening this is also having an impact. This comes with a degree of cautious in European markets in the wake of concern over how the referendum in Catalonia played out on Sunday, with the increased political risk impacting on the euro today. Countering the caution though was the Japanese Tankan survey overnight which showed business was increasingly confident. UK investors will be keeping an eye on the governing Conservative Party conference with Chancellor Hammond’s speech this morning.
Wall Street closed higher again on Friday with the S&P 500 +0.4% at 2519, whilst in Asia the Nikkei was +0.1% higher (several Asian markets including China are on public holiday). European markets are looking positive in early moves, however Spanish equities are reacting lower in response to the Catalonian referendum. In forex, the US dollar is solidly strong across the majors, with the euro at the bottom of the performance board. For commodities, a stronger dollar is pulling precious metals lower with gold and silver both just under half a percent lower, whilst oil has continued to consolidate.
The first trading day of the month is always PMIs day. The Eurozone final Manufacturing PMI is at 0900BST and is expected to be confirmed at 58.2 (from the 58.2 in the flash reading and up from 57.4 last month). UK Manufacturing PMI is at 0930BST and is expected to drop slightly to 56.4 (from 56.9 last month). Then the US ISM Manufacturing PMI is at 1500BST and is expected to drop slightly to 57.5 (from 58.8 last month).
Chart of the Day – AUD/USD
The correction on Aussie dollar has breached some important support levels in the past week but the really key level has survived, for now. The August low at $0.7805 was briefly breached on Thursday only for an intraday rally to save the bulls. However the ensuing bull hammer candle could not be confirmed as Friday’s strong decline has heaped the pressure back on the downside, whilst the early weakness in today’s moves add to this. The concern is that the momentum indicators are already suggesting that there will be a decisive move to break $0.7805, with the RSI in the mid-30s and a four month low, the MACD lines accelerating lower (below neutral now) to a near four month low and the Stochastics also bearishly configured. The key test in this move will be the old support at $0.7865 which seems to have become a basis of new resistance and in failing to reclaim this level, the sellers are increasingly strong. A closing breach of $0.7805 would be a confirmed bear breakdown and open supports at $0.7750 and $0.7710. The hourly chart shows a run of lower highs with negative momentum configuration with the hourly RSI failing around 60 and hourly MACD lines failing around neutral.
The heavy handed response of the Spanish government to the “illegal” referendum in Catalonia has put the euro under strain this morning and with the added strength of the US dollar we are seeing EUR/USD back in decline again after two days of rebound. The rebound seems to have been a pullback to the neckline of the top pattern than completed below $1.1820. The corrective forces on the pair remain in play as the market has already pushed back below the low from Friday’s session and the daily momentum indicators continue to gain downside impetus. The hourly chart shows a similar position with the hourly RSI and MACD lines accelerating lower whilst the market forms lower highs and lower lows again. A retest of Wednesday’s low at $1.1712 is building, whilst the $1.1660 key August low remains very much in the firing line in the coming days. The top pattern implies 270 pips of downside to $1.1550. The resistance is building between $1.1820/$1.1830.
In a similar position to the moves on EUR/USD, the rally on Cable late last week unwound back to the breakdown neckline around $1.3450 and then the sellers resumed control. With the early downside seen during today’s session the traction in a correction towards the 200 pips top pattern implied target (of $1.3250) continues to develop. The momentum indicators are certainly moving that way, with the bear cross on the MACD lines, whilst the Stochastics and MACD lines drop ever lower in four week lows. Last Wednesday’s low at $1.3340 is the initial support but a failure of this would continue the run of lower highs and lower lows. It would also serve to strengthen the resistance around $1.3450. The hourly chart shows a fairly moderate and orderly corrective momentum but the market is still in decline, with Friday’s lower high at $1.3425 a near term reference. A close above $1.3450 would be needed to improve the outlook now.
The bulls are back and are looking to break higher once more. The near term resistance of the old 112.70 high seemed to be building as a barrier on Friday, but this has been taken out in early moves today as the market looks to once more gain upside traction. The RSI and Stochastics have remained strong throughout he choppy move higher of the past couple of weeks, but there is a definite push higher with the market posting consistent higher lows. This means that the bulls will be looking now at 112.20 to be a potential which has been a consistent floor in recent sessions. A decisive close above 112.70 adds to the bullish intent and a move above the resistance at 113.25 would continue the run of higher lows and higher highs. There is then minor resistance a t113.55 and then the key July high at 114.50. The hourly chart shows positive momentum configuration with corrections being bought into.
Gold remains under corrective pressure as the market falls further in a three week downtrend channel. The momentum indicators corroborate this move and continue to deteriorate for the bulls. The RSI is falling below 40, MACD lines are ready to fall below neutral and the Stochastics are firmly stuck in bearish configuration. The formation of lower highs and lower lows within the trend channel now means that the channel is below the long term pivot band $1300/$1310 and Friday’s reaction high at $1290 is another potential lower high. Selling into intraday strength remains the outlook as the market has dropped to another new multi-week low, now looking to test the $1267 low from mid-August. The next key reaction low to test is at $1251. The concern will be added to by the hourly chart which shows any move to unwind the RSI towards 50/60 is being seen as a chance to sell. The key resistance is firming at $1313.50.
The near term reaction lower following Thursday’s bearish engulfing candle consolidated on Friday and with the support of the four week uptrend approaching (at $52.20 today) the bulls need to hold on to prevent the positive trend losing impetus. The market is seeing a minor correction following the breakouts above $50.50 and then $52.00 but this is the zone in which the bulls can be expected to begin to look for their next opportunity. The momentum indicators are just rolling over which looks to simply be an unwinding move within a bullish breakout, for now. Hourly indicators are relatively benign and the market is now looking to settle around the uptrend but the bulls need to resume control soon otherwise the outlook could begin to turn more corrective. A breach of $50.50 would now be a disappointment for the bulls. Resistance is now key at $52.85, with $51.75 initially restrictive.
Dow Jones Industrial Average
Even though the bulls were still fairly restrained on Friday there is still a sense that the move to new high ground is imminent. Perhaps it is understandable that there was a slight pause for breath on Friday, being the final trading day of the quarter, and some book squaring was to be expected. However the outlook remains positively configured and the market will be eyeing a push above the 22,420 key all-time high. Momentum indicators remain strongly configured and suggest that weakness continues to be seen as a chance to buy. A closing breakout would once more re-open the way towards the range breakout target at 22,675. The importance of support at 22,179 is growing.