The issue of interest rate differentials are at the forefront of traders’ minds today in the wake of comments from Janet Yellen and as we move into ECB day where the European Central Bank is expected to expand its program of quantitative easing. The actions of the ECB in both the rates announcement at 1245GMT (watch for the deposit rate being cut) and also the press conference at 1330GMT (watch for changes to the size and length of the asset purchase programme) will cause significant volatility this afternoon. The markets have baked in some fairly lofty expectations on the ECB and it will be interesting to see if Mario Draghi can deliver. This will involve persuading the hawkish voices on the governing council (most notably Bundesbank President Jens Weidmann) of the need for such wide reaching extensions to QE. The question is whether the ECB can meet such lofty expectation of an extension to its QE program. My view is that the market has gone too far and priced in too much, which could cause some disappointment and a short squeeze on the euro.
However, with Federal Reserve Chair Yellen laying the ground for a December rate hike from the Fed this means that the world’s two biggest central banks are engaging direct policy divergence. The US dollar had the big move yesterday with strong gains against major currencies and pulling commodity prices sharply lower. The trade weighted dollar briefly moved to its highest level since 2003 yesterday before paring those gains slightly. However, the control of the dollar bulls has continued overnight. Equity markets have pulled back on the news, with the S&P 500 falling 1.1%. Interestingly this was a mirror move to the gains seen on the previous day on the back of weaker ISM data. Asian markets were fairly mixed overnight with the Nikkei all but flat, but European indices have opened lower today in early trading.
In forex trading the dollar remains strong today with the euro leading the declines. Interestingly, the Aussie and Kiwi are again performing well, despite the weakness in commodity prices which continues.
Other than the ECB, markets will be digesting the services PMIs which are released through the morning. The UK services PMI is at 0930GMT and is expected to improve slightly to 55.0 from 54.9, whilst the ISM Non-manufacturing data is also key at 1500GMT and is expected to dip slightly to 58.0 from 59.1. Also today there are the weekly jobless claims at 1330GMT with 268,000 expected (260,000 last) and also US factory orders at 1500GMT which are expected to come in at +1.4% month on month.
Chart of the Day – FTSE 100
The FTSE 100 continues to push gradually higher in its painful rally. A close above 6395 yesterday was a 4 week high and re-opens the 3 month high at 6488 with the resistance of the overhead supply around 6500. Can it finally make the upside breakout that UK equity investors have been longing for? I am not convinced. The daily RSI is back around 60 where each of the rallies in the past few months have failed, with the resistance being formed on numerous occasions between 6450/6488. Already at the open today the market is pulling lower again and looking on the intraday hourly chart the support band comes in between 6350/6400. Hourly momentum also looks underwhelming and not with the strength of an index that has the impetus to breach through key resistance quite yet. A move below 6320 would confirm the lack of control by the bulls and re-open 6221 as a key low.
As we move into what could be another momentous day for the ECB the euro remains under pressure. Yesterday’s sharp intraday decline all but unwound the rebound of Tuesday. The euro remains technically very weak ahead of the ECB announcement. However be under no illusion, the euro will not be running off technicals today. There will be considerable volatility around both the ECB rates announcement at 1245GMT (watch for the deposit rate being cut) and then the press conference at 1330GMT with Draghi expected to announce further easing measures to the QE program. The volatility will come with little real settled view on what the ECB may do, so any air of disappointment (the bar is set quite high here) creating a short squeeze (euro rally). Near term resistance levels are at $1.0640 and $1.0690, whilst a move above $1.0760 would open the key medium term overhead resistance at $1.0810. If the ECB throws the kitchen sink at the problem then expect a move back below the March low at $1.0456 and on the way towards parity. My hunch is for disappointment and a euro rally. Expect a bumpy ride.
I have been talking about the dollar bulls still being in control of Cable and that rallies are a chance to sell but even I was surprised by the acceleration lower yesterday which took Cable down 190 pips at one stage. The problem is that support above $1.5000 has been decisively broken now by the move and we now look back to trading from April for the next key levels. Initially the support at $1.4850 is open, but in truth there is little real support until the key April low at $1.4563. Furthermore, momentum indicators are still not yet too stretched so there is still further downside potential. Even after yesterday’s hugely bearish candle the sellers have still been happy to continue today although I would still advocate selling into any rallies. The initial resistance now comes in between $1.4990/$1.5020, with the reaction high at $1.5135 now key near term. Yesterday’s low at $1.4893 is the initial support.
I said yesterday that I did not see it likely that there would be a breakout of the 122.20/123.67 trading band in front of the Non-farm Payrolls. That assessment is now hanging on by a thread, with yesterday’s rally failing at the resistance almost to the pip before quickly falling back by 50 pips. That does not seem to have put off the dollar bulls though as they are back again today and pushing higher. I continue to see a bullish bias to the near term outlook and expect that an upside break above 123.67 will be seen. Also the way the bulls are controlling the pair now would suggest it may even come ahead of the payrolls report. Momentum indicators are strong and with further upside potential. I would still look to use dips within the range as opportunities to buy. The rising 21 day moving average at 122.90 currently has also become a basis for support. Above 123.67 would re-open the key high at 125.28.
Gold is similar to many of these dollar-related plays in that I continue to believe that any rallies should be seen as a chance to sell. This was again the case yesterday as once more the bears took control and the selling pressure has subsequently burst through the support at $1052.50. Overnight has seen some rebound on gold from $1045.90 but again with the dollar bulls in control, the old support at $1052.50 is now a basis of resistance and there is a band of overhead supply today up towards $1057 for the sellers to work with. The hourly momentum indicators suggest that a minor unwinding technical rally is underway but this should be merely a technical rally that helps to renew downside potential. If the unwinding rally takes off today, the main band of resistance is between $1065/$1074.50. However if the recent downtrend channel is anything to go by then further pressure on the February 2010 low at $1043.75 will be seen and then further weakness potentially for a test of the huge psychological support at $1000.
Intraday spikes continue to be used as a chance to sell. The moves on WTI yesterday came on the back of comments out from OPEC members that the majority of the cartel was ready to curb production levels (cue spike higher) only for Saudi Arabia (the biggest oil producing member) to counter the claims (cue spike lower). On a technical basis the drift lower continues and the intraday hourly chart continues to show the downtrend that has been in place for the past 6 days as the retreat from the resistance band 42.60/$43.70 continues. A breach of $40.40 support was seen yesterday and the support around $39.90 was tested (yesterday’s low was at $39.83). Oversold momentum indicators on the hourly chart are just now unwinding, but this is again likely to provide another chance to sell. Initial resistance is around $41.50. However once the oversold momentum has unwound on the hourly char , the bearish configuration suggests that these intraday rebounds remain a chance to sell. Further resistance is with yesterday’s spike high just below $42.00.